Indian Oil & Gas Industry

January 9, 2013
Business Policy, Planning and Strategy

Submitted by Yash Khandelwal (154) Yogesh Nivangune (155) Sudhir Prajapati (156)
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Introduction Indian Oil and Gas Industry India is the worlds fourth largest consumer of primary energy and accounts for about 4.6 per cent of the world's energy consumption after China, US and Russia. Vandana Hari, Asia Editorial Director, Platts, believes that Indias tremendously growing energy demand has made the country an energy leader on the global platform with more than 28 billion tonnes of prognosticated reserves. The Government of India's New Exploration Licensing Policy (NELP) launched in 1997-98 has garnered investments over US$ 14 billion and has resulted in 87 oil and gas (O&G) discoveries. NELP has encompassed all the ingredients of a favourable investment climate, fiscal stability, transparency of the rule of law, contract stability, minimal policy induced uncertainties and a stable legal and regulatory framework. The refining sector in India has also undergone a silent transformation wherein the country emerged as a major export hub. With a refining capacity of 215 million metric tonnes per annum (MMTPA), exports of petroleum products have now crossed 60 million tonnes (MT), raking-in revenues of about US$ 60 billion. Petroleum products have emerged as the single largest component of merchandise exports from India. Production and Consumption Key Statistics - The hydrocarbons sector is continuously undergoing changes and policy modifications are in-tune with them. Natural gas is rapidly contributing to the energy requirements owing to commercial development of coal bed methane, shale gas, underground coal gas and gas hydrates. President Pranab Mukherji anticipates that natural gas usage will increase significantly in the years to come while urging the need to connect various parts of India with gas pipelines so that economic benefits of natural gas reach to all. The Government of India (GoI) is also lending full support to companies acquiring overseas O&G assets and imports of liquefied natural gas (LNG). Diesel & Petrol - Petroleum products are Indias biggest export earner, fetching revenue of about US$ 59 billion annually. Export of these products stood at 28.9 MT during AprilSeptember 2012, according to the petroleum ministrys data wing, the Petroleum Products Planning and Analysis Cell (PPAC).

During 2011-12, the consumption of petroleum products was about 148 million metric tonne (MMT) showing an import dependence of more than 75 per cent. Diesel consumption, which makes up for more than 40 per cent of the fuel sales, registered a growth rate of 7.2 per cent at average 87, 000 barrels per day (b/d) in September and October 2012 wherein automobile sector contributed majorly (as reflected in the sale of diesel vehicles).

Gas Sector - India's shale gas reserves are at about 290 trillion cubic feet (TCF), of which 63 TCF could be recovered, according to a study by US Energy International Agency. Shale gas is natural gas formed from being trapped within shale formations. Business Policy, Planning and Strategy Page 2

Natural gas sector constitutes about 9.8 per cent of primary energy consumption which is projected to grow up to 20 per cent by 2025 as per Indian Hydrocarbon vision. About 65 per cent of natural gas consumption is accounted by power and fertiliser sectors. Petroleum and Natural Gas Regulatory Board chairman S. Krishnan stresses on the need to evolve a strategy to meet significantly higher share of energy needs from natural gas and take its contribution in the countrys energy basket from 9.8 per cent to 25 per cent in the medium term. The production of natural gas in India was 135 million metric standard cubic metres per day (MMSCMD) during 2011-12. Future - Majorly driven by transportation and industrial sectors, demand for oil is anticipated to surge immensely by 2020 while domestic power and fertiliser industries are projected to drive the demand for natural gas in the country. Given the recent exploration and development efforts undertaken in India, domestic production of O&G is expected to increase substantially. Furthermore, development of technologies enabling efficient use of fossil fuels coupled with use of renewable energy sources could help in filling the demand-supply gap for O&G. The Government has already started taking initiatives to reduce the countrys dependence on imports by encouraging exploration of alternate fuel sources such as coal bed methane (CBM), gas hydrates, hydrogen fuel cell, and blending of bio-fuels. The top two companies in this sector are Reliance Industries limited and Oil and natural gas Corporation, so we have selected these 2 companies for the implementation of SWOT - EFAS, IFAS, SFAS and TOWS matrix. Company details Reliance Industries Ltd RIL is an India-based company. The company is India's largest private sector company on all major financial parameters. They are the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 117th amongst the world's Top 200 companies in terms of profits. The company operates world-class manufacturing facilities across the country at Allahabad, Barabanki, Dahej, Hazira, Hoshiarpur, Jamnagar, Nagothane, Nagpur, Naroda, Patalganga, Silvassa and Vadodara. The company operates in three business segments: petrochemicals, refining, and oil and gas. The petrochemicals segment includes production and marketing operations of petrochemical products. The refining segment includes production and marketing operations of the petroleum products. The oil and gas segment includes exploration, development and production of crude oil and natural gas. The other segment of the company includes textile, retail business and special economic zone (SEZ) development. Reliance Industry is the world's largest polyester producer and as a result one of the largest producers of polyester waste in the world. In order to deal with so much waste, they operate the largest polyester recycling centre that uses the polyester waste as a filling and stuffing. This idea was resulted in an award of 'Team Excellence'. Oil and natural gas Corporation Business Policy, Planning and Strategy Page 3

