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2003 Student Case Competition
The Student Case Competition is
sponsored annually by IMA to promote
sound financial/accounting analysis
and presentation skills.
A MANAGEMENT PRACTICES CASE
TransEuro is a wholly owned subsidiary of a major European oil company. Its primary business is the exploration and production of oil. The company is located in central West Africa and has field operations in Angola, Congo, and Gabon. The company's primary base of operation is on land, with a few platforms in shallow water off the coast of West Africa. It also owns pipelines and terminals in the southern part of its region. In the north, it uses pipelines owned by other companies to export oil. While some of its "brown-field" (land-based) operations are wholly owned, others are jointly owned with other oil companies such as Elf, Marathon, Amerada Hess, and ARCO. The joint-venture agreements specify detailed formulae for allocating production and costs between parties. Many of TransEuro's activities take place in remote wilderness areas, which requires TransEuro to provide infrastructure and services that in populated areas are taken for granted. For example, the company must supply housing, food and medical services, entertainment, and transportation. In effect, it must run its own communities in these isolated areas.
TransEuro began operation in the early 1960s when oil was discovered in the region, and it has been highly successful and profitable ever since. In 1997, it was one of the most profitable and cash-rich companies in the region. Taxes and levies on oil exports by the company are the main revenue source for its host governments. Local nationals regard the company as a technology leader and as an employer of first choice.
THE CURRENT SITUATION
The first 30 years (1965 to 1995) were generally profitable and high-growth years for the company. By 1996, however, the profit picture for TransEuro had begun to change. Most of the oil on hand had been depleted, and there were few reserves left. With reduced production and no commensurate decrease in operating expenses, TransEuro's unit-operating cost per barrel (UOC) had begun to increase. (The UOC is the total operating cost, excluding depreciation and depletion, divided by the barrels produced.) At a budgeted production of 112,000 barrels per day, the UOC was forecasted to...