SVKM’s Narsee Monjee Institute of Management Studies Bengaluru

Post Graduate Diploma in Management

REPORT ON INDUSTRY ANALYSIS OF

OIL AND GAS INDUSTRY

Submitted to

Dr. Narayani Ramachandran

Prof. Vasant Cavale

Submitted by-

ATULYA SACHAR A017

MIDHILA ER A032
MOKSHA SHAH A034
SIDDHARTH KUMAR A060
SONALI HOODA A061
VAISHWI SINHA A067
VIGNESH S A068

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 TABLE OF CONTENTS
EXECUTIVE SUMMARY ..................................................................................................................... 4
PESTEL ANALYSIS .............................................................................................................................. 5
Political factors: .................................................................................................................................. 5
Economic factors: ............................................................................................................................... 5
Social factors: ..................................................................................................................................... 5
Technological factors: ........................................................................................................................ 5
Environmental factors: ....................................................................................................................... 6
Legal factors: ...................................................................................................................................... 6
FUNCTIONAL ANALYSIS .................................................................................................................. 7
MARKETING ANALYSIS ............................................................................................................... 7
Market structure & players ............................................................................................................ 7
STP analysis .................................................................................................................................. 8
Segmentation ................................................................................................................................. 8
Targeting........................................................................................................................................ 8
Positioning ..................................................................................................................................... 9
Marketing mix ............................................................................................................................... 9
Product life cycle ........................................................................................................................... 9
Porter’s five forces....................................................................................................................... 10
SWOT Analysis - ONGC ............................................................................................................ 13
KPIs: Key Performance Indicators .............................................................................................. 14
FINANCIAL ANALYSIS ................................................................................................................ 16
Du Pont Analysis ......................................................................................................................... 16
Cost Structure Analysis ............................................................................................................... 21
JOINT VENTURES, MERGERS AND ACQUISITIONS .............................................................. 24
Joint Ventures .............................................................................................................................. 24
Merger and Acquisitions.............................................................................................................. 24
HUMAN RESOURCE ANALYSIS ................................................................................................ 29
Workforce .................................................................................................................................... 29
Talent shortage and talent acquisitions ........................................................................................ 29
OPERATIONAL ANALYSIS ......................................................................................................... 31
Production and Processing of OIL and GAS ............................................................................... 32
Value Chain Analysis .................................................................................................................. 34
SUPPLY CHAIN MANAGEMENT ................................................................................................ 36

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 GLOBAL SCENARIO ..................................................................................................................... 39
Foreign direct investment (FDI) .................................................................................................. 39
Global suppliers, buyers, competitors.......................................................................................... 40
STRATEGIC ANALYSIS .................................................................................................................... 42
DECISION ............................................................................................................................................ 46
CONCLUSION ..................................................................................................................................... 49

TABLE OF FIGURES

Figure 1 Global Market Leaders: their capitalization and revenue ......................................................... 7

Figure 2 Domestic Players: their revenues.............................................................................................. 8
Figure 3 Return on equity ..................................................................................................................... 17
Figure 4 Accounts payable turnover ratio ............................................................................................. 17
Figure 5 Accounts Receivable Turnover Ratio ..................................................................................... 17
Figure 6 Current Assets Turnover Ratio ............................................................................................... 18
Figure 7 Fixed Assets Turnover Ratio .................................................................................................. 18
Figure 8 Inventory Turnover Ratio ....................................................................................................... 18
Figure 9 Total Assets Turnover Ratio ................................................................................................... 19
Figure 10 Current Assets to Total Assets .............................................................................................. 19
Figure 11 Current Ratio ........................................................................................................................ 19
Figure 12 Debt Equity Ratio ................................................................................................................. 20
Figure 13 Financial Leverage................................................................................................................ 20
Figure 14 Working Capital.................................................................................................................... 20
Figure 15 Upstream M&A volume for 2018 was 12 percent lower than 2017 ..................................... 27
Figure 16 Christmas Tree To Production Separator.............................................................................. 33
Figure 17 Value Chain .......................................................................................................................... 34
Figure 18 FDI Inflows in the industry.................................................................................................. 39
Figure 19 Crude oil and natural gas consumption................................................................................. 42

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 EXECUTIVE SUMMARY

The oil and gas sector is one of the core industries in India and plays a major role in influencing
decision making for all the other important sections of the economy. Crude oil is the most actively
traded commodity in the world and the market is dominated by large conglomerates that are
competing for ever dwindling resources. India’s economic growth is closely related to energy
demand; therefore the need and importance of oil and gas is projected to grow more.

This report provides the functional analysis and financial profiling for the upstream oil and gas
industry. The domains covered for analysis are Human Resource, Marketing, Supply chain,
financial and Information Technology.

In Human resource analysis, the year-wise data of permanent manpower employed in the
government-owned petroleum companies revealed the decline in the manpower employed by oil
PSUs by 59 per cent in the clerical category and the growth in the executive or managerial category
by 32 per cent. Similarly, the manpower in the exploration segment dipped 33 per cent but number
of persons employed in the pipeline segment has jumped 40 per cent. With a combined workforce
of about 1.4 lakh – ONGC and Indian Oil alone contribute over 33,000 regular employees each.
Lack of experience, lack of hard job and technical skills, too-high salary demands, lack of soft
skills, and lack of formal engineering educations are few of the key challenges oil companies
encounter while hiring.