More than half century survival in oil and gas industry is a record of work by Oil and Natural Gas Corporation Limited (ONGC). It was originated in the year of 1956 as a private sector company. Later, in the year 1993 the company was came to known as Public Sector Company. ONGC's habitual activities deals with exploration, development and production of Crude Oil, Natural Gas, LPG and some other value added petroleum products such as NGL, C2-C3, Aromatic Rich Naphtha and Kerosene. The company going along with two of its folds namely ONGC Videsh Limited (OVL) and Manglore Refinery & Petrochemicals Limited (MRPL) and ten of Joint Ventures/Associates. ONGC's Basins are totally seven in numbers, Western Offshore Basin (Mumbai & Baroda), KG Basin (Rajamundary), Cauvery Basin (Chennai), Assam & AssamArakan Basin (Jorhat), CBM-BPM Basin (Kolkata) and Forntier Basin (Dehradun) and ONGC has two plants situated in Uran and Hazira. The company covers five regions such as Mumbai, Baroda, Nazira, Chennai and Kolkata and also ONGC running eleven institutes for different specialisation in different locations. ONGC involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometers of pipelines in the country. Its international subsidiary ONGC Videsh currently has projects in 15 countries. ONGC has been ranked 357th in the Fortune Global 500 list of the world's biggest corporations for the year 2012. It is also among the Top 250 Global Energy Company by Platts. 1. SWOT Analysis It is a classical strategic planning instrument. By using the framework of strengths and weaknesses and external opportunities and threats, this instrument provides a simple way to estimate the best way to implement a strategy. This instrument helps the planners of what is usually achieved, and what things should be considered by them. SWOT Framework - a 2 x 2 matrixes should be done in a group of key members of the team or organization. First, it is important to know clearly about what the purpose of the key changes and in what the team or organization a SWOT analysis will be undertaken. Once these questions are clarified and agreed upon, one can begin by brainstorming idea and then having it sharpened and clarified in the discussion. Estimation of the internal capacity will help identify where a position of the project or organization today is - what resources can be utilized and what problems have to be resolved. By doing this we can identify where/when new resources, skills or new partners will be needed. When thinking about strength, it is necessary to think about examples of the real success and what is their explanation. An estimation of the external Business Policy, Planning and Strategy Page 4

environment tends to be focused on what is happening outside the organization or on fields that are not yet affecting the strategy but may influence the strategy - both positively and negatively. It's important that we pay attention to what actions and solutions that may arise. Level of correlation should be viewed from 2 sides/directions in the terms of both internal and external conditions. The strategy that can be planned for the institution based on the SWOT matrix is shown in the box numbers 5, 6, 7 and 8 in below given table. Technical implementation of the strategic plan is as follows
INTERNAL CONDITION Strengths (3) Strength .. Strength N Opportunities (1) EXTERNAL CONDITION Threats (2) Opportunity 1 Opportunity N Threat 1 Threat N (5) Weaknesses (4) Weakness 1 Weakness N (6)

(7)

(8)

1. 2. 3. 4. 5.

Box number 1 is filled with opportunities that can be utilized by the organization. Box number 2 is filled with threats faced by the organization Box number 3 is filled with the strength held by organization Box number 4 is filled with weaknesses faced by the organization Box number 5 is filled with the strategy presented in the form of development programs which can be used to take advantage of opportunities by utilizing the existing strength. 6. Box number 6 is filled with the strategy presented in the form of the development program that can be used to reduce the weaknesses by looking at the existing opportunities 7. Box number 7 is filled with the strategy presented in the form of the development programs that can be used to reduce and to anticipate the threats by looking at the existing strength. 8. Box number 8 is filled with the strategy presented in the form of the development programs that can be used to reduce the weaknesses and threats that they face. Inclusion of development programs at boxes 5, 6, 7 and 8 must be sorted by their priority. Advantages of SWOT Analysis Business Policy, Planning and Strategy Page 5

It is a source of information for strategic planning. Builds organizations strengths. Reverse its weaknesses. Maximize its response to opportunities. Overcome organizations threats. It helps in identifying core competencies of the firm. It helps in setting of objectives for strategic planning. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.

