A PROJECT REPORT ON GLOBALIZATION STRATEGY ANALYSIS Of ONGC

(Oil & Natural Gas Corporation)

SUBMITTED TO; MS.ROMA JAITLY SUBMITTED BY: RAVINA (104) VASUNDHRA(119)

Acknowledgement
This is to thank our Teacher and Guide Ms. ROMA JAITLY who has been very generous in giving us her precious time and information, to assemble this survey on GLOBLIZATION STRATEGY OF ONGC. We extended our gratitude towards her for continuously giving full cooperation and suggestion for the betterment of the project, without her cooperation, observation and keen interest this project would not have seen the daylight.

We would also like to thank other faculty members for providing us their able support to complete this project.

Last but not the least, we express our indebtness towards our family and friends, whose moral support and confidence nourished us with the determination to work hard leading to the making of this dissertation work a success.

RAVINA

(104)

VASUNDHRA VERMA (119)

MBA 3 -A

Table of Contents
Title Page No
Executive Summary 3 Chapter 1: Oil and Gas Industry the driver of the Energy Sector 4 1.1 Strategic Globalization: An Industrial perspective 5 1.2 Globalization in Oil and Gas Industry 6 Chapter 2: ONGC: Indias biggest ambition 7 2.1 Biggest Wealth-Creator for Stakeholders 7 2.2 Growth Story 7 2.3 ONGC Videsh Limited 8 Chapter 3: Way Forward 12 Conclusion 14 References 15

Executive Summary
The best method to study the processes of international business would be to understand an industry that drives the world economy. The oil and natural gas industry is at crossroads, diminishing resources and ever increasing demand has made it one of the most volatile industries of the world. This project aims to understand the processes involved in the international operations of Indias biggest oil and Natural Gas Company. ONGC (Oil and Natural Gas Corporation) is the highest profit making corporation in India. This project aims at mapping the international growth of ONGC over the past 10 years and aims at understanding the strategic initiatives taken up by its international subsidiary ONGC Videsh . The project is also aimed at understanding various frameworks that define business strategy by applying the framework in the current context. ONGC contributes to 77% of Indias crude oil production and 81% of Indias natural gas production. The political, economic, technological environments drive the companys strategies in the global scenario. We also analyze the implications of the impending divestment strategies of the Indian government on the firm. This project hopes to impart a better understanding of the oil and gas industry and the various strategies oil firms employ to gain competitive advantage in a volatile industry. The project would first analyze the industry and the global forces that drive it and then move on to ONGCs place in the sector and the strategies it should follow in the future. The project involves analysis in terms of current trends of globalization in the industry and in ONGC. We also analyze the future prospects of the firm and make certain suggestions as to what they can do differently. Some of the suggestions given here have not been implemented by any other oil and gas firms and could give a considerable competitive advantage to ONGC in the future

Oil and Gas Industry: The driver of the Energy sector

Oil and natural gas industry is an extremely volatile industry driven directly by the crude oil prices and it is an important industry. Current oil and gas price volatility and uncertain demand are making it more difficult for oil companies to plan forward investments. Oil companies require security of demand to underpin long-term investments. The Indian oil & gas industry pegged at US 110 bn - which is about 15% of Indias gross domestic product is one of the focus industries in the countys rapidly growing economy. The ever rising energy demand, which grew at a compound annual growth rate of 4.57% between 1996 and 2006 as compared to the global average of 2.07%, has created challenges for the sector. Currently, the sector accounts for 36% of Indias primary commercial energy consumption. An expanding economy and a growing population have resulted in increased consumption of primary energy resources, such as coal, oil and natural gas, in India. In the last five years, the countrys primary energy consumption increased at a compounded annual growth rate (CAGR) of 7% to reach 469 million tonnes of oil equivalent (MTOE) in the share of natural gas in the countrys primary energy mix increased from 8% in 2008 to 10% in 2009. However, this share is quite low compared to the global average (24%), primarily due to supply side constraints. Indias 44 cubic meters (cm) per capita of natural gas consumption also lags the global average of 429 cm per person.

1.1

Strategic Globalization: An Industrial perspective

The strategy implied in globalization for the Oil and Gas industry is specific to nations competitiveness in terms of the resources it provides. The following would be a typical competitive advantage analysis Involved generic to the industry before going for investments in a particular nation.