It is known that major Indian oil companies have an advantage in various areas like Brand
recognition, Extensive distribution channels of BPCL, IOC, HPCL, Capacity advantages of ONGC
(being the top producer of Oil and Gas in the country) and Major advantages in innovation and
technology. With the price of the crude oil set by the OPEC nations, the profits made by the
upstream companies mostly depends on reducing cost.
To stay ahead of the competition, the oil industry needs to cut down on its operational expenses.
This goal can be achieved if the sector incorporates technology and improves its operational
efficiency. By embracing technologies like Kymera Xtreme, Casing drilling technology, HCS
AdvantageOne, SCADAdrill System for exploring, engineering, construction and maintenance
respectively, and relying on automation, cloud computing, Internet of Things etc., oil companies
can reduce their expenses.

India is the third-largest importer of oil. Given that fuel permeates every sector of the economy, the
escalation in its cost will have wider implications. Oil importers will take a hit on margins else,
pass on the cost to consumers. According to our analysis, in India, the oil and gas industry has a
huge potential and contributes over 15% to India’s GDP. The Government of India has revamped
the regulatory framework in the upstream sector with a view to attract foreign investment (i.e., a
shift from NELP to HELP) this is also consistent with the government’s objective to facilitate ease
of doing business in India. The Government is looking to reduce its import dependency for oil and
hence will put in place some reforms to encourage investments in the upstream industry. From an
economic and financial perspective, investment in oil and gas industry is lucrative, with substantial
prospects in India. Given the growing demand for oil in India and the Government’s aim to reduce
crude oil imports by 10% by 2022, it is apparent that there will be major investments in this industry
in future.

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 PESTEL ANALYSIS

PESTEL Analysis involves analysis of the Political, the Economic, the Social, the Technological,
Environmental and Legal factors in which an oil and gas company operates.

Political factors:

 The OPEC nations are the major producer of world's crude oil. Therefore, every policy made by these
countries related to the crude prices have their influence on crude oil prices.
 The cut down of the crude oil production in the OPEC countries along with Russia, and US sanctions
on Iran and Venezuela has driven up the crude prices.
 US supplies cut India’s dependence on Middle-East suppliers and enhance the country’s bargaining
power with them.
 Indian government subsidies for fossil fuels, including oil and gas, have decreased by 76% over the
three years to 2017.
 High-level inter-ministerial committee’s recommendations to revert back to production sharing
contracts instead of revenue sharing contracts for oil and gas auctions.
 The interim budget proposed a capital outlay of Rs 49,057 for the Exploration and Production (E&P)
segment, which is a 6.69 per cent drop from the expenditure in 2018-2019.
 The Govt of India has targeted to decrease oil imports by 10% by the year 2022.

Economic factors:

 Depreciating currency: India is the third-largest importer of oil. Given that fuel permeates every
sector of the economy, the escalation in its cost will have wider implications. Oil importers will take
a hit on margins else, pass on the cost to consumers.
 Demand: India's energy consumption will rise by 156 per cent to 1,928 million tonnes of oil
equivalent by 2040 from 754 million tonnes of oil equivalent in 2017. Renewable sources are also
expected to continue their upward trajectory, as their share in the energy mix is expected to increase
from 4 per cent today to 15 per cent by 2040.

Social factors:

 Lifestyle: With the ever-increasing number of private vehicles, an overall domestic consumption of
petrol and petroleum product is on rise in India.
 Awareness: Increasing awareness on environment friendly fuels and decreasing trend in the use of
fossil fuels.

Technological factors:

 End-to-end Exploration and Production (E&P) solutions are available to help oil and gas operators
increase efficiency, reduce costs and improve return on investment. These solutions range from
seismic processing and interpretation to production modelling.
 The developing technology and techniques have dramatically altered the manner in which oil and
gas reserves are identified, developed and produced. E.g.: Deep Shear Wave Imaging, Ji-Fi,
Multifunctional Nano-Tracers etc
 Digital-enabled marketing and distribution. Retailers in other industries have implemented digital
technologies to gain a better understanding of consumer habits and preferences, optimize pricing
models, and manage supply chains more efficiently.

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 Threat of electric cars. As electric car batteries mature and electric cars become more feasible
business proposition, the demand for oil as fuel could shrink further.

Environmental factors:

 Wastewaters, gas emissions, solid waste and aerosols generated during drilling, production, refining
and transportation amount to over 800 different chemicals that lead to pollution.
 Environmental impacts include intensification of the greenhouse effect, acid rain, poorer water
quality, groundwater contamination, among others. The oil and gas industry may also contribute to
biodiversity loss as well as to the destruction of ecosystems that, in some cases, may be unique.
 Oil and gas upstream industry in India requires prior environmental clearance before any drilling
activities.

