Red Sky Energy Limited: Production, Costs, and Macro Factors

This report provides an analysis of Red Sky Energy Limited, an Australian oil and gas acquisition company, focusing on its business environment, production costs, and sustainability practices. The report examines the company's operations in the context of the Australian oil and gas market, highlighting its competitive landscape and the impact of macroeconomic factors. It discusses the company's production costs, including fixed and variable costs, and analyzes its profitability. Furthermore, the report evaluates the company's sustainability practices, including its management of positive and negative externalities, and its efforts to develop a competent management framework. The analysis also considers the implications of the Australian political and economic environment on Red Sky Energy's business operations, addressing factors such as interest rates, inflation, and unemployment.

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Macro business environment

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Executive summary
Red Sky Energy Limited has specialisation in the oil and gas acquisition across Australia. The
organisation is involved in acquiring of Flax oil and gas field. The prime objective of the
company is to explore the business activities for the purpose of economic deposits of Australian
oil and gas. Factor of production of a business is referred as the production of goods and services
for the purpose of maximising the economic profitability of the businesses. Factor of production
are land, labour and capital. The production procedure of Red Sky Energy Limited creates
positive externality as the company allows easy access to capital thus providing opportunity to
develop the visibility as well as public image. It generates positive externality as it provides
benefit to a third party.

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Table of Contents
Introduction......................................................................................................................................3
1. Business environment..................................................................................................................3
2. Production cost and scale.............................................................................................................5
Macro business environment...........................................................................................................5
Sustainability Practice of the Business............................................................................................7
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

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Introduction
Red Sky Energy Limited has specialisation in the oil and gas acquisition across Australia. The
organisation is involved in acquiring of Flax oil and gas field. The prime objective of the
company is to explore the business activities for the purpose of economic deposits of Australian
oil and gas. Red Sky Energy Limited has been running its operations in Innamincka, which is
located in the northeast South Australia (Red Sky Energy Limited, 2018a).Though the business
is based on Melbourne, Australia, however, it has expanded its businesses across the market of
Australasia, and North America.
Business environment
The Companyaims at acquiring of assets since it would be easier to produce or to bring in the
production process very quickly. The organisation shows its interest in Gold Nugget Gas
venture. In this context, it can be stated that the Gold Nugget usually produces approximately
millions of cubic feet gas along with five barrels of oil in each of the day and it occupies 320
acres area across the country (Red Sky Energy Limited, 2018b).
Some of the key competitors of Red Sky Energy Limited are Sundance Energy Australia, Elk
Petroleum, Fremont Petroleum and Freedom Oil and Gas (Carr, 2018). On the other hand, Red
Sky Energy Limited has been serving its operation to a wide range of the customers across the
global markets. For instance, the services of Red Sky Energy Limited are taken by the aviation
industry, or the commercial airlines, military and the technical services. However, from the
above analysis it can be observed that the oil and gas industry in the Australian market is highly
competitive due to the presence of large competitors across the market. In terms of
microeconomics, it can be stated that the market structure of the oil and gas industry of Australia
is perfectly competitive. Apart from this, a large number of firms are closely substituted to each
other. The large substitutes of the company include ethanol, wind power as well as thermal
power. This are regarded as a public momentum that leads to increase in utilization.
As per the concept of perfect competition, identical products are sold in the market place and
hence, Red Sky Energy Limited would not be capable to charge higher prices of the products.

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Since, the switching cost is lower; therefore, the customers would like to switch to other
companies in case of charging of higher prices of the products or in case of declining the quality
of the products. Furthermore, the consumers have complete knowledge on the price level and the
technology used in the production process of the company. Therefore, it can be recommended
that in case of increasing the profitability scale over the competitors, Red Sky Energy Limited
would need to bring and implement innovative strategies in the business. Apart from this, the
organisation would rely upon the brand loyalty strategy for maintaining a long term relationship
with the customers.
Figure 1: Profit maximisation in perfect competition
(Source: Azevedo& Gottlieb, 2017)
In order to increase the profitability under this type of market structure, the organisation would
require to set marginal revenue is similar to the marginal cost (which can be seen in the above
figure). Though, the net profitability earning by the firm would be zero, negative or positive in
the short run, however, in the long run the organisation would earn positive profitability
percentage.
Demand curve in perfectly competitive market is horizontal line, which is equivalent to the price
level is said perfectly elastic. Since, the firm would earn supernormal profit in the long run

