How Power Relations Affect Different Actors in Oil Supply Chain

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Introduction

In order to establish how power relations shape and affect different actors in a supply chain of oil, it is prudent to define the actors. There are three major actors; state; firms; and civil society. Access to oil resources is the dynamic of power between the states and the firms. While, competition for oil access, and reserve replacement defines power between firms. Equitable sharing of earnings generated from oil business is the balance of power, among the three major actors in the oil industry. There are several models used to analyse the power relations of the actors in the oil supply chain; Supply Chain Management (SCM); Global Commodity Chain (GCC); and Global Production Network (GPN). The chain framework describes sequential and linkages between elements of elements of an economic activity. The paper will utilize the SCM and GCC approaches to analyze the power relations between actors in oil supply chain. However, complete analysis cannot be done using any single framework. Despite the complexity of the power relations in the oil industry, GCC framework is best suited for analysis of the power relation in the oil industry supply chain.

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Supply Chain Management

For the purpose of this study, the Bridge- Le Billion oil production frameworks will be adopted (Bridge & Le Billion, 2012). Supply chain management is intended to achieve high customer value at the lowest possible cost. According to Cox (1999), “when companies decide to become involved in any supply chain they have to make decisions about how they will control and manage their primary supply chain itself.” That explains why oil firms and states often use of forms of power available to them to control and manage oil supply chain. It is through controlling the supply chain that firms and states can attain competitive advantage either through cost reduction or restriction of access to oil resources and markets.

Different actors interact in a manner that enhances the value of oil value. However, it is important to note that the actors can adopt irrational behaviour to promote self interest at the expense of reduction of overall cost to the supply chain and enhanced value for the consumer. The struggle arising from supply chain competition dictates that actors in oil supply chain must be responsive to each other to avoid losing competitive advantage (Cavoulacos & Deffarges 1997).

State vs. oil firms

The relationship is characterized by the struggle to dominate access of oil resources. The state acts as the landlord. It provides lease permits to the oil firms to undertake exploration, production and transportation of oil. The firms have to cede some of their interests to meet the requirement set by the state, to gain access to oil resources. Therefore, the state has the power to control the upstream face of oil production and distribution. The government aims at ensuring maximization of oil value through charging of levies. The state uses that power to either restrict or entice capital for the financing of upstream phase activities. The government can make the access impossible by setting restrictive costs on concessions to exploit oil. This is often applied against foreign companies, to give National Oil Companies (NOCs) competitive advantage. However, this practice has the likelihood of increasing the overall cost of oil supply chain. In addition, it is likely to hinder value addition, especially for less developed countries which may lack advanced oil extraction technologies and capital.

The foreign companies are likely to use their technological and capital capabilities to negotiate concessions by governments. This often happens in less developed economies. More so, giant oil firms and NOCs may use connections with policy makers in their mother countries to influence the ease of access to foreign based oil resources. In Africa, NOCs from China have used this tactic to gain access to oil resources. Although at face value it may appear like the beneficiary of such arrangement is the recipient of infrastructure development in exchange for oil, a closer scrutiny reveals otherwise. It is because the infrastructures are financed through loans and are focused on facilitating the extraction of oil resources. The result is increase in the overall supply chain cost at the expense of a firm’s profitability or a foreign state’s energy security consideration.

The state has the power to regulate the actions of the oil firms. Therefore, the state has authority over the oil firms with respect to rules and regulation governing the oil industry. It is empowered to reprimand the oil firms for not following laid down operational guidelines. Also, the firms have soft power, which they use to regulate the behaviour of the state. Both multinational and NOCs owned by foreign interests can use their economic power through actions such oil production and distribution boycotts. This has the likelihood of influencing the state to concede to desirable actions especially for countries with little reserve and government operations are highly dependent on oil levies.

Firms vs. Firms

Oil firms relate with one another within the supply chain. Their power relationships are pivoted on struggle to attain competitive advantage: “ability of the organization to differentiate itself in the eyes of the customer, from its competition, and secondly by operating at a low cost” (Christopher 2012). Oil firms mainly operate as either giant multinational firms, independents or integrated firms. The large multinational firm’s market presence is characterised by branded products and high market capitalization. These firms controlled the oil prices due to ownership of large upstream resources and downstream resources. The power of these firms diminished from 1960s as a result of nationalization of oil resources. The entry of independent firms and soviet oil also diminished the controlling power of the major multinationals. These firms have in response used mergers and acquisition to solidify their control of the oil market.

