Report on Prospective Investment
The Oil and Gas Industry is indeed one of the most profitable areas for potential entrepreneurs to venture into. However, as with any other good thing, it comes with a baggage of its own risks and hurdles. One needs to be well informed to make right decisions as far as every aspect of the investment is concerned. Only then will it make business sense. It is important to have information that will help give insight into what one is going into. Understanding the risks will be of great advantage since only then will one be able to avoid them, or take necessary steps to minimize them or their effects. In this case an international investment is of interest since the eye is on an international platform and a foreign country to be specific (Global Oil & Gas Industry Profile 8). One needs to make the best decisions regarding mode of entry as well as having a deeper knowledge in any political or legal issues involved. In addition, understanding any issues of ethical nature will be of great importance. Each is examined here in detail.
The mode of entry chosen upon will greatly count since it directly affects present and future operations of the investment. This is especially the case because different modes of entry into foreign markets differ in degree as regards the risk they present (Remner et al 7). They are also different in terms of the amount of resources they require as well as their control and commitment (Global 1). The return on investment they promise is also not the same. For these reasons, the mode of entry chosen upon stands out as one of the major success factors of any international venture (Bartlett & Beamish 49). Basically, there are two main types of entry modes. These include equity and non-equity modes. In the latter category are export and contractual agreements whereas the former includes wholly-owned subsidiaries and joint ventures.
The mode of entry one chooses is to a great extent determined by prevailing market factors. Exporting as a non-equity mode involves selling of goods and services that are produced in one country to other countries (Bartlett & Beamish 10). It is categorized into two: direct and indirect exports. Direct exports represents the most commonly used mode of exporting, usually made by a holding company. It capitalizes on the economies of scale existing in the country of production. Better control over distribution is a common advantage. It should be noted that direct exports are the most preferred if volumes are small (PR, Newswire par. 4). A possible result of large volumes of production in this regard is protectionism in this mode there are no intermediaries.
It may be the most recommended mode of entry for the oil and gas industry, especially if the volumes of production are small (Ramanigopal 4). However, one would say it is still appropriate for large volumes due to the many advantages that come with it. It should be noted that factors on the ground are, after all, what may determine the ultimate choice on the mode of entry. The exporting mode is characterized by sales representatives who represent foreign manufacturers and suppliers in local markets (Global Oil & Gas Industry Profile 8). They do this at a certain commission on the sales made. They help with local advertising, sales presentations in the local niche, clearance formalities at customs and other legal requirements as need may arise. Importing distributors are also common. They buy the product in their own right and resell to wholesalers and retailers in local markets (Volberdar 70).
Advantages of this mode, perhaps what makes it the most appropriate for the oil and gas industry include greater foreign market control, good target market feedback information, and the establishment of a better relationship with buyers. In addition, there is better protection of patents, goodwill, trademarks and other company property (Volberda 21) There are relatively greater sales, implying greater profit, as opposed to indirect exporting. In spite of these advantages, there are also quite a number of disadvantages. It involves higher start-up costs and risks, unlike indirect exporting (Bartlett & Beamish 28). It is also very demanding In terms of investments of time, personnel, resources and organizational changes. In addition, it requires more information and longer time-to-market, contrary to indirect exporting.
Indirect exports, on the other hand, refer to the process of exporting through intermediaries who are domestic based (Bartlett & Beamish 25). Here, there is no control over foreign markets by the exporter. Employed in this mode are exports trading companies, export management companies, export merchants, confirming houses and non-confirming purchase agents. Advantages of this include: greater resource concentration towards production, easy and fast access to market, no many financial commitments, low risks especially for companies who value domestic market more than foreign ones, outsourcing of export management hence management team is not under much pressure, and export processes are not handled directly (Bahgat 170). Disadvantages are minimal or no control of marketing, distribution, and sales. Also, wrong choice of market through wrong distributor could lead to inadequate market feedback, a result of which is relatively low sales (Bartlett and Beamish 27). A firm’s functionality may also be hindered by export partners who may wrongly select a specific market.
The investment risks one may be exposed to are, to a greater extent spelt out in the disadvantages of each mode of entry. This is not to say that other factors like natural calamities like floods and others caused by mankind do not count. One may use a mode that carries the least risk factors, but what if a war broke out in the area of investment? In most cases, war is a result of long-standing political tensions and conflicts that at one point in time get out of hand (Jensen 89). It is, therefore, advisable to read political temperatures before making a decision. A potential prospective investor should keep himself up to speed with what is going on in the world (Peck 62) .This way, he will be able to decide wisely if to invest or not. For instance, a region may be rich in oil but also be prone to war. Should one then invest in such a place?
Another perspective of the political factor in investment may come in awarding of contracts. More often than not, such tendering processes are affected by political interference (Jensen 146). Care should, therefore, be taken before investing much capital. For example, a firm may win a tender or license to carry out prospective activities and exploration, only to be told that the process was not fair and claims of political interference being made. What then happens if a firm had already been issued with the relevant license by the relevant authorities? This is where political and legal issues overlap. Due to the possibility of such unseen developments, one is advised to consult widely and seek required legal advice, just to avoid extra costs that might be incurred later (Albqami et al 70). In fact, it is advisable to minimize political risk by using an international licensing agreement where the home country makes limited some resources and even rights (Saudi Arabia Oil & Gas Report). This way, there is an aspect of the investment being locally owned; to a greater extent it can be said.
It is paramount to know and understand all the processes and steps involved before one fully sets foot in the desired investment in the region of one’s interest. What other issues, apart from legal and political are at play? Are bribes required? What if the answer to this is in the affirmative? What is one’s ethical ground on such matters? Is there a clash with personal principles, and if so, what should one consider first, principle or investment? An understanding of these issues could give a better insight into how possible the investment is. Such issues as bribery turn to be political issues and legal issues where one moves to a court of law with such claims of bribery (Global Oil & Gas Industry Profile 17). It can be advised that one is always clean and on the safe side if they keep and observe integrity.
Having considered the issues discussed so far, one should then revisit their business plan and evaluate if everything on it is viable. They should then know what bits of it may need improvement or changes, to be more precise. Factors on the ground may dictate a further projection on the amount of capital to be pumped in .This may be in a bid to boost security or other extra costs not contemplated before. It is emphasized here that the mode of entry will define the investment’s growth path and performance so one should choose carefully and consider what has been recommended. Indeed if the right decisions are made, returns from investment in this industry could be greater than even estimated.
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