Legal factors:

 Safety in Offshore Operations Rules, 2008 provides principles related to health, safety and
environment when dealing with petroleum activities including systematic development and
improvement of health, safety and environment.
 Petroleum and Natural Gas Rules, 2009 provides for matters such as, where and by whom
applications for mining leases may be made, the terms upon which such licenses are granted, the
maximum area and time frame for leases, etc.
 Government has enacted various policies such as the New Exploration Licensing Policy (NELP) &
Coal Bed Methane (CBM) policy to encourage investments
 Petroleum Amendment Rules, 2011- provides information regarding storage, delivery and dispatch
of petroleum.
 Open Acreage Licensing Policy, 2016 will facilitate investors in proposing, through a suo motu
Expression of Interest (EoI), blocks of their choice for contracting based on the data available in
National Data Repository
 Policy framework to promote and incentivize Enhanced Recovery Methods for Oil and Gas-2018 to
provide fiscal incentives to adopt Enhanced Recovery, Improved Recovery and Unconventional
Hydrocarbon production Methods.

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 FUNCTIONAL ANALYSIS

MARKETING ANALYSIS
India's real GDP has been growing by 5-10% per year, up $110 billion in 2014. New business
reforms can expand the Indian economy by 8% this year, beating China for the first time in decades.
At 23% of total energy supply, Petroleum is India's second largest source. Boosted by fallen crude
prices, India is expected to overtake Japan to become the world's 3rd largest oil consumer, at about
4.1 million barrels/day. India is now where China was a decade ago, and oil consumption is strongly
linked to economic growth. Petroleum has no large-scale substitute, so as countries develop and
install more extensive transportation systems, oil demand increases. Since 2005, India has been
responsible for 20% of incremental global oil demand increase, versus 55% for China.
Macro level factors fuelling strong oil demand
 GDP growth and population owing to accelerated investment in education, health and human
capital and ensuring ease of doing business.
 Urbanisation: Rate of urbanisation is expected to grow quickly due to increased opportunities
and developments. As compared to 32% urbanisation in 2015, it is expected to rise to 46% in
2040.
 Energy consuming sectors: Energy demand in transport sector to rise by 4.1% by 2040 and
strong growth expected across industries such as cement, iron and steel, petrochemicals etc.

Market structure & players

Figure 1 Global Market Leaders: their capitalization and revenue 1

1
Oil and Gas Report,www.ibef.org,2016

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 Figure 2 Domestic Players: their revenues2

STP analysis

Segmentation
 On the basis of location of customer company: The customers in the oil and gas industry
are divided into two major groups of National Oil Companies (NOCs) and International
Oil Companies (IOCs).
 On the basis of geographic location : Transportation of the crude oil and gas is an
important aspect that companies take into consideration. Also having diverse operations
and customers across variety of oil prone countries would imply a safety margin while
facing dramatic market changes in one location.
Targeting

With cut throat competition and new entrants into the market along with ever changing customer
needs, product differentiation is the way forward for Oil and Gas Corporations. Changes in
customer’s values means marketers should reassess the strategies based on new customer values
and differentiate the products and services against competition. Differentiation strategies not only
leverage the company’s profitability but also increase the brand awareness in the market. But
differentiation without attraction is not going to be fruitful. The need for innovative and novel
services and products can raise the customer’s appetite and encourage clients to try the new
services. They should address the customer’s needs in an innovative and technological manner.
Differentiation should be in line with value creation, and consequently, should attract customer’s
attention to innovative values and solutions.
Different customers/industries require different level of hydrocarbons and purity. Certain industries
require rather impure forms of gas which has low level of hydrocarbons, pesticides and fertilizer
industries being one of them, require Sulphur as raw material. Companies today invest in
machineries with latest technology to extract different forms of crude oil and gas cost effectively.
Also, established and decent oil companies are willing to a pay extra for premium product. Some
oil and gas corporations are providing free transportation of oil and gas for their customers just to

2
Oil and Gas Report,www.ibef.org,2018

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differentiate their services from the competition. So, differentiation is not just related to products
but also service based.
Positioning

One way of differentiating a company from others is through branding. Product differentiation can
influence the brand equity and pricing strategies. A unique and hard-to-replace brand is a distinctive
feature that customers use to differentiate available products in the market. The name of the brand
will also affect the positioning of the product in customer’s mind. One of the criteria for customers
to distinguish amongst competitors in the market is the brand strength and visibility. Brand
recognition and reputation is a major differentiator in the oil and gas market and can give significant
advantages over competition.
There is a strong relationship between brand image and successful differentiation strategies.
Although variations in novel tools and equipment in addition to specialized resources is a
differentiator in any challenging market, the pace of progress is unequal among competition.
Companies are aware of differentiation benefits but only few have the resources, budgets and
flexibility to risk new ideas for proposing new products and services. Challenges oil and gas
companies have been facing in recent years have provided a great chance for service companies to
discern and differentiate their capabilities from competitors through unique products and
customized services.

Marketing mix

4 P’s of marketing:

Product
The products of the upstream oil and natural gas industry include crude oil and natural gas.