Factor Conditions
Human Resources: Oil firms require highly skilled labor at drill stations and since the initial capital investment is very high, cheap labor is generally preferred Material Resources: The natural resource is probably the most important aspect of choosing a nation to invest for an Oil and Gas firm. In this particular industry, natural resources play an important role. It is their excessive availability of oil in their countries that gives OPEC countries a lot of bargaining power.

Demand Conditions Since India is a rapidly growing nation, the demand for oil has been on the rise over the past decade. It has already been observed that the demand will only increase and the growth of an Indian firm will help its cause in terms of becoming a competitive force in the world. For a firm seeking to invest abroad, particularly in this industry, the home demand conditions dont matter as much as the exploration and production is done with the objective of shipping oil to the home country. So the demand conditions in the host country are not really what should be considered while thinking of investment in the particular country. Firm Strategy Structure and Rivalry The ease of setting up businesses in Russia, Vietnam, Brazil and Argentina makes these nations good nations to invest in for Oil firms looking for cost advantage and good friendly contracts. Our nations relations with these nations also matters a lot in this case as oil exploration is a largely political and social issue. It also helps if the nation is culturally close to India and so ONGC has traditionally chosen Academic Group 03 P Nations the age 6th have a long standing relationship with us rather than ones with whom we are still building relationships. Government A force that drives the above issues would be the home nations relations with the host country and its position on the development. ONGC Videsh Limited looked overseas for stake in the countries that had their oil exploration projects still in the nascent stages and that helped them get a stronghold in these nations. Political stability is very important to be considered before investing in a nations oil exploration project. Recently, the political turmoil in Libya led ONGC to withdraw its officers from the country and rethink its global strategy. 1.2 Globalization in Oil and Gas Industry The degree of globalization can be understood by analyzing the following drivers in the industry. Market Drivers: The market drivers in most cases here are local as most nations across the world (except the OPEC) are importers of oil and the domestic consumption fuels a firms willingness to go global. Cost Drivers: Low costs cant really drive the industry as Oil and Gas industry as a whole is a capital intensive industry so firms do not mind paying up the initial capital to reap long term benefits. Government Drivers: This is the key in this industry as ONGC as a strategy only goes for countries that encourage industrial set up and have good trade relations with India. In the oil industry, there is a lot of political issues involved in the oil trading between countries and thus, government drivers are extremely important Competitive drivers: The global competitors are very important in this industry. However, mot oil and gas firms form cartels to ensure collective benefit from the industrial growth. Competitive Drivers, government and the local markets drive the globalization in the Oil and Gas industry.

ONGC: Indias biggest ambition

Set up as a commission in 1956, ONGC is owned 74.14% in stake by the Indian Government. 2.1 Biggest Wealth-Creator for Stakeholders: The People of India (through Government of India) built ONGC with Rs. 342.8 Crore, contributed over 2 years from 1959 to 1981. ONGC has paid back so far: (a) Contribution to Exchequer: Rs. 2,33,486 Crore (Rs.1,87,813 Crore to Central exchequer, Rs. 45,673 Crore to State exchequers) (b) Dividend (cumulative): Rs. 46,212 Crore till FY2009( GoI: Rs. 36,360 Crore +Other shareholders Rs.9,852 Crore (c) Government of India realized Rs. 14,380 Crore through progressive Disinvestment in 2004. ONGC continues to be a zero debt company. 2.2 Growth Story 1955: Oil and Natural Gas Directorate formed August 1956: Directorate raised to the powers of a commission October 1959: commission turned into a statutory body by an act of the Indian Parliament 1970: Discovery of Bombay High, the first offshore drill of ONGC 19902010: Growth in various parts of the country Inorganic growth globall through ONGC Videsh Ltd. Disinvestment in 2004 to raise further capital Academic Group. Going International: Hydrocarbons India Private Ltd was incorporated in March 1965 as an ONGC subsidiary. The main objective was to augment ONGC's production of hydrocarbons by sourcing equity oil and gas from abroad. It became a public limited company on April 1, 1975 and was renamed ONGC Videsh Limited on June 15, 1989. 2.3 ONGC Videsh Limited ONGC Videsh Limited (OVL) is a wholly-owned subsidiary of Oil and Natural Gas Corporation Limited (ONGC) - the flagship national oil company of India. The primary business of OVL is to prospect for oil and gas acreages abroad including acquisition of oil and gas fields, exploration, development, production, transportation and export of oil and gas. The company explores for crude oil, natural gas, and natural gasoline. Being a public sector company OVL has quite an advantage over its competitors with government passing laws to better facilitate the growth of the company. In Jan 2000, Government of India granted a special empowerment that allowed OVL to facilitate the smooth functioning of the company in the international environment. 2.3.1 Growth in E&P global footprint Starting with the exploration and development of the Rostam and Raksh oil fields in Iran and undertaking a service contract in Iraq, a major breakthrough was achieved by OVL in 1992 in Vietnam with the discovery of two major free gas fields, namely LanTay and LanDo, in partnership with British Petroleum and Petro- Vietnam. The string of acquisitions post Jan 2000 is proof that OVL is looking for inorganic growth. This is a strategic move because the industry is too capital intensive and instead of discovering fresh projects in other countries it is much easier to acquire existing projects and grow inorganically. OVL presently has participation either directly or through wholly owned subsidiaries/joint venture company in 40 E&P projects in 15 countries namely, Vietnam (3 projects), Russia (2 projects), Sudan (3

