2.2 Legal
The UK law reflects the political and social attitudes of its country. It is quite common to talk about the society becoming more controversial and business organisations can afford to ignore the legal implications of their actions. The law also recognises that business organisations owe a duty of care to society as a whole. Organisations must obey, applying all current laws while trading and managing their operations, therefore legal environments are essentially important for all industries and organisations.
The oil industry has many more regulations and polices to follow due to its sensitive connection with the public safety and their health concern.
The DTI (the department of trade and industry) takes the lead on most issues relating to the offshore oil and gas industry, where its activities are regulated by a number of Government Departments. Given the nature and scale of the industry and its complexity, this is not surprising. The DTI has authority over a great many routine activities (for example, drilling a new well), and where environmental issues are involved it will authorise an activity only after detailed consultation with other Government Departments such as The Ministry of Agriculture and The Environment Agency.
The Government's intention is to introduce a series of separate regulations covering specific activities that, in the long term, will constitute a fully integrated set of regulations covering all aspects of the offshore oil and gas industry that have the potential to cause a significant environmental impact.
2.3 Economical
The oil industry has contributed over £25billion to the UK economy in the last 25 years. However, the UK’s oil reserves are declining and production is set to fall by 60% by 2011 ().
According to the , in 2005:
- The UKCS produced around 3.5 million barrels of oil equivalent (BOE);
- The offshore oil and gas industry spent £5billion operating existing fields and invested over £4billion in new production, both in capital investment and exploration;
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received over £7billion in taxation (2005/06) from the UKCS, compared with just over £5billion in 2004/05.
The upstream oil and gas sector is a major employer, both within the UK and for UK nationals overseas.
At the time of writing, the sector provides employment for 260,000 people. Of these:
- 30,000 are directly employed by operators;
- 155,000 are employed by contractors and the supply chain;
- 75,000 are employed in jobs that are created through the economic activity above.
The spread of jobs across the UK is as follows:
- 32% in Scotland;
- 25% in the South East of England;
- 11% within the North of England and East Anglia.
Source: (http://www.prospects.ac.uk/cms/ShowPage/Home_page/Explore_job_sectors/Oil__gas_and_petroleum/As_it_is/p!elkbfg)
The oil industry is pivotal to the UK economy. It provides jobs therefore strengthening the economy. The government also relies on the amount of money it receives from the industry through taxes “ received over £7billion in taxation (2005/06) from the UKCS, compared with just over £5billion in 2004/05”.
The oil industry also requires employees thus providing income to the economy, and as the products are marketed the industry receives income from expenditure of their consumers on goods and services provided thus establishing a circular flow of income as illustrated in diagram 1.2
Diagram 2.3.1 illustrates how the oil industry affects the UK economy and vice versa
2.4 Political
Because oil is a valued commodity, politics can play a vital part in controlling its ownership, many wars have been fought over its control and ownership, “oil - due to its sheer value as a commodity - aggravates tensions between rival ethnic groups and with central governments over royalties and compensation in many cases this leads to brutal repression by the police and military to keep dissent under control” (the oil industry – do or die). A fine example of how politics can play a cruel role in controlling the world most valued commodity is in Chechnya, where they withdrew from Russia only because the planned pipeline which goes through Grozny, carrying Caspian oil to the Black sea ports. The conflict came to an end when Yeltsin realised that his military operation had cost more than re–routing the pipeline. The greatest area of conflict over oil of course remains in the Middle East, in particular Iraq, the US invasion of Iraq was subsequently because of oil and not weapons of mass destruction, despite what George W Bush and Tony Blair say. This conflict is due to the fact that the Middle East supplies 38% of the world's oil, and 51% of the US's. It is expected to supply 48% of world oil by 2010.
From looking at how oil contributes to conflicts, I will now analyze the impact oil has on UK politics. Political decisions inevitably affect the country’s economic environment, i.e. the proportion of GDP accounted for by the government and the distribution of income between different groups in society.
Further more, the social and cultural environment of the country is influenced such as that of a government passing a law that allows shops to open late on a Sunday.
The political system can also govern the rate of the appearance of new technology, and how and when it will be adopted, through tax concession on research and development. It also has the power to change dependant upon internal and external pressures. The parliament enforces licensing and regulations, which govern product standards and domestic product producers. Similarly, the government can place an embargo on the import and the export of oil.