Price
The upstream companies have no say in deciding the price of crude oil as it is
dictated by the OPEC.

Promotion
A very small part of the total expenditure goes into the marketing, selling and distribution expenses.
For example, GAIL’s selling and distribution expenses contribute about 0.05% of the total
expenditure and the trend is constant over the years.

Place
The customers for the oil and gas industry (upstream) are the refineries. These refineries are mainly
located in the coastal region closest possible to the oil field. The states having refineries are Gujarat,
Maharashtra, Tamil Nadu, Andhra Pradesh etc.

Product life cycle

Oil and gas fields generally have a lifespan ranging from 15 to 30 years, from first oil to
abandonment. Production can last 50 years or more for the largest deposits. Deepwater fields,
however, are operated just five to ten years due the very high extraction costs.

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The life cycle of oil and gas fields can be broken down into three stages:

 Start-up (two to three years). During this period, production increases gradually as more
and more wells are drilled.
 Plateau production, when output stabilizes. This stage also lasts two to three years, or
sometimes longer in the case of larger fields.
 Decline, during which production falls at a rate of 1% to 10% a year. When production
ends, large quantities of oil and gas remain underground. Oil and gas companies are
therefore constantly seeking to improve recovery rates using enhanced recovery
techniques (see Close-up: "Developing Oil and Gas Fields"). Oil field recovery rates
range from 5% to 50%. The rate is higher (60% to 80%) for fields that produce only
natural gas, as its lower density and greater flow rate make production more efficient.

Gas has a higher recovery rate (60% to 80%) than oil (5% to 50%). Things don't always go
according to plan in oil and gas production. Some reservoirs will produce up to 10% to 20% more
oil or gas than expected, while others may produce a great deal less than initially estimated.

There are many reasons for this unpredictability. Oil and gas fields contain residual water, which
is driven up the well with the hydrocarbons. After time, there may be more water and less oil or
gas. The cost of extracting and separating the water out can result in a loss-making operation. In
addition, at some sites the natural gas extracted is not intended for sale. Yet, gas production at these
fields can sometimes spike, which means that less oil is produced. The global economic climate
can also impact the life cycle of oil and gas fields. For example, if oil prices drop over a long period
of time, companies may decide to abandon an oil field earlier than planned. Conversely, if oil prices
rise, production may continue longer.
All of these factors impact profitability, and in some cases force companies to abandon production
early at the risk of losing almost all of their considerable initial investment. To reduce this risk,
engineers carry out regular appraisals throughout a field's life cycle. When oil and gas companies
abandon a field, they may sell it to a smaller private company with lower production costs that
require lower returns. In other cases, the field may be bought by a state-owned company in the host
country.

Porter’s five forces

Threat of new entrants: Medium

1. Economies of scale:
Risk management techniques and technological advancements lead to economies of scale in the
upstream industry. External economies of scale occur outside of the firm, within an industry in
form of merger and acquisition or expansion. The entrant has to seize a substantial market share
while existing players have to retain customers, in order to utilize economies of scale.

2. High capital requirements:

Large capital is required for acquisition and exploration of hydrocarbon reserves, drilling and
completing wells, floating oil platforms and installing pipelines.

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3. Limited product differentiation:
The products i.e. Crude oil and natural gas are produced to an industry standard and
consequently there is limited scope for product differentiation between companies. Although,
there may be scope to differentiate on the basis of factors such as reliability of supply, or the
physical characteristics of the hydrocarbon

4. High switching costs:

Switching costs are high since the customers i.e. The downstream industry cannot easily switch
from one firm to the other as they are not capable of refining different types of crude.

5. Non-access to distribution channels:

The increase in the pipeline tariffs by owning companies can increase the operating costs for a
new entrant.

6. Costs independent of scale:

The costs advantages that may not be replicated by a potential entrant would be for proprietary
product technology and access to raw materials

7. Supportive govt policies:

Government has enacted various policies such as the new exploration licensing policy (nelp) &
coal bed methane (cbm) policy to encourage investments. The government also has allowed
100% fdi in upstream projects.

Intensity of rivalry: High

8. High fixed or storage costs:

The upstream oil and gas industry is capital intensive and it requires areas for storage of
materials related to drilling activities like casing pipes, well heads, xmas trees, drill bits, etc.
To support its drilling activities.

9. Limited differentiation:
The commodity i.e. Crude oil has limited space for differentiation. Only the property of the
hydrocarbon can be a basis for product differentiation.

10. Large capacity addition because of economies of scale:

The firm would have to invest a lot of capital for technologies used in exploration.

11. High exit barriers:

Being a player in the oil and gas upstream industry requires high investments and fixed costs.
Once such huge investments have been made exiting the scenario is not easy.

12. Diverse competition:

The opec nations are the major players in the upstream industry. They set the price of oil and
natural gas as they are the major producers.

13. Shifting rivalry:

Joint ventures are common in this industry as it partly takes off the burden of being capital
intensive industry. Often, an upstream and downstream firm merges to make activities simpler.

14. Low strategic stakes:

With only few firms holding a large market share, the market is less competitive in india. But
major part of crude oil used in india is imported and globally opec nations have larger market
share making strategic stakes low.

