Critically discuss the implications of recent trends and changes within the supply chain of the UK petroleum retail market.
Critically discuss the implications of recent trends and changes within the supply chain of the UK Petroleum retail market.
Introduction
The United Kingdom incorporates four separate legal systems within its entity that are Wales, England, Northern Ireland and Scotland . In order to maintain uniformity in laws pertaining to the ownership of natural fuel such as Petroleum, the 1937 Petroleum Act was passed, which established that all such resources fall under the control of the British Crown. The petroleum distribution system in the United Kingdom resembles the system that is prevalent in the United States of America, that is, a large independent private gas producer’s feed fuel into an infrastructure, whose grid is spread nationwide . Over the years, numerous changes have taken place in the supply chain of oil and gas in the United Kingdom.
Natural Oil or Petroleum has developed great significance in the modern communities and economies. In the United Kingdom (UK), the Industrial sector is responsible for 63% consumption of the oil produced in the region, whereas transportation consumers nearly 29% of the fuel . The remaining oil production is utilized for other purposes including residential (5%), commercial (2%), electricity (1%) and heating (less than 1%).
It is essential for the United Kingdom government to ensure a constant supply of petroleum and related fuels in the region. Therefore, it has been stated that in order to combat the uncertain supply of petroleum from foreign resources, the United Kingdom would have to ensure that the local production of oil did not exceed the usage or demand.
Changes in Supply chain of the UK Petroleum Retail Market (1970-Date)
Historically, it can be observed that the United Kingdom enjoyed, in addition to Norway significant oil production and sales as oil production from the North Sea reserves promoted the industry. By 1996, the United Kingdom reached a plateau. Oil production in the region faced a drop rate of 37% in a mere span of 7 years from 1996 to 2008 . The United Kingdom’s national economy depends heavily on oil and gas extracted from the UK Continental Shelf. However, investment in that sector has increased in recent years.
In 2013, the United Kingdom invested approximately 14 Billion Pounds in the shelf, which was a record high investment . 70% of such investment is usually spent with UK based suppliers . Such spending trends imply that the manufacturers, engineers, etc. have enjoyed high levels of employment and profits.
However, recently, it has been discovered that the Oil and Gas Supply Chain in the United Kingdom is not highly effective or efficient due to the reduced collaboration between businesses in the industry. In this regard, Deloitte claims that the full potential of the UK Continental Shelf is not being utilized .
The country reached peak levels of production of crude oil and natural gas liquids in 1999, which has since then reduced considerably . The production of crude oil and natural gas liquids has fallen at a rate of 8 % every year between 2004 and 2014. Despite the potential setbacks that the oil supply chain of the North Sea can face, the taxes and the fiscal regime should be improved in order to encourage foreign investment so as to enable the supply chain to produce more barrels of oil . The United Kingdom is also expected to engage in decommissioning about 51% platforms during 2019 to 2026. However, most of the larger platforms are expected to remain in function .
In terms of the number of fuel stations in present in the United Kingdom, Deloitte (2012) has noticed a significant decline in the existence of Petrol Filling Stations (PFS). For instance, the number of 37500 PFS in 1970 has reduced almost 75% by 2011 as the number is now below 9000 . Such a significant decline can be attributed to the advent of the new technology that is less heavily reliant on petroleum-based fuel. Factors that have been deemed responsible for such reduction on the retail fuel market include high levels of competition, the cost of productions, increasing costs of compliance and environmental legislations, etc. .
The significant effect has been observed in less populated areas in the United Kingdom as such costs affect the final pump prices as well. In the United, Kingdom companies own and operate 1,215 stores, whereas dealers and hypermarkets own and operate 5,827 and 1,448 stores respectively . The hypermarket in this industry refers to businesses operated and owned by multiple retailers of hypermarkets.
In terms of major players in the market In the United Kingdom, three major companies own and operate petroleum sites. These include Shell, BP and Esso . However, in terms of players in Petrol Filling Stations, the region has experienced a decline by 31% since 2001 . Independent ownership is prevalent on Oil company sites while supermarket ownership has increased in the past decade, due to the increased expectation of services and options that consumers expect from their petrol filling stations.
While there has been significant competition between oil company sites and independent dealers in terms of oil and petroleum retailing in the United Kingdom, the independent markets have managed to capture the market via utilization of unique marketing streams such as symbol branding, high-quality customer services, etc.
In various countries, different governmental and military organizations supervise and influence the development and enforcement if petroleum product standards . Hence, in the United Kingdom, the U.K military of defense has played an integral part in maintaining the standards of the petroleum products within the region. Similarly, while the United Kingdom has some contribution to the international oil trade, the Organization of the Petroleum Exporting Countries (OPEC) produce about 41% of the total oil production of the world every day .