projects), Iran (1 project), Iraq (1 project), Libya (3 Academic Group 03. projects), Myanmar (5 projects), Syria (2 projects), Egypt (2 projects), Cuba (2 projects), Nigeria Sao Tome Principe JDZ (1 project), Brazil (5 projects), Nigeria (2 projects), Colombia (6 projects), and Venezuela (2 projects) and is actively seeking more opportunities across the world. Out of 40 projects, OVL is operator in 17 projects and joint operator in 6 projects. Over the past 6 years, the overseas production of oil and gas production for ONGC has been on the rise and the recent developments of mergers and joint ventures with companies abroad has helped this purpose. OVL now has a global footprint across 15 countries with 39 projects. Since its first hydrocarbon revenue from overseas in 2002-03 from Vietnam, this year OVL registered the highest ever production of 8.87 MTOE of oil and gas. 2.3.2 Imperial Energy Acquisition OVLs acquisition of Imperial Energy in January 2009 got a mixed response from critics as some said it was taking a huge gamble and its ROI might be affected in the short term others welcomed the move as it would help the dwindling outputs back home and would help increase ONGCs reserves. The strategy behind ONGCs process of acquisition can be explained by the standard framework used to understand the globalization policies used by various firms Academic Group 03. The Ownership Advantage in this case would be strategic assets that Imperial Energy has in Russia and Kazakhstan, crucial for ONGCs presence in the region as it was trying to build up resources in the oil-rich Siberian blocks. This was ONGCs opportunity to establish presence in the Western Siberia, one of the worlds largest oil and gas producing regions, by acquiring an asset with significant long-term production and reserves potential. Imperial Energys block was then the platform for its expansion in the future auctions of hydrocarbons block. This was OVLs biggest overseas acquisition since it spent $1.7 billion to buy a 20% stake in the Sakhalin-1 field in Russia. The ownership advantage here implies the long term profitability of the project and most similar acquisitions, while requiring high amounts of capital are done by OVL with the idea of reaping long term benefits of acquiring the natural assets and resources in various countries. Location Advantage: There is a reason why OVL always went to the Russian government and not the Middle Eastern nations. The relations with the respective countries are extremely important. The only Middle Eastern country where OVL has a global footprint is Iran and the reasons to that effect are simply the good relations the country has had with Iran in the recent past. Other location advantages involve the attitudes of the government towards the industry in the respective nations; it is much easier to go through with such acquisitions in developing nations as they are willing to invest in new projects. Russia as a nation has always been willing to encourage development and industrial process in its country, and hence, was a good region to invest in. Transportation costs are also a good consideration and it would be profitable to invest in countries in the Asian region, that said, OVL has also had investments in Latin America proving that transportation costs are not what really give a location advantage for a deal. Location in the Imperial Energy was extremely strategic, which is why OVL was willing to pay such a high price for the deal as western Siberia is a hot bed of untapped resources. Internalization Advantage: The internalization advantage can be understood in this context where there would cases where OVL might have to step back from a deal as the host country has very weak labor laws or does not have similar work culture. Since it is not really a technology innovation firm, ONGC wouldnt have issues with weak intellectual property rights laws.