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15. Few major competitors:
The industry has few major players like ONGC which produces 56 % of crude oil in India,
followed by OIL, IOCL.

16. Robust industry growth:

The industry is growing robustly. With the government’s attempt to reduce crude oil imports
by 10% by 2020, the industry is expected to attract us $25 billion investment in exploration and
production.

Threat of substitute products: Low

17. Collective public mentality:

People are moving towards clean energy sources like (solar, wind etc.) Hence, they are possible
substitutes for oil and gas industry

18. Price-performance trade-off:

Since there is limited space for differentiation and price is set by the OPEC nations. There is no
price-performance trade-off for the oil and gas industry.

19. Produced by industry earning high profits:

Fuels like coal and nuclear energy are possible substitutes of the industry.

Bargaining power of buyers: Medium

20. Buyers purchase large volumes relative to seller’s sales:

To satisfy the demand for oil and gas in the country, the buyers i.e. the refineries, has to buy a
large quantity of crude from the upstream industry.

21. Significance of the purchases to their total operating costs:

The operating costs in this industry is very high, the company has to be operating for a while
before the products purchased become significant part of their operating cost.

22. Standard and undifferentiated products:

Crude has very limited space for differentiation. The power of buyers is dependent on the
property of hydrocarbon of the crude and the procedure of refining that the refineries use.

23. High switching costs:

The buyer’s switching cost may be high as all the refineries may not be able to refine all types
of hydrocarbon. Since all the companies in the upstream industry may not be producing the
same crude that the refineries want, the switching cost will be high

24. Uncontrolled profits:

The price of the crude is as fixed by the OPEC and refineries can set the price for the refined
oil.

25. Possibility of backward integration:

Depending on the size of the company, there is a possibility of backward integration, however,
it is low.

26. Huge effect on quality of product or service of buyer:

The quality of the crude oil is the main component for the refineries and it directly affects the
product of the buyer.

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Bargaining power of suppliers: High

27. Supply dominated by few companies:

The suppliers are the companies that provide equipment for drilling and exploration. The
supplier market is niche and there are only few companies dominating this market.

28. No competition from substitutes:

Oil is used in many industries and hence completely substituting may be possible only in the
distant future. Therefore, there is no threat of substitutes in the supplier side.

29. Industry is an important market segment:

The oil and gas industry are a very important because of its versatile product and suppliers to
this industry solely provide their products and services to the upstream industries.

30. Product supplied is an important input to industry:

Without the equipment, the crude cannot be extracted. So, the importance of the product
supplied is very high.

31. Supply products are differentiated:

The drilling equipment are differentiated based on the technology used.

32. Suppliers do not forward integrate:

The equipment companies do not forward integrate as the upstream industry has large capital
and resource requirement.

SWOT Analysis - ONGC

Strengths
• ONGC is India’s largest crude oil and natural gas producer
• Strong brand name of ONGC company
• High profit making and high revenues
• Has over 30,000 employees in its workforce
• ONGC produces about 30% of India’s crude oil requirement
• Commemorative Coin set was released to mark 50 Years of ONGC
• Strong advertising and branding of the company along with recognition from several
awards

Weaknesses
• Being a government organization, slow bureaucratic decisions can reduce efficiency
• Intense competition means limited market share growth for ONGC

Opportunities
• Increasing natural gas market
• ONGC can increase business by more oil well discoveries
• Expand global export market and have international tie-ups

Threats
• Government regulations affects business of ONGC
• High competition form Indian as well as global oil companies
• Hybrid and electric cars in the market can reduce fuel consumption

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• Fluctuating crude oil prices can affect the business

KPIs: Key Performance Indicators

1. Capital expenditures
Spending by an E&P operator to acquire, find and develop reserves is known as capital
expenditures, or CAPEX.
Upstream capital expenditures are divided into four major categories:
 Proved property costs for the acquisition of properties with proved reserves.
 Unproved property costs related to the acquisition of acreage and leases.
 Exploration costs, commonly known as finding costs, related to identifying and proving
a prospective location that may contain oil and gas reserves. This includes geological
and geophysical costs and the costs to drill exploratory wells.
 And finally, development costs, which are the costs of obtaining access to prove
reserves. This includes costs for drilling development wells and the installation of
surface facilities needed for production.

2. Operating expenditures
Operating expenditures, called OPEX, for an E&P operator are incurred as part of day-to-day
operations. These include direct field related production costs along with non-cash charges such as
depreciation, depletion, and amortization expense and property impairments.

3. Authorization for expenditure

AFEs are used in joint ventures as evidence that the joint interest owners have agreed to participate
in the project and approve the expenditures. The summation of all proposed AFEs becomes the
capital budget for an E&P company in any fiscal year.

