Question

In: Economics

2. The oil and gas industry is a unique industry so also is the electrical power...

2. The oil and gas industry is a unique industry so also is the electrical power industry. What characteristics of the former distinguish it from the latter in terms of structure, conduct and performance

Solutions

Expert Solution

  1. Oil & Gas = There is exploration & discovery process whereas Electrical it has none.
  2. Oil & Gas = There is a processing element, whereas Electrical has none
  3. Oil & Gas = Can be scattered across a geographical region, whereas Electrical power industry has designated locations
  4. Both have a distribution network & metering elements
  5. Oil & Gas has extensive maintenace element, whereas Electrical in comparison has none
  6. Electrical = limited equipment categorization - turbine, transformer, switchgears, circuit breakers, distribution network, metering stations all of these fall under low voltage, medium voltage, high voltage, transmission voltage categories and products are manufactured, in each category without a worry of its end users in great production numbers.
  7. Oil & Gas = the list runs into thousands - drill pipes (casings, conductors, tubing) normal pipes, fittings, pressure vessels, distillation column, pumps, compressors, valves, ….etc. Though there is standardization, yet they are special & needs to be customized to a situation / specification, mostly made to order unlike in electrical where one size fits all. Due to this customization one cannot maintain inventories as in Electrical industry
  8. Electrical = once installed & running, have a easy time, unlike oil & gas which also has streamlined processes, yet it has to be managed every minute, to avoid fire, environment & accidents risks. In electrical works the operators can grab a “nab” whereas Oil & Gas the operator has to be awake even in his entitled 8 hrs of sleep !!
  9. Both have distributed assets all over the geographical region
  10. Installing hydel turbines = is manpower intensive considering the dam construction itself (civil engg), whereas, oil & gas is dependent on chemical, mechanical, civil, electrical, instrumentation, petroleum engineers
  11. Electricity = is a utility service. Oil & Gas = also falls in utility but it is an “economy in itself

Electric Power companies are often regulated utilities given monopoly status by local governments They price the electricity on a “"cost of service basis”. They are answerable to the Public Utility Commisions and sometimes to national regulatory agencies - in the US that is FERC. They may be investor owned. They contract for their fuel on an open market basis. They do not own gas wells, oil wells or uranium mines. The risk in the business is relatively low and return on investment is guaranteed to a degree.

Oil companies are often oil and gas companies as gas and oil are often found together or associated. Oil companies may own the resources in the ground. They are often fully integrated owning oil wells, gathering systems, refineries, gas processing plants and petrochemical factories to make products from oil and gas derivatives. They are often global companies which is rare in electric power industry. Often they are partners with National Oil Companies (think Petrochina, Petronas, Saudi Aramco, PETROBRAS, Gazprom etc. ) which own or have the primary concession to the oil and gas resources. They invest money and provide technical skills to develop the resources in exchange for a share of the profits. They are not heavily regulated except by safety and environmental agencies. They usually can set their prices at will (subject to market forces only) unlike in electric power where local utility Commisions approve rates. Except in transportation fuels like gasoline, oil companies do not sell much of anything directly to end user customers whereas power utilities often do sell directly to commercial, industrial, and residential consumers. Natural gas is usually handed over to independent gas pipeline companies who transport it to Local Distribution companies that do sell it to individual consumers. ExxonMobil is usually not your gas supplier if you are a homeowner!

Oil and gas companies face large risks as they are investing vast sums with no guarantee of any return depending on political instabilities, price volatility, the success of their drilling efforts and so on


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