2.3.3 Current Developments and Future Plans

Dec 2010, OVL swapped its Russian stake of Imperial Energy with Sistema for a 25% stake in Sistem-owned JSC Bashneft. The agreement would give OVL access to Sistemas oil fields in Arctic. In Jan 2011, OVL and its partners Indian Oil Corp. were in the last lap of negotiations for developing a gas field off the coast of Iran with an estimated investment of over $ 5 billion. On 19th Jan this year, OVL showed interests in acquiring strategic equity stakes in Russian government owned companies such as Rosneft Oil Company and JSC "Zarubezhneft". The Academic Group 03 Page 11 strategy behind this has been explained by an OVL executive as wanting a share of their assets and the consultation for the acquisition is still going on. This comes as a follow up of the firms framework agreement. The following key areas have been identified in OVLs Management Discussion and Analysis Report of 2009-10[6] as important for the future outlook of the company 1. New Ventures: OVL intends to maintain its trend of adopting a balanced portfolio and continue acquiring producing properties and a lot of emphasis is being given to increasing the companys reserves 2. Exploration: The state-of-the-art data center and a knowledge team have both been set up to scan and identify value in the existing exploration assets. 3. International Alliances: OVL wants to continue forging international alliances to attain a collaborative approach to value creation. 4. Geographic spread: OVL will continue to consolidate its positions where it has already gained presence and would make consistent approach of finding attractive acreages in other hydrocarbon rich countries

2.3.4 Risks and Concerns Financials: While ONGC has been posting profits for all this years, its profits have declined from 2008 onwards; this might be attributed to the recession. However, thecontinuous acquisitions and expensive deals that have very little ROI in the short term could cause the company to go into heavy debts and could be a source of trouble. OVL needs to look at consistently consolidating its current assets to improve the bottom line. [7] Political Unrests: The recent uprising in Egypt has shown that a political unrest can change the outcome of the countrys future in a matter of days. This has to be taken into consideration before going into any country.

2.3.5 Recession and the volatility of the industry The deep economic recession that had spread worldwide in the past year has taken a severe toll on global oil demand during 2009-10. The global oil demand continued to remain subdued during most of the current year. Sustained OPEC production cuts and improving economic prospects however resulted in upward movement of prices in 2009-10. Global Upstream M&A activity began to pick up pace, increasing in volume quarter by quarter with improved access to funding and relative economic stability, therefore posting advantage of reduced valuations and less competition for opportunities. The oil and gas deals in 2009 totaled $153 billion and surpassed the pre-crash levels of 2007 (2008 data has visible impressions of the rise and fall of oil prices, Academic Group 03 Page 12 while 2007 data is similar representation for comparison). Tracking on the deal count numbers of actual transactions above the $100 million mark, the picture however still seemed to be blurred with 124 deals in 2009 versus 160 in 2008 and 168 in 2007. ONGCs reaction towards recession was contrary to the conventional processes. While other oil firms sought to consolidate their assets, ONGC went ahead and signed its biggest acquisition deal to date, that of Imperial Energy ($2.1 billion). This was a strategic move in line with the long term vision of the firm and was a good move. OVL could have however, foreseen the development of the Arctic fields and wouldnt have had to swap its stake in Imperial Energy to the resource rich Arctic fields. The volatility of the oil and gas industry is a big challenge that has to be addressed. OVL addresses this concern by ensuring all its assets are raised in a safe and secure manner. It ensures security to its shareholders by having an optimum D/E ratio.

Way Forward
ONGC Videsh has grown a lot over the past years. However, it is disturbing to note that it always seeks in organic growth towards developing its resource base. The following are some suggestions that could help its globalization strategy: 1. Team up with the strong players: ONGC should make deals only with firms that are stable and are from politically stable nations. Currently, it has ensured security in its dealings with this strategy and it should continue pursuing it. 2. Innovation through cost leadership: Though cost leadership is difficult in an industry as capital intensive as this, ONGC can aim towards seeking areas that havent been discovered yet like parts of Africa and some Asian nations that are rich in resources. The low costs in these regions would help improve its bottom lines and give a certain competitive edge. 3. Aim at producing surplus: It would be impressive to see India become an oil exporter in spite of not having enough resources of its own. This is where OVL can play a key role, the acquisition of assets would further help our countrys cause.