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perfect competition, more substitute goods would enter in the market, and hence, the supply
curve would shift to the rightward (Goerke, 2011). Consequently, the equilibrium price level
would be declined and the economic profitability percentage would be zero.
Production cost and scale
Factor of production of a business is referred as the production of goods and services for the
purpose of maximising the economic profitability of the businesses. Factor of production are
land, labour and capital. These factors are considered as the variable cost since the total cost
would be increased with the rise of the production cost. Therefore, from this point, it can be
stated that with the rise of cost of input, the variable cost would be increased. It is noted that the
production cost of perfectly competitive firm is dependent upon both the fixed cost and variable
cost. The fixed cost of Red Sky Energy Limited is the cost of rent of the office room, equipment
lease, and business license feeswhereas the variable cost of the company is the annual salary of
the employees (since, it is dependent upon the number of labours), cost of raw materials etc.
Therefore, it can be inferred that the fixed cost would not be changed while the variable cost
would be varied with the passage of time.
Table 1: Net profit of Red Sky Energy Limited
(Source:InvestSMART Financial Services Pty Ltd. (2019)
From the above figure, it can be observed that the net profit of the Australian firm is negative,
which refers that the variable cost is more than the fixed cost and hence, the firm’s optimal size
is small.
Macro business environment
Red Sky Energy Limitedis an Australian company and the company operates in a democratic
political system. The country has been observed to deal with the competencies of its government.
In the Index of Economic Freedom, the country has been ranked in the fifth position among other

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global cities. According to Zattoni& Cuomo (2010), the competent governance system in
Australia providesRed Sky Energy Limited with a protected as well as safe business
environment. The country also involves a robust regulatory system thus providing a strong
banking as well as financial regulations. The life quality that is provided by the country has been
rated the seventh largest in the world.
The rate of interest in Australia has been at an all-time low level at 1.50 percent. According to
Swanson & Williams (2014), the country has been witnessing a steady policy in the upcoming
years. The country witnessed an above-trend rate during the first half of 2018. As a result, the
business of Red Sky Energy Limitedhas witnessed a positive trend as well as non-mining
business investmentthat have been expected to rise. On the other hand, the inflation rate in
Australia increased by 0.4 percent that has been lesser than projected. In spite of increasing over
the year, the annual increase at 2.1 percent has been lower in comparison to market expectations
(Refer to Appendix 2). According to Milner, Page & LaMontagne (2013), the unemployment
rate declined by 0.2 percent as the number of individuals who have been employed increased to
approximately 27,000. As a result, the rate of trend participation remained constant at 65.6
percent during 2018. It could be inferred that the country has not been in inflation thus boasting
to avoid technical recession for 26 years (Refer to Appendix 1).
The business exports its commodities to other countries where the exchange rate involves a large
proportion of foreign liabilities that are denominated in Australian dollar.The products that are
provided by the company are regarded to be normal rather than inferior. During recession, the
demand will decrease, as recession is a period that decreases the overall income (Chowdhury,
2012). The business is likely to witness serious issues during recession that leads to decline in all
major macroeconomic aspects such as GDP, factors of production as well as household income.
As a result, the future of the business is also likely to get affected. Over the enduring period, the
company is likely to witness both highs as well as lows in its business cycle due to average
business development rate.

S = PMC = SMC
SMB
D = PMB
P1
Q1 Q2
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Sustainability Practice of the Business
The production procedure of Red Sky Energy Limited creates positive externality as the
company allows upstream as well as develops large gas field. It generates positive externality as
it provides benefit to a third party.
Figure 1: Positive Externality
The diagram shows positive externality that is known to provide advantage to the overall society
that is regarded to be greater in comparison to personal benefit (Van den Bergh, 2010).
The production procedure of the business creates a negative externality,as the decision that is
associated with production does not involve paying complete decision cost. The company
involves negative externality as in the production procedure it leads to emission of greenhouse
gases thus initiating harmful externalities. As a result, the producers involve a lower marginal

S = MC
D = MB
P1
Q1 Q2
Deadweight Loss
S’ = MC - X
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costs thus effectively shifting down the supply curve (Van den Bergh, 2010). In this case, the
marginal cost will not equal the marginal benefit that results in a deadweight loss.
Figure 2: Negative Externality
In order to reduce negative externality, the government has intervened with laws as well as
regulations that include the operation of all private as well as public businesses.
The sustainability practice in the business included development of management systems in
order to influence the long-term business viability. This included greater responsibility to non-
traditional stakeholders as well as continuous development regarding reporting practices (Huck,
Kübler&Weibull, 2012).

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Conclusion
It could be concluded that the production procedure of the business creates a negative
externality, as the decision that is associated with production does not involve paying complete
decision cost. The company involves the investors to purchase shares thus involving multiple
strategies to invest. The development of a competent management framework has also helped to
deal with decision-making procedure that takes place in the company. The senior management
has been responsible for providing report that measure performance against the strategies.

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Appendices
Appendix 1
Appendix 2

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