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Vertical integration of national oil companies has diluted the power of major multinational players. The vertical integrated state owned firms have acquired control of vast upstream resources, more often through state patronage. The major multinationals have vast control of refining and distribution infrastructure especially in the developed market. Unfortunately, the major companies are losing control of large low cost oil reserves making replacement of both downstream and upstream assets very difficult. The situation is worsened by the fact that the downstream assets such as refineries of the major multinationals are located in developed countries whereas the growth in oil demand is in Asia and other developing markets. Furthermore, restrictions on access of oil resources based on domestic politics has greatly hampered the control of the oil supply chain by the major multinationals, thus enhancing the power of NOCs and independent firms (Bridge & Le Billion 2012).

State, Firms and the Civil Society

There is an intricate power interaction among the state, firms and the civil society throughout the oil supply chain. At the upstream stage the civil society champions for the equitable sharing of the benefits arising from crude oil exploration and extraction. The civil society agitates for the inclusivity of rights of individuals throughout the oil supply chain. The issue of labour relations is a core theme of engagement between the oil firms and the civil society (Cumbers & Atterton 2000). The civil society is also involved in championing the right of the indigenous communities to be compensated for foregone opportunity to use land for tradition production purposes. Furthermore, the civil society has been instrument in agitation for control of environmental pollution arising from production and consumption of oil and its constituent’s products.

The civil society seeks to offset the balance of power between the people on one side and, the state and firms on the other side. The aim is to ensure that oil supply chain management does not only serve the interest of the firm and state but also creates value for the good of all. This effort has often resulted in strain relationship between the actors as it is seen as an added cost mainly by the oil firms. The government role in this power play should be mediating the interest of the firms and civil society in the context of existing laws and regulation and optimization of the economic value of the oil supply chain.

Global Commodity Chain

The GCC framework analysis of power does not only focus on the productive resources ownership, but also interrogate the system coordination and oil industry organization (Gibbon, 2001). OPEC is an example of global commodity chain. It is a representative of global governments’ intervention on global oil supply chain. According to Inkpen (2010), “OPEC was founded in 1960 with the objective of shifting bargaining power to the producing countries and away from the large oil companies.” It addresses the power relations in oil supply chain that allow certain agents gain competitive advantage over others in terms of low cost of production and value addition.

Emphasis will be given to governance structure, since it is the element that shows how parameters under which a given chain operates are determined and controlled. There are two types of governance structure in GCC approach; buyer driven and producer driven (Gereffi 1994). In the oil supply chain, the producer driven governance structure is applicable due to the nature of commodity and operations.

In the oil supply chain, the control of production system lies with NOCs, TNCs and other big integrated firms. According to ( Spero & Hart 2009), an oligopoly of seven major oil companies controlled the oil supply chain from extraction, transport, refining and end product sales during the twentieth century. To assert, their power the seven firms with headquarters in the Netherlands, UK and the US, formed joint ventures and cooperation that were aimed and restricting market entry by competing firms. These firms are characterised by large capital and technological capabilities. Overall, the NOCs are increasing state resources to influence the oil supply chain. The entry to developed markets by emerging firms is controlled by the TNCs and large integrated firms. Thus power, is viewed in terms of restriction to market entry. This challenges the general assumption that there is no single producer with monopoly and that trade barriers reduction will in effect offer opportunities to potential producers. It emerges that free trade in oil has not led to enhanced market access (Le Billon & Cervantes 2009). Rather, it has precipitated the need for oil producing countries to support NOCs in order to offset the power of TNCs. The state has stepped into the power struggle to control oil supply chain by supporting NOCs, which now dominate the market in terms reserve replacement as well production capabilities.

The oil industry has strategic implication on security, transportation and almost all other important economic activities in all countries (Jones 2012). As a result of these strategic considerations, the oil supply chain is central to the international macroeconomic and geopolitical environment. Thus, every state is at the centre of the power relations with respect to evolution and management of the industry, either indirectly through NOCs or through direct regulations of operations. This is clearly demonstrated by the behaviour of state in oil producing nations. More so, emerging oil consumers such as China and India are increasing using state power and resources to influence the relations in global oil supply chain.

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Global Production Network

The ownership of oil firms, and the perceived social economic implication, affect on oil flow through the network. In addition, the behaviour of the state towards the local communities where oil resources are located also plays a major role in sustaining oil flow.

Global oil production network such the oligopoly that the “Seven Sisters” (Spero & Hart 2009) had created had substantial power over oil exporting countries. The oligopoly used its financial strength as well as support from their mother states, to control prices, divide oil markets and block outsiders from the lucrative business. This was made possible by vertically integrating their financial and technological resources and political patronage. Thus, the firms had created competitive advantage based on cost and value by using political and financial muscle to protect the global oil production network or a cartel.