Recently the government raised the corporation tax for the oil industry to 50 per cent. This resulted in heavy criticism directed towards oil producers that the new tax, announced in the pre-Budget report, would do permanent damage to UK oil and gas reserves.
Malcolm Webb, chief executive of the UKOOA (UK Offshore Operators Association), said he was “staggered” that the Chancellor had increased corporation tax on the oil industry to 50 per cent. He said the move would take £6.5bn out of the industry over three years and warned that it would "cost this country heavily in terms of jobs, inward investment, balance of trade, security of supply and ultimate tax revenues. It can only have a depressant effect on investment in UK oil and gas." His comments are in agreement with the economic model of the oil industry’s impact on the UK economy. (Illustrated in diagram 1.2)
Available at (online)
2.5 Technological
Technology developments affects the oil industry’s ways of communication. Recently I read an article on the internet, and it stated that optical fibre is to be used for transoceanic communication “The Gulf of Mexico has just seen the installation of the first high bandwidth (2.5 Gbit) telecommunications cable solely for the use of offshore platforms. This “Fiber Web” link installed by PetroCom, for the first time provides the opportunity to directly control or monitor the performance of a subsea (or downhole) system from the office desk”. The reason for this new kind of communication is because there are higher demands on oilfields; the substantial amount of oil that is producing from the oilfields is driving the industry into deeper waters, increasing the complexity of subsea systems – (A review of the subsea applications of optical fiber). It suggests that there is a need for more complex and fault tolerant communication system to monitor communication bandwidth. This technology currently offers more reliable, versatile, and cost-effective, communication than previous methods.
(online)
2.6 Ecological
“The oil industry is growing increasingly aware of its serious image problem. Put differently, people are becoming increasingly aware of the systematic abuses of people and nature inherent in the production and processing of petroleum”. This compelling statement was found from an article on the internet and it shows a negative side of the industry that is seen by most, if you look back at the social factors most people see oil spillages polluting the beaches or killing wildlife.
There are environmental pressures arising from the effects of urban pollution and concerns over global warming have already resulted in the setting of international CO2 emission targets in the 1997 Kyoto Protocol. Global warming has brought about serious implications for quality of life not necessarily for the present generation but for the future one. The oil industry cannot ignore the threats to the natural ecology of the UK and its environment. There is growing pressure in various production processes within the oil industry both directly and indirectly to clean up its act. This is evident by the extinction of species and depletion of natural resources thus receiving severe complaints on mining and production possibilities. Another factor is that the general public has shown a willingness to contribute money to alleviate ecologically harmful practices. Due to the media the public has become increasingly aware of the ecological issues.
The ecological damage of the oil industry is not just from disasters such as the Sea Empress (Pembrokeshire, February 1996) or Braer (Shetland, January 1993) groundings; the impacts are systematic, arising from its ordinary, day-to-day operations. The first stage in the oil production process is exploration, mainly by seismic surveying. ‘Underwater explosions of around 250 decibels (the human pain threshold is at 140 db) are created with air guns, and underlying geology deduced from measurements on the reflected sound waves”. This has a particularly disturbing effect on cetaceans, who use sound for communication and navigation, and may even be responsible for whale groundings. Fish are also displaced, which in turn affects the cetaceans and birds which feed on them. Studies have shown that the number of cod and haddock is reduced by up to 45% within 5 nautical miles of the blast. The blasts can damage tissues, including lungs, guts and ears in mammals, and swim bladders in fish adding to the ecosystem destruction. Legislations are in place to limit the amount of damage caused by the oil industry during exploration and drilling (see 3.2 legal factors, The Offshore Chemical Notification Scheme).
Then, during the drilling stage, "muds" (lubricants) are pumped down, to keep the drillbit cool and to regulate the flow of oil and gas. “They consist of hydrocarbons, heavy metals (including cadmium, mercury and lead) and other toxic chemicals, and also contain corrosion inhibitors, detergents and biocides”. Drill cuttings (the removed rock) are dumped on the seabed (totalling over 1.5 million tonnes in the UK North Sea). These cuttings smother seabed wildlife, and significant effects on the structure of ecological communities have been observed several kilometres from platforms. Not only are the rocks surrounding oil reservoirs often radioactive, but cuttings are also contaminated with oil, "muds" and chemicals. 3,826 tonnes of oil were discharged with cuttings offshore Britain in 1996. To get an idea of the scale of the problem here, one must remember that over 6,000 wells have been drilled in the North Sea since 1964.