In terms of storage capacity, the major producers of the industry have produced enough crude stocks so as to create a considerable barrier to any hike in the process over nearly 12 months. Therefore, despite the advent of war in the Middle East, the United Kingdom, has a margin of 12 months of crude oil supply to combat any major change in oil prices and supply . The main transport technology and services that are utilized by the upstream oil services industry include sea and air transport which have experienced a growth above 10% during the years 2011 to 2014 .
The biggest Oil and gas reserve that is currently still being utilized by the United Kingdom is that of the North Sea. The discovery of a large gas field in Netherlands led to the speculation of such deposit, which was discovered and operated on by Shell in 1961 . The UK after numerous debates essentially gained significant control of the oil reserves of the UK Coastal shelf. The oil deposits are still being utilized and extracted today. These reserves in the North Sea were able to provide 67% of the oil demand and 53% of the gas demand in the United Kingdom . The UK supply chain managed to create sales of 33.8 billion pounds in 2014 .
The current structure of the UK Petroleum Industry is largely dependent on various historical, and strategic decisions take by the British government. For instance historically, the United Kingdom acquired a 51% stake in BP in 1914, via the influence of Winston Churchill . In this manner, the country managed to gain control of and have power in deciding important supply issues relating to Petroleum and other gasses provided by the fuel.
Such factors in the past have dictated the present and future trends, as BP continues to extract oil from the North Sea even today. Currently, the upstream Oil and Gas Supply Chain structure of the United Kingdom consists of wells, reservoirs, facilities, etc. It includes about 32 subsectors consisting of more than 1500 companies .
In 2014, the industry reported a turnover of 38% from export activities. In terms of trends, the upstream sector demonstrated cost reduction trends, improving liquidities, internationalization, production efficiencies, and other technological solutions and innovations, etc. The UK industry could be observed to be consolidating its operations and improving its presence in the global oil industry.
In terms of the analyzing the structure of the petroleum industry, the number of supply chain companies present in the United Kingdom’s Oil and Gas Supply Chain has increased by 290 companies from 2008 to 2012 . Such growth in the supply chain is a result of the strong investments in the United Kingdom Continental Shelf (UKCS) in the past years as well as the present. The industry consists of Oil and Gas producing companies, various transportation companies, retailers, etc.
The trend for the demand of Petroleum and natural gas in the United Kingdom is expected to decline in contrast to the developing countries of the rest of the world. In fact, the United Kingdom Petroleum Industry Association (UKPIA) states that the demand for petroleum products is likely to plateau or fall . 90% of the fuel in the United Kingdom is utilized as fuel. The demand for petroleum has shown a slow falling trend, whereas Diesel demand has increased slightly since 1990. Such trends have been attributed to the advent of fuel-efficient cars and more transportation of goods by roads respectively .
In terms of technological changes, the overall Research and Development of the United Kingdom in the Oil and Gas industry is estimated to be about 0.3% of sales, which is undesirable in comparison to the 4% spent by Norway. More funding for the Research and Development program can increase the chances of significant technological changes in the industry that could potentially reduce costs and increase production.
Recent evidence of the value of Research and Development (R&D) in this industry can be observed via the 4.5 billion pounds Clair Ridge Project, which enhanced oil recovery for the industry. In this respect a project named PILOT has been established as a partnership between the UK government and the industry, which aims to improve infrastructure access, increase and enhance oil recovery, improve exploration successes in the industry, etc. . In the United Kingdom, the research and development in the Oil and Gas industry are largely dependent upon the private companies that operate in the region .
Conclusion
Hence, it can be observed that the United Kingdom has managed to face significant changes in the Oil and Gas market as it strives to adapt to the changing oil prices and demands of the region as well as the world. Oil and Gas production had reached its peak in the 1990s and had been declining slowly every since then. The current and future structure of the Petroleum Industry in the United Kingdom is highly dependent on the historic decisions that were taken by the UK government for instance, the acquisition of BP. Similarly the United Kingdom also plans on gaining maximum possible production out of the oil reserves present in the North Sea.
The government encourages private companies to invest and create new technology, which could boost oil production and generate income for the government. In terms of future perspectives, the United Kingdom aims at improving their fuel extraction processes. It also plans on decommissioning of various plants that will be no longer of use to the government. Overall, it could be stated that the UK oil industry continues to be major contributor to the economy and it is expected to play its role in the coming years.
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