4. Finding and development costs per BOE

Finding and development costs, also known as F&D costs, are used to estimate a company’s costs
to find and develop new reserves. This measure is reported as a ratio on a per barrel of oil equivalent,
or BOE, basis. Changes in natural gas reserves are converted to “oil equivalent barrels” at a ratio
of 6 Mcf to one barrel of oil.
Mcf or millions of cubic feet is the standard production measure for natural gas around the world.
For an operator that primarily produces gas, production may be reported on an MCF equivalent, or
MCFE, basis using the same conversion factor.
While methods can vary, a common calculation includes unproved property costs, exploration costs
and development costs in the numerator. Reserves changes from extensions and discoveries;
improved recovery and revisions are used for the BOE denominator.

5. Production costs per BOE

Production costs are also commonly analyzed on a per BOE or per MCFE basis. Here production
costs for the period are divided by combined oil and gas production volumes. Industry financial
analysts may allocate production costs between oil and gas using relative production weightings,
with oil today generally receiving a greater share of the cost. This is done because at the field level,
liquids are normally more expensive to produce and process than an equivalent amount of gas.

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6. Production replacement ratios
The production replacement ratio, also known as reserves replacement ratio, is used to measure the
extent to which an E&P company replenishes its reserve base as it is depleted by production.
These ratios are calculated as a percentage of reserves additions in a period divided by the total
production in the same period, generally a fiscal year. The components of reserves additions
included in this ratio calculation can vary. Common methods include:
 All sources – which includes the total net change in reserves for the period.
 F&D additions – which include extensions and discoveries, improved recoveries and
revisions, but excludes any purchases and sales of proved reserves. An F&D rate
greater than 100% indicates that a company is adding to its reserves base by “the drill-
bit,” rather than by acquisition.
A company that is not adding annual reserves that are at least equal to its annual production is
effectively liquidating the company if this trend continues. As oil gets harder to find, this becomes
a real challenge for an E&P company with large production volumes.
The operational measures we’ve addressed thus far – F&D costs per BOE, production costs per
BOE and production replacement rates – can be analyzed on an annual basis. But they are often
reported using a three-year or five-year average to smooth out any anomalies in the data.

7. Reserves-based lending
The volume and value of proved reserves are key to a company’s ability to arrange external
financing to fund exploration and development projects. This is especially true for numerous
independent E&P operators that do not have the internal financial resources of major oil company
like ExxonMobil, Shell, BP or Chevron.
A bank will typically provide reserves-based lending, where an E&P company’s proved reserves
serve as collateral. The company’s borrowing base, or amount the bank will lend, is based on the
value of these reserves. The borrowing base is re-determined twice a year. Periods of low
commodity prices can present a significant challenge to a company as the value of its reserves, and
subsequently its borrowing base may be lowered.
Additional loan repayments may be required and the E&P company may need to defer or cancel
projects because funding is not available.

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 FINANCIAL ANALYSIS

Du Pont Analysis

Particulars Company For the For For For For For

year the the the the the
ended year year year year year
31st ended ended ended ended ended
March, 31st 31st 31st 31st 31st
2013 March, March, March, March, March,
2014 2015 2016 2017 2018
Return on Equity = Net Income / Shareholders' Equity OIL 0.187 0.144 0.117 0.094 0.053 0.096
Net Profit Margin = Net Profit After Tax / Net Sales OIL 0.361 0.311 0.258 0.240 0.163 0.250
Total Assets Turnover Ratio = Net Sales/ Total Assets OIL 0.401 0.275 0.269 0.249 0.210 0.242
Financial Leverage = Total Assets/ Total Equity OIL 1.290 1.684 1.684 1.571 1.559 1.578
Return on Equity = Net Income / Shareholders' Equity HOECL -0.839 -0.236 -4.490 0.012 0.110 0.101
Net Profit Margin = Net Profit After Tax / Net Sales HOECL -5.071 -2.086 - 0.123 1.454 0.777
30.307
Total Assets Turnover Ratio = Net Sales/ Total Assets HOECL 0.062 0.036 0.095 0.059 0.049 0.091
Financial Leverage = Total Assets/ Total Equity HOECL 2.663 3.125 1.554 1.621 1.555 1.434
Return on Equity = Net Income / Shareholders' Equity BPRL -1.159 24.140 -9.148 -0.228 -0.902 -0.044
Net Profit Margin = Net Profit After Tax / Net Sales BPRL NA NA NA NA -4.273 -1.775
Total Assets Turnover Ratio = Net Sales/ Total Assets BPRL 0.000 0.000 0.000 0.000 0.101 0.019
Financial Leverage = Total Assets/ Total Equity BPRL 5.505 -0.079 1.167 1.175 2.094 1.330
Return on Equity = Net Income / Shareholders' Equity GAIL 0.166 0.162 0.091 0.075 0.092 0.114
Net Profit Margin = Net Profit After Tax / Net Sales GAIL 0.085 0.076 0.047 0.044 0.073 0.086
Total Assets Turnover Ratio = Net Sales/ Total Assets GAIL 1.064 1.155 1.073 0.980 0.870 0.924
Financial Leverage = Total Assets/ Total Equity GAIL 1.844 1.840 1.816 1.733 1.451 1.440
Return on Equity = Net Income / Shareholders' Equity ONGC 2.454 2.883 1.836 1.540 1.360 1.031
Net Profit Margin = Net Profit After Tax / Net Sales ONGC 3.666 5.040 3.196 2.977 3.239 2.346
Total Assets Turnover Ratio = Net Sales/ Total Assets ONGC 0.468 0.392 0.399 0.355 0.317 0.292
Financial Leverage = Total Assets/ Total Equity ONGC 1.431 1.458 1.439 1.459 1.326 1.506
Return on Equity = Net Income / Shareholders' Equity CAIRN 0.434 0.192 0.036 0.023 NA NA
Net Profit Margin = Net Profit After Tax / Net Sales CAIRN 1.603 0.751 0.169 0.184 NA NA
Total Assets Turnover Ratio = Net Sales/ Total Assets CAIRN 0.241 0.225 0.184 0.111 NA NA
Financial Leverage = Total Assets/ Total Equity CAIRN 1.124 1.140 1.144 1.127 NA NA
Return on Equity = Net Income / Shareholders' Equity ESSAR -0.482 0.052 0.283 NA NA NA
OIL
Net Profit Margin = Net Profit After Tax / Net Sales ESSAR -0.020 0.001 0.015 NA NA NA
OIL
Total Assets Turnover Ratio = Net Sales/ Total Assets ESSAR 1.235 1.701 1.705 NA NA NA
OIL
Financial Leverage = Total Assets/ Total Equity ESSAR 19.440 21.419 10.772 NA NA NA
OIL