SWOT analysis groups key pieces of information into two main categories: External factors (EFAS) The opportunities and threats presented by the external environment to the organization. Internal factors (IFAS) The strengths and weaknesses internal to the organization.

The internal factors may be viewed as strengths or weaknesses depending upon their effect on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. The factors may include all of the 4Ps; as well as personnel, finance, manufacturing capabilities, and so on. The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position. The results are often presented in the form of a matrix.

a. External factor analysis summary (EFAS) Reliance Industries Limited S NO Opportunities 1 2 3 Strong domestic energy demand NELP & OLP Untapped domestic Oil & Gas potential(More oil well discoveries) For petroleum products and pipeline sector, FDI is permitted up to 100% through different routes. Different types of Oil Reserves, CBM, shale gas W R WS Comments

0.12 4 0.10 4 0.08 3

0.48 Enjoy value add due to forward integration 0.40 More ease to avail blocks 0.24 29% of blocks area awarded are with RIL

0.08 4

0.30

It would help of to form more JVs and increase exploration portfolio Investment in shale gas blocks in North America

5 6

0.05 4

0.20

Increasing Natural Gas market 0.05 3

0.15 Has a big natural gas block under operation Page 6

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Foreign opportunities Threats

0.03 4

0.10

International presence & ability & intent to further exploit international opportunities

Delayed Clearances & government interference Upstream skills, dependence on borrowed technology and equipment shortage Exchange rate fluctuations Environmental laws

0.12 3

0.36

Due to multiple clearance , many approvals stuck at different stages

2 3 4 5 6

0.10 3 0.08 4 0.08 2

0.30 Less experience hence dependence 0.32 small international portfolio 0.16 0.21 0.20 3.42 Projects stalled due to unable to get the clearances under the same Output of the discovered asset uncertain at times eg KG 6 Strong financial position help to acquire blocks

Uncertainty of Oil & Gas 0.07 3 recoveries Increased competition within government and private 0.05 4 players Sum 1.00

Oil and natural Gas Corporation S NO Opportunities 1 2 3 W R 4 4 4 WS Comments

Strong domestic energy 0.12 demand NELP & OLP 0.10 Untapped domestic Oil & Gas potential(More oil well 0.08 discoveries) For petroleum products and pipeline sector, FDI is 0.08 permitted up to 100% through different routes. Different types of Reserves, CBM, shale-gas Oil

0.48 huge demand for the explored products 0.40 More ease to avail blocks 0.32 50% of blocks area awarded are with RIL

0.30

It would help of to form more JVs and increase exploration portfolio Have screened few projects but yet to act on it Small player exploration in domestic natural gas

5 6 7

0.05 3

0.15 0.10 0.10

Increasing Natural Gas Market 0.05 2 Foreign opportunities 0.03 4

International presence & ability & intent to further exploit international opportunities Page 7

Business Policy, Planning and Strategy

Threats 1 Delayed Clearances government interference Upstream skills, dependence on borrowed technology and equipment shortage Exchange rate fluctuations Environmental laws Uncertainty of Oil & Gas recoveries Increased competition within government and private players Sum & 0.12 3 0.36 Being a PSU has clearances problems minimal government

2 3 4 5 6

0.10 4 0.08 2 0.08 4 0.07 3 0.05 4 1.00

0.40 Vast experience 0.16 Big International portfolio 0.32 Very few projects stalled 0.21 Diversified and huge portfolio 0.20 3.50 PSU, experienced hence ease of acquiring block

b. Internal factor analysis summary (EFAS) Reliance Industries Limited

S NO

Strength

VRIO W V,R

WS 0.40

Comments

1 Strong Financial position 2 Project management capabilities

0.10 4

V,I,O 0.10 4 O V,I R,I V,O 0.08 3 0.07 3 0.07 3 0.05 3

3 Strategic alliances & JVs Drilling & Exploration Expertise Market Share ( % of 5 exploration ) Enhanced International 6 Presence 4 7 Forward Integration Weakness 1 High leverage position 2 Lack of Skilled Manpower 3 Excessive dependence on

Has cash and cash Equivalents of Rs 395 billion High reputation for completing projects in 0.40 time eg KG block, Jamnagar Refinery Strategic Alliance with BP, Chevron & 0.24 Carrizo More than a decade of experience in 0.21 exploration 0.21 Around 28% of exploration at indian levels 3-4 countries with only 10 blocks under the belt As Omcs & polyesters and petrochemical 0.12 products 0.15 0.60 Has a healthy DE ratio of 0.36 There is a disparity in availability of skilled 0.45 manpower 0.20 Only few key blocks that do bulk of
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V,R,I 0.03 4 0.15 4 0.15 3 0.10 2