Rig and pipeline installation causes further disturbance to seabed ecosystems, through dredging, filling and anchoring. Underwater structures will be treated with protective chemicals, which release toxins into the water. The scale of chemical usage in the North Sea is not documented; however discharges of production chemicals are estimated at 6,000 tonnes per year (30% of quantity used), plus 84,000 tonnes of drilling chemicals (57%), (see 3.2 legal factors, The Offshore Petroleum Production and Pipelines (Assessment of Environment Effects) Regulations, 1998).
Source: (online)
The implications of global warming has also had a major impact on climate change. Climate change occurs because of Greenhouse Gases in particular Carbon Dioxide. Carbon Dioxide currently holds the title of being responsible for 60% of the gases that make up GHG’s. Carbon Dioxide occurs naturally in the environment, but is also produced when fossil fuels combust. “They say that predicted changes over the next 100 years will be faster than any for at least 10,000 years. Flooding and coastal erosion currently threatens 46 million people, and this could rise to 92 million people with a 50 cm rise in sea level, resulting in massive population migration, and loss of infrastructure of up to 10% of GDP in some countries”. Fluctuating weather events are likely to cause much damage. "Climate change is likely to have wide-ranging and mostly adverse impacts on human health, with significant loss of life", through heat waves, extreme weather events, contaminated water supplies, air pollution and increased transmission of disease, including malaria (threatening 60% of the world's population), yellow fever, cholera and giardiasis. Impacts on ecosystems will be huge, with major disruption to agriculture and numerous species extinctions
Source: http://www.eco-action.org/dod/no7/59-65.html
2.7 Ethical
“Ethical standards are generally regarded as those ways of acting or being, that are deemed acceptable by some reference group at a particular time and place”. However the difficulty occurs in trying to agree just what is right and wrong, especially when no two people have precisely the same opinions.
Many critics have long argued that ethical considerations are of little interest to business yet this is not true when analysing the oil industry due to the impact it has on the population and the environment of UK. It can also be difficult to distinguish between ethics and profit, as some organisations may consider themselves as doing something profitably good but it is unethical in the eyes of the general public such as the episode regarding BAT (British American Tobacco) smuggling cigarettes.
‘Business and Sustainability’ Compiled by Liz Walley, (2nd edition). Pearson Education Limited
Culture has a great effect in defining ethics and what is considered unethical in one society may be considered perfectly acceptable in another. It is suggested that the UK society is becoming increasingly concerned about the ethical values adopted by its commercial organisations. As mentioned earlier with expanding media availability and an increasingly intelligent audience, unethical business practice is being scrutinized. This can be seen particularly in the oil industry “From undertaking a survey among oil service firms operating in Angola, they found that, in practice, policy on the corporate social responsibility of oil companies is mainly driven by economic incentives (good for business), rather than by ethical considerations”.
The oil industry has a considerable environmental impact, from exploration right through to the end use of its products. Exploration for oil can involve deforestation, forcibly removing people from their land and polluting waterways and fragile ecosystems with oil waste. A lot of oil exploration takes place in oppressive regimes that seem to have a higher regard of the fiscal reward more than the wellbeing of people or the environment. Pipeline and tanker spills, with their devastating consequences for wildlife and the environment, are common, whilst the refining of crude oil is energy intensive and also highly polluting, mostly in terms of toxic emissions to the air. And many of the end products themselves, such as petrol, chemicals and pesticides, are highly toxic.
Available at (online)
In a mature industry such as oil, organisations must think beyond their own customers to society as a whole. There are good philosophical and pragmatic reasons why firms should act in an ethically responsible manner. At a time of increasing competition in many markets, good ethical stances can act as differentiators in the eyes of increasingly sophisticated buyers. Many industries (cosmetic, pharmaceutical etc) have identified segments of their markets that are prepared to pay a premium price in order to buy a product that has been produced in an ethical manner or from a company that has adopted ethical practices. Many personal investors are now concerned not just about the return that they will get, but the way in which that returns will be achieved, this helps companies to build their positive brand image. Walley (2006) suggest that in long term companies that are aware of ethical issues will outperform other companies.