4. Domestic Support: The ONGC financials showed a slowdown in 2009-10 with PAT decreasing considerably; however, the OVL financials show a consistent increase in PAT. This proves that while OVL is doing extremely well, the domestic arm of ONGC is not cost effective. This could be dangerous as most of the funding used for new global acquisitions come from funds generated internally through equity markets and debt raised by government entities. If the bottomline of the consolidated financials is not lucrative, OVLs source of funds might dry up and this could be dangerous for ONGC as a firm. For any firm before going global, it needs to maintain a stable structure domestically else, the stability of the firm becomes a challenge. 5. Energy Policy: Given the uncertain energy policies and the failure of COP15 summit, ONGC should look at playing greater role in pushing the Indian Government (subsequently nations across the world) towards adopting a standard procedure. There should be policy advisors that should drive suggestions towards investing in nations that have a certain stance in terms of their energy policies. 6. Reserves oriented approach: Instead of looking at competition as a competition, we should look at them as allies and seek to build more joint ventures as oil is a dwindling reserve and we need to look at joint ventures for stability in the industry. 7. Dealing with price volatility: Re-evaluate all investment strategies, including the balance between oil and natural gas investments. This would involve scenario planning for investments and divestments against low to moderate prices even if current prices are high. It also involves having plenty of liquidity before investing in a project as protection against any potential volatility.

Conclusion
Oil and Gas industry is a very volatile industry with difficult entry barriers and requires capital intensive investments. It is driven by the countrys political and economic stability and its success determines the nations competitive advantage. Globalization strategies for such an industry are interestingly, driven by local demand and global supply. This inequation often causes difficulties for firms in going global. The essential globalization strategies simply involve acquiring as many assets and reserves as possible across the world. This is the strategy followed by ONGC, its global footprint has been growing ever since its modest beginnings at Vietnam in1992-93. ONGC, a public owned subsidiary is Indias shining star when it comes to performance and has attributed most of its high profits to its acquisition policies abroad with its international subsidiary ONGC Videsh limited (OVL). ONGC currently has a very strong global footprint, 40 E&P projects in 15 countries and is actively seeking more opportunities across the world. Out of 40 projects, OVL is operator in 17 projects and joint operator in 6 projects. OVLs strategy is in line with its vision of being a global power in terms of acquiring assets. There has been an attempt to understand the industry through Porters Diamond Model and the degree of globalization that is feasible and required in an oil and gas industry by examining the various drivers of globalization in the industry. The most important deal ONGC has had in the recent past that of Imperial Energy, worth $ 2.1 billion has been examined to understand why Oil and Gas firms go for globalization models and acquisitions instead of setting up at various locations themselves. ONGC has become a global force to reckon with being the only Indian company to feature in the Fortune 500 in 2007 and it continues to be one of the top 50 oil companies across the world by size. Its global strategies have been extremely fruitful so far. However, it needs to rethink its strategy in terms of the domestic slump in production and political instability in the countries where it seeks to do business. In true sense, ONGC is indeed a global company which has great potential. But in an industry so volatile, security is what provides stability and globalization in this context would mean looking at high potential high return areas that are stable politically, economically, socially and culturally. Academic Group 03 Page 15 References 1. US Energy Information Administration: India http://www.eia.doe.gov/emeu/cabs/India/Oil.html 2. The Industry Handbook: The Oil Services Industry http://www.investopedia.com/features/industryhandbook/oil_services.asp 3. The Vietnam connection http://www.hinduonnet.com/fline/fl2001/stories/20030117003811200.htm 4. www.ongcindia.com 5. ONGC Annual Reports 2008-09, 2009-10 6. Management Discussion and Analysis Report of 2008-09, 2009-10 7. OVL Financials http://www.ongcvidesh.com/Performance.aspx 8. Global and Transnational Business: Strategy and Management by G. Stonehouse, D. Campbell,

J. Hamill, T. Purdie