16
 500% Return on Equity
0%
has been consistent
March'12 March'13 March'14 March'15 March'16 March'17 March'18 over the years for
-500%
all companies with
-1000%
the exception of
-1500% BPRL which saw a
-2000% sharp decrease in
-2500% March 2014 due to
-3000% a provision for
impairment loss of
OIL HOECL BPRL GAIL
Rs.8300 crores.
ONGC CAIRN ESSAR OIL

Figure 3 Return on equity

50.000 Accounts Payable

Ratio represents
40.000 the how quickly
30.000
companies are able
to pay their
20.000 respective
10.000
suppliers. HOECL
has been
0.000 performing well in
March'12 March'13 March'14 March'15 March'16 March'17 March'18 the past, beating
the industry
OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL
average due to its
Figure 4 Accounts payable turnover ratio
small size, but we
find that as they
have expanded
their operations, the Accounts Payable Turnover Ratio has fallen. This shows that when scale of
operations increases, management needs to keep up with the expansion to maintain proper ratios

30.000 Accounts
25.000
Receivable
Turnover Ratio
20.000
represents the speed
15.000
at which companies
10.000
are able to convert
5.000 their trade
0.000 receivables into
March'12 March'13 March'14 March'15 March'16 March'17 March'18 cash. OIL being one
OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL of the biggest
players in the market
Figure 5 Accounts Receivable Turnover Ratio maintains a
consistent ratio over
the years, despite dynamic changes in the market. This shows the goodwill the firm enjoys in the
marketplace.

17
7.000 Current Assets
Turnover Ratio
6.000
represents the how
5.000 efficiently a firm
4.000 utilises its current
assets to generate
3.000
revenues. GAIL has
2.000 outperformed the
1.000 industry standards
0.000
throughout the years
March'12 March'13 March'14 March'15 March'16 March'17 March'18 under review due to its
efficiency in
OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL operations and proper
management of
Figure 6 Current Assets Turnover Ratio current assets.

5.000 Fixed Assets

Turnover Ratio
4.000 represents how
efficiently a firm uses
3.000
its Fixed Assets to
2.000 produce revenues.
ONGC is the industry
1.000 leader again in this
0.000
Ratio.
March'12 March'13 March'14 March'15 March'16 March'17 March'18

OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL

Figure 7 Fixed Assets Turnover Ratio

250.000 Inventory Turnover

Ratio represents how
200.000
well a firm manages
its inventory. BPRL
has not been able to
150.000
manage its inventory
properly and neither
100.000
does HOECL.
Smaller firms have
50.000 difficulty maintaining
this ratio.
0.000
March'12 March'13 March'14 March'15 March'16 March'17 March'18

OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL

Figure 8 Inventory Turnover Ratio

18
 1.800 This ratio
1.600 represents how
1.400
well a firm
utilises its Total
1.200
Assets to
1.000
generate
0.800
Revenue. GAIL
0.600 is the industry
0.400 leader here.
0.200
0.000
March'12 March'13 March'14 March'15 March'16 March'17 March'18

OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL

Figure 9 Total Assets Turnover Ratio

1.200 It indicates the

extent of total
1.000
funds invested
0.800 for the purpose
0.600 of working
capital and
0.400
throws light on
0.200 the importance
0.000 of current assets
March'12 March'13 March'14 March'15 March'16 March'17 March'18 of a firm. It
should be
OIL HOECL BPRL GAIL
worthwhile to
ONGC CAIRN ESSAR OIL observe that how
much of that
Figure 10 Current Assets to Total Assets portion of total
assets is
occupied by the current assets, as current assets are essentially involved in forming working capital and
also take an active part in increasing liquidity. BPRL has not managed this ratio well in March 2014
but has improved over the years.