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single asset 4 Safety issues 5 Organization Structure Sum

Oil and natural Gas Corporation

0.05 4 0.05 4 1.00

production 0.20 Maintains high standards of safety Fast discussion making ability (Pvt Sec 0.20 Company) 3.38

S NO

Strength

VRIO W V,R

R WS

Comments

1 Strong Financial position 2 Project management capabilities

Has cash and cash Equivalents of Rs 201 billion Huge experience of completing lots of V,I,O 0.10 3 0.30 projects in time 0.10 3 0.30 O V,I R,I 0.08 4 0.32 Exxon, Shell, TOTAL,petrobras, Sinopec etc Working from past 50 yrs. in the biz of exploration Around 50% of market share in 0.07 5 0.35 exploration in Indian Markets 0.07 4 0.28

3 Strategic alliances & JVs Drilling & Exploration Expertise Market Share ( % of 5 exploration ) Enhanced International 6 Presence 4 7 Forward Integration Weakness 1 High leverage position 2 Lack of Skilled Manpower 3 Excessive dependence on single asset

V,O 0.05 4 0.20 Presence in more than 15 countries V,R,I 0.03 2 0.06 No forward integration; tie-ups with buyers

0.15 5 0.75 Very healthy DE ratio of 0.04 0.15 3 0.45 There is a disparity in availability of skilled manpower

0.10 4 0.40 Has even distribution of big assets 0.05 4 0.20 Maintains high standards of safety 0.05 3 0.15 PSU, limitation on decision-making 1.00 3.76

4 Safety issues 5 Organization Structure Sum

Business Policy, Planning and Strategy

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2. Strategic Factor Analysis Summary (SFAS) Strategic analysis consists of measuring the strengths and weaknesses of a company's position. There are a number of tools or methods used as the foundation for strategic analysis of a business; strategic factor analysis strategy is one of the most popular methods because not only does it focus on internal strengths and weaknesses but also on the external environment the company is operating in.

Reliance Industries Limited

Strategic Factors- RIL

R WS

D (S,I,L) L L S,I S,I

Comments Has cash and cash Equivalents of Rs 395 billion Has reputation to complete projects in estmated time limits eg development of KG D6 block There is a disparity in availability of skilled manpower Has only one big exploration block with deals with maximum exploration for the company Enjoy value add due to forward integration More ease to avail blocks 29% of blocks area awarded are with RIL Due to multiple clearance , many approvals stuck at different stages

S1 Strong Financial position 0.14 4 0.56 S2 Project management capabilities 0.13 4 0.52

W1 Lack of Skilled Manpower 0.09 3 0.27 W2 Excessive dependence on 0.11 2 0.22 single asset Strong domestic energy demand growth 0.15 4 0.60 0.12 4 0.48 0.08 3 0.24

O1

L L I,L

O2 NELP & OLP Untapped domestic oil O3 and gas potential(More oil well discoveries) T1

Delayed Clearances & 0.06 3 0.18 government interference

S,I

Upstream skills, dependence on borrowed T2 0.05 3 0.15 technology & equipment shortage T3 Currency exchange rate fluctuation Sum

S,I

Less experience hence dependence

0.07 4 0.28 S,I,L Small International portfolio 1.00 3.50

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Business Policy, Planning and Strategy

Oil and natural Gas Corporation

Strategic Factors- RIL S1 Strong Financial position S2 Project management capabilities

R WS

D (S,I,L) L L S,I S,I L L I,L

Comments Has cash and cash Equivalents of Rs 201 billion Huge experience of completing lots of projects in time There is a disparity in availability of skilled manpower Has even distribution of big assets huge demand for the explored products More ease to avail blocks 50% of blocks area awarded are with RIL

0.14 4 0.56 0.13 3 0.39

W1 Lack of Skilled Manpower 0.09 3 0.27 W2 O1 Excessive dependence on 0.11 4 0.44 single asset Strong domestic energy demand growth 0.15 4 0.60 0.12 4 0.48

O2 NELP & OLP

Untapped domestic oil O3 and gas potential(More oil 0.08 4 0.32 well discoveries) T1 Delayed Clearances & 0.06 4 0.24 government interference

S,I

Being a PSU has minimal government clearances problems

Upstream skills, dependence on borrowed T2 0.05 4 0.20 technology & equipment shortage T3 Currency exchange rate fluctuation Sum