The power relationship between various actors in oil supply chain can be understood through analysis of governance in oil contracts using the GPN framework. The core aspects of the contractual relationships among the three actors in the oil industry include; incentive, authority and trust. The governance of oil supply chain procurement is characterised by high level of uncertainties and complex technologies. The processes often last for a number of years.

An example of oil global production network contractual relationship is the construction of an offshore platform. The contract consists of engineering, fabrication, installation and commissioning. The processes require extensive coordination of phases among actors. The intricacies of the coordination are based on management of power relations. Without the proper definition of power relations, such a contract can be hazardous to the oil exploring firms, government as a buyer and also to the contractor. The main cause of the contractual hazard is the difficulty of estimating costs since each platform is distinct (Olsen et al. 2005).

This kind of exchanges has complex linkages among various actors separate in time and space. Thus applying GPN framework in crafting the contract and governance structures actors can mitigate the hazards. This large oil contracts requires alliance of various actors in order to deliver the desired product. Strategic alliances helps enables oil actors to access innovative technologies and huge financial resources to engage in oil production and marketing (Crump 2007). Incentive is used to share risks and rewards among different actors in the contract. The principle of mutual sharing is used in building incentive. If one of the parties fails to fulfil its contractual obligation, the share of benefits is reduced for all actors. Consequently, if one party over performs, the arising benefits are shared mutual among the actors.

In order for the contractor to deliver according to specification and in timely manner the various actors in the production network often form a steering committee. Power in this setup flows from duties and responsibilities (Crump 1997). The powers of each member in the alliance are exercised by their representatives. Effective exercise of authority and application builds trust among the various actors.

One of the major risks associated with oil supply chain is exposure to political interference at national and global level. The GPN framework postulates that organizations have the power to influence the national politics with the intent of mitigating the political risks. A case in point is the use of political connections by Shell to avoid nationalization in Nigeria. In addition, the focus on offshore drilling by Mobil and Chevron mitigated the risk posed by political instability in Nigeria (Frynas & Mellahi 2003). Therefore, oil firms can analyze the production network and identify power relations risks. This is crucial in ensuring that the appropriate risk mitigation measures are instituted. Close relationship with political regime is a double edged sword (Watts 2005). It can cushion the oil supply chain against adverse regulations while at the same time expose the company to civil friction for collaboration with unpopular political leadership. Therefore, oil industry players must be cautious to avoid comprising their long-term strategic interests.

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The entry of Chinese oil firms into Nigeria demonstrates that firms and government have to contend with social-political issues. Using the GPN framework to interrogate the influence of oil firm ownership with respect to socio-economic progress (Bridge 2008), it is apparent that Chinese ownership has posed conflict. The social political concerns of the inhabitants of the Niger Delta have profoundly affected the oil production and the overall network operation. What began as a power struggle between the state and the Niger Delta occupants has spilled out to a global concern. The kidnapping of Chinese workers and Bombing of the state’s oil installation demonstrates strained power relations within the production network. The main concern is the equitable sharing of the benefits generated from oil resources (Obi, 2008). It is the onus of the state and the firms to ensure that the local community is effectively integrated in decision making and their interest addressed to mitigate the existing problems.

Conclusion

The oil supply chain has three main actors; the state, the firms and the civil society. Each actor endeavours to maximize benefits through use of competitive advantage or and regulations. The GPN urge that chain approach has simplistic conceptualization of economic production and distributions activities; vertical and linear in nature. Such conception fails to capture the complexity of the oil political economy that comprises of intricate links; multidimensional and multilayered. The chain approach analysis of power relations among actors in oil economics is founded on the idea, that by identifying the hierarchical relationships among actors, detailed analysis of dynamics of power relations can be achieved (Henderson et al. 2002). The GCC framework is preferred for analysis of the power relation in the supply chain since the oil production framework is vertical aligned to the flow of crude oil. However, the other oil supply chain analysis framework offers critical insight to other factors that influence power relations among various actors.

References

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Bridge, G 2008, ‘Global production networks and the extractive sector: governing resource-based development’. Journal of Economic Geography, vol.8, no. 3, pp.389–419.

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Watts, M 2005, ‘Righteous Oil? Human Rights, the Oil Complex, and Corporate Social Responsibility’, Annual Review of Environmental Resources, vol.30, pp. 373–407.

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