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Impact of Shale Gas Extraction on Business

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Published: Thu, 12 Jul 2018

Research Question and Research Methodology

This study was commissioned by Stolthaven Terminals (ST) to explore the potential economic impact of US shale gas extraction on ST’s business development strategy. The business development team’s preliminary assessment of the impact of US shale gas on ST’s business demonstrates a possibility for US LPG exports to fill unmet global LPG demand, primarily in Asia. This paper generates a strategic approach to selecting an optimal location for a new Stolthaven LPG terminal.

Stolthaven Terminals offers storage for petroleum, chemical products, and gas. The implications of any innovative commercial production process, such as commercial shale gas extraction, should be evaluated carefully. Currently, the company is not active in the LPG storage segment. One of the ST’s objectives is to actively enter the LPG storage market, which is highly influenced by the US shale gas production. Shale gas extraction is presumed to be the main catalyst for LPG production and the development of related technologies. The LPG market transformation is believed to be facilitated by the growing US exports of shale NGL-derived LPG, the wider Panama Canal opening in 2015 and a significant LPG shipping capacity increase by 2015. This chapter frames the methodology that will answer the research question:

Which investment opportunities does the impact of the US shale gas extraction upon the global LPG market bring to an independent storage operator’s (in application to Stolthaven Terminals) business development?

The studied problem can be defined as a managerial optimization problem. The current business should be optimised to reflect the reality of industry developments under the US shale extraction influence. The methodology modifies Chopra and Meindl’s (2013) theoretical framework for network design decisions into a structured strategy for LPG network design and LPG storage capacity location so that it can be applied to the studied problem and in order to develop a recommendation for Stolthaven Terminals on the optimal location of a new LPG terminal in 2015.

The supply chain related managerial decision making principles are established by Chopra and Meindl. They derive several factors that influence an optimised decision making process; strategic factors, technological factors, macroeconomics factors, and political factors (Chopra and Meindl, 2013). This chapter will establish the relevant methodology and introduce the research sub-questions.

Methodology

Management science and the academic world agree on four phases that determine a location for independent storage. Chopra and Meindl describe these phases and a strategic decision making process for a facility location. Phase one contains strategy and requires determination upon development and growth strategy, adequate competition evaluation, and capital constraints. Phase two requires a regional demand analysis, identification of risks and competitors, evaluation of local policy and tax environments, identification of possible trade restrictions. Phase number three implies selection of potential sites for a facility, and phase four is a final location choice that is based on aggregated and analysed information of previous phases. It is understood that a decision of such a nature is predicated by an executive decision to evaluate the feasibility of the investment. Such an executive decision, with a high degree of likelihood, is triggered by a market balance shift or a market transformation.

In my case, the US shale development is a trigger that facilitated LPG market changes and attracted attention to possible imbalances. If I apply Chopra and Meindl’s (2013) framework to Stolthaven Terminal’s intention to enter the LPG storage market, then the first phase revolves around the strategy considerations with a goal to identify and understand the strategy for the entry. The company is willing to enter the market and the financial decision is assumed to be positive if an investment decision is developed. To establish objectives and define strategy, an initial market analysis and evaluation of potential changes in the market is carried out to fulfil phase one of the framework. Chapter 3 determines the strategic approach and conclusion of the initial market assessment while Chapter 4 analyses the strategic implications and develops a specific areas of applications for the strategy.

The third chapter will access the LPG market dynamics in order to narrow the broad market activities down to a specific area that potentially contains business opportunities Stolthaven Terminals and is relevant for the established framework. It concludes with identification of the most opportunistic LPG market segment and answers the first sub-question:

From a chemical storage operator’s perspective, in which area of the LPG market will the US-shale impact be the most evident for a chemical storage operating company?

Further, the fourth chapter will finalise the phase one and concludes on strategic action that is relevant to Stolthaven Terminals in the identified LPG market segment to answer the sub-question 2:

What is the impact of the shale-driven growth of low-cost LPG exports from the US on the global petrochemical industry and which strategic implications for Stolthaven Terminals can be derived from it?

The second phase brings consideration of the configuration of the regional facility location (Chopra and Meindl, 2013). Here, fulfilling the strategic implications, the product flows are modelled in order to identify the regions where the exported from the US product optimally emerges in future.

Next, within the fifth chapter, the 2015 forecasting network optimisation model is constructed to answer the sub-question 3:

How will the US LPG exports be optimally allocated to the LPG demand nations in 2015?

Next, when the optimal regions of interest are identified, the transformed 2015 LPG market structure is applied to relevant locations within each optimal region so that an unmet storage demand is geographically sited. The third phase contains an assessment of the existing business environment, which includes competition activity assessment, customers, and potential joint venture opportunities evaluation. This phase also includes analysis of the qualitative variables of decision making, such as geographical location, proximity to major distribution centres, hinterland connectivity, and areal demand localisation. Chapter 5 concludes phase two of the framework with a network optimization model for the product, which identifies specific regions for the third phase analysis. Chapter 6 focuses on the third phase of the market entry site selection process. Chapter 6 answers the sub-question 4:

In which specific optimal locations within each optimal nation will the unmet demand for LPG feedstock storage emerge?

Next, the fourth phase challenges the selected specific location to assess costs, estimate planning and scheduling, and establish pricing policy. Upon the completion of the last phase, an educated investment decision and financial decision could be made and the further strategic course of action could be established. I stop at phase three with a concluding list of potentially attractive locations for an LPG terminal location. A significant number of assumptions and lack of reliable data lead to a necessity to explore the impact of these uncertainties upon the outcomes of the research. Chapter 7 introduces the qualitative sensitivity analysis of the research uncertainties and assumptions as well as evaluates the reliability of the outcomes of economic evaluations. The sensitivity analysis also investigates the potential impact of implemented forecasting assumptions upon the results of the quantitative model.


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