S,I

vast expereince

0.07 2 0.14 S,I,L bigger international portfolio 1.00 3.64

Business Policy, Planning and Strategy

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3. Score Comparison between RIL and ONGC

Score Comparison IFAS EFAS

RIL 3.38 3.42

ONGC 3.76 3.50

SFAS

3.50

3.64

4. TOWS Matrix This analysis helps us to get a better understanding of the strategic choices. It helps us to ask, and answer, the following questions: How do we: Make the most of your strengths? Circumvent your weaknesses? Capitalize on your opportunities? Manage your threats? A next step of analysis, usually associated with the externally-focused TOWS Matrix, helps us to think about the options that we could pursue. To do this we match external opportunities and threats with our internal strengths and weaknesses, as illustrated in the matrix below:

TOWS Strategic Alternatives Matrix External Opportunities (O) 1. 2. 3. 4. Internal Strengths(S) 1. 2. 3. 4. SO "Maxi-Maxi" Strategy Strategies that use strengths to maximize opportunities. External Threats (T) 1. 2. 3. 4. ST "Maxi-Mini" Strategy Strategies that use strengths to minimize threats.

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Internal Weaknesses (W) 1. 2. 3. 4.

WO "Mini-Maxi" Strategy Strategies that minimize weaknesses by taking advantage of opportunities.

WT "Mini-Mini" Strategy Strategies that minimize weaknesses and avoid threats.

This helps you identify strategic alternatives that address the following additional questions: Strengths and Opportunities (SO) How can you use your strengths to take advantage of the opportunities? Strengths and Threats (ST) How can you take advantage of your strengths to avoid real and potential threats? Weaknesses and Opportunities (WO) How can you use your opportunities to overcome the weaknesses you are experiencing? Weaknesses and Threats (WT) How can you minimize your weaknesses and avoid threats?

Reliance Industries Limited

Internal Factors(IFAS)

Strength S1. Strong Financial position S2. Project capabilities management

Weakness W1. Organization Structure

External Factors(EFAS)

W2. Safety issues W3. Excessive dependence S3. Strategic alliances & JVs on single asset S4. Drilling & Exploration W4. Lack of Skilled Expertise Manpower S5. Market Share ( % of exploration ) SO Strategty Company should leverage its financial position and expand into untapped market WO stretegy Through FDI company can from more JV's and strategic alliances for skilled manpower. Also by
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Opportunity O1. Strong domestic energy demand growth O2. NELP & OLP
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O3.For petroleum products and pipeline sector, FDI is permitted up to 100% through automatic route. O4.Untapped domestic oil and gas Company should focus on new markets (shale gas, cbm through potential(More oil well discoveries) & oil sands) O5. Different types of Oil Reserves, CBM, Shale Gas Threats T1. Delayed Clearances & government interference T2. Currency exchange rate fluctuation ST Strategy

participating in NELP & OLP it can reduce dependence on single asset

WT Strategy

With its project management skills & financial position T3. Upstream skills, dependence on company should focus on borrowed technology and equipment developing existing blocks on shortage priority T4. Increased competition within government and private players
Comment on strategy Formulations for RIL

Focus on existing portfolio

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Oil and natural Gas Corporation

Internal Factors(IFAS)

External Factors(EFAS)

Strength Weakness S1. Market Share ( % of W1. Organization Structure exploration ) S2. Strategic alliances & JVs W2. Safety issues W3. Excessive dependence on S3. Strong Financial position single asset S4. Project management W4. Lack of Skilled Manpower capabilities S5. Drilling & Exploration Expertise WO stretegy

Opportunity SO Strategy O1. Strong domestic energy demand growth O2. NELP & OLP O3. Untapped domestic oil and gas Company should exploit available opprotunities in potential(More oil well discoveries) natural gas, cbm and shale O4. For petroleum products and gas pipeline sector, FDI is permitted up to 100% through automatic route. O5. Different types of Oil Reserves, CBM, Shale Gas Threats ST Strategy

With upcoming types of oil reserves company can focus on training manpower to exploit these opportunities

WT Strategy

Company can do forwrad T1. Delayed Clearances & government contract for reducing the interference impact of currency exchange rate fluctuations T2. Upstream skills, dependence on borrowed technology and equipment shortage
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Given the increase in competition among existing players focus on faster decision making is vital

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Company should also reduce the impact of dependence on borrowed technology from its T3 . Currency exchange rate fluctuation project management capabilities and drilling expertise

Comment on strategy Formulations for ONGC

5. Recommendations and Conclusion

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