John Gummer (2006, cited by Walley) suggests “environmental liabilities of a company will rapidly translate into financial liabilities.” also, in the oil sector many companies do not work with those companies that can not meet ethical standard.
Ethical businesses require all companies in their supply chain to assess themselves on how well they measure against these ethical standards. So, these ethical issues can affect a company to win contracts from ethical businesses. For example, Ernst & Young (2005) mentioned that BP is trying to bring their contractors in Colombia in line with their ethical standards. In Colombia BP outsourced 80% of business unit to contractors. So, it is important for these contractors to meet BP’s ethical standards, if contractors do not want BP to give these contracts to other companies. BP also run workshops to help these contractors to increase awareness of ethical issues. In 2004 the majority of its contractors agreed to outline compliance with BP Colombia’s policies covering ethical conduct.
3 Conclusion
The oil industry in the UK is being more and more scrutinised as society today is becoming increasingly environmentally conscious of global warming and climate change. The social, ecological and ethical performance of the oil industry is ever-changing. This is reinforced by the legal, economic, political and technological factors together with the internal and external drivers that underpin the oil sector today and for the future. Environmental pollution such as emissions from combustion of fuels and materials by road transport come from car manufacturers and the oil industry. With a socio-cultural preference of air transport, this environmental pollution is enhanced resulting to higher prices of fuel and stricter policies on oil production. Moreover, the aid of technology lessens the harmful impact on the environment due to precision of operations before drilling. Similarly, there is a legislation signalled towards the Offshore Petroleum Production and Pipelines decreasing environmental damage. With oil running scarce yet only having been discovered in the early 1800’s, the oil industry is under plenty of pressure to confine to environmental laws and regulations, that has come to awareness due to media coverage of a deterioration of the environment over the last few decades. This creates a more environmentally conscious consumer, therefore the strain of maintaining and improving profits is increasing.
4 BIBLIOGRAPHY
4.1 Websites
- (online)
- (online)
-http://www.ethicalconsumer.org/magazine/news/news99.htm [Accessed 7/12/2006]
http://www.bp.com/sectiongenericarticle.do?categoryId=9007569&contentId=7014471 [Accessed 7/12/2006]
- (online)
- (online)
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(online)
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- (online)
- (online)
- (online )
http://www.bp.com/sectiongenericarticle.do?categoryId=9008542&contentId=7015595 [Accessed 7/12/2006] (online)
4.2 Journals
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‘Global economy suffers governance failure’ . London: . pg. 1
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. Tulsa: . Vol. 100, Iss. 9; pg. 25, 1 pgs
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. (Eastern edition). New York, N.Y.: . pg. A.1
- Oil and Gas Journal, Tulsa; Dec 20, 1999. Vol.97, Iss. 51; pg 23
- Accountancy. London; Dec 2005. Vol.136, Iss. 1348; pg54
- EIU ViewsWire. New York; Dec 1, 2005. pg n/a
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Economic Review. Atlanta; 2nd QTR 1998, Vol 83. Iss 2, pg 30
- Journal of Environmental Planning and Management, Abingdon, Mar 2001,Vol 43, Iss 2, pg 253
4.3 Books
‘Business and Sustainability’ Compiled by Liz Walley, ). Pearson Education Limited
‘International Business’ Ball Donald A, Wendell H. McCulloch Jr, Paul L Frantz, J
Michael Geringer (9th edition). The McGraw-Hill Companies.
‘The Business Environment’ Palmer Adrian and Bob Hartley (4th edition). The McGraw-Hill Companies
‘The new economy of oil’ Mitchell J, Koji Murita, Norman Selley, Jonathon Stern (2001) Earthscan Publications Ltd
‘Green Inc’ Frances Cairncross (1995) ) Earthscan Publications Ltd
‘Exploring Corporate Strategy’ Johnson Gerry, Keran Scholes, Richard Whittington (7th edition) Pearson Education Limited
4.4 Articles
Financial Times Energy; ‘Oil markets to 2010’ (1998) Peter Enav, FT Business Ltd
Issue 7. In the paper edition, this article appears on page(s) 59-65 .