30.000 Usually Current

Ratio is 2:1. It
25.000 represents how
20.000 many times the
current liabilities
15.000 of a company can
10.000 be paid using the
current assets.
5.000 CAIRN has too
0.000 high a current
March'12 March'13 March'14 March'15 March'16 March'17 March'18 ratio indicating
poor management
OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL of its current
assets.
Figure 11 Current Ratio

19
8.000 ESSAR OIL has a very
high Debt Equity Ratio
6.000 which led to its sale in
March 2016. This ratio
4.000 represents the long term
borrowings as a
2.000
percentage of the total
0.000 equity.
March'12 March'13 March'14 March'15 March'16 March'17 March'18
-2.000

OIL HOECL BPRL GAIL

ONGC CAIRN ESSAR OIL

Figure 12 Debt Equity Ratio

35.00

30.00

25.00

20.00

15.00

10.00

5.00

-
March'12 March'13 March'14 March'15 March'16 March'17 March'18

OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL

Figure 13 Financial Leverage

20,000

10,000

-
March'12 March'13 March'14 March'15 March'16 March'17 March'18
-10,000

-20,000

-30,000

OIL HOECL BPRL GAIL

ONGC CAIRN ESSAR OIL

Figure 14 Working Capital

20
 Growth Rate

Particulars Company For the For the For the For the For the For the
year year year year year year
ended ended ended ended ended ended
31st 31st 31st 31st 31st 31st
March, March, March, March, March, March,
2013 2014 2015 2016 2017 2018
Operating Cycle OIL 49.801 48.513 80.219 93.817 72.223 68.968
Cash Cycle OIL 40.710 37.271 65.332 76.980 54.042 51.872
Operating Cycle HOECL 163.874 282.975 263.890 248.712 234.235 225.259
Cash Cycle HOECL 125.128 197.853 154.321 156.161 128.513 116.896
Operating Cycle BPRL NA NA NA NA NA 36.002
Cash Cycle BPRL NA NA NA NA NA 33.026
Operating Cycle GAIL 28.009 28.601 32.450 33.366 32.912 31.382
Cash Cycle GAIL 6.792 6.483 9.337 11.986 12.276 9.349
Operating Cycle ONGC 51.691 57.080 69.299 65.642 50.369 53.250
Cash Cycle ONGC 29.724 31.960 44.827 42.793 28.420 28.712
Operating Cycle CAIRN 23.074 45.345 50.864 38.340 NA NA
Cash Cycle CAIRN 14.965 30.885 25.714 -9.869 NA NA
Operating Cycle ESSAR OIL 40.621 49.467 68.714 NA NA NA
Cash Cycle ESSAR OIL 5.211 8.831 1.178 NA NA NA
Company As at As at As at As at As at As at
31st 31st 31st 31st 31st 31st
March, March, March, March, March, March,
2013 2014 2015 2016 2017 2018
OIL 9.92% 10.04% 7.48% 5.05% 0.50% 1.87%
HOECL -83.91% -23.61% - 1.18% 10.98% 10.13%
449.02%
BPRL - 2414.02% - -22.79% - -4.40%
115.94% 914.77% 90.24%
GAIL 11.52% 11.43% 4.97% 2.75% 3.08% 7.12%
ONGC 24.06% 19.46% 11.70% 11.81% 13.51% 12.98%
CAIRN - 13.56% 2.75% 1.05% NA NA
658.12%
ESSAR NA NA NA NA NA NA
OIL

Operating Cycle and Cash Cycle

Cost Structure Analysis

1) Major Cost Elements

The Oil and Gas Upstream sector is primarily focused on the production and sale of crude oil and
natural gas. The major cost elements for this industry are the purchase of Plant and Machinery
for the extraction of oil as well as the Purchase of Licenses for setting up operations in new and

21
prospective areas. Further, the Exploration Costs are incurred heavily for finding out and testing
new sites for digging oil. Royalty Payments also play as a major cost element for those companies
who have joint ventures. Employee Costs are also significant as this is a labour-intensive industry
and high retention costs because of the unsafe nature of the work performed. Finally, levy of Rates
and Taxes on this industry is also a large cost element because of the regulated nature of the
business.

2) Cost Units Applicable for the Industry

Crude Oil production is measured at the business level as Million Metric Tonnes (MMT)
Natural Gas is measured at the business level as Million Metric Standard Cubic Meters (MMSCM).
At the most basic of levels the purchase of stock in trade which is natural gas (purchased by either
subsidiaries or through joint venture agreements) is as per the metric tonnes or through barrels
Renewable Energy/ electricity production is also undertaken by some companies and they are
measured in Megawatts

3) Cost Drivers
The cost drivers are inter-linked to each other. With an increase in the exploration costs, there will
be further purchase of plant and machinery- this will cause an increase in the depreciation, depletion
and amortisation expenditure. Exploration costs are also linked to increase in royalty payments as
and when a new joint venture is set up, the royalty payments will increase. When a company decides
to expand its production line, it will have to incur employee benefit related costs. A major part of
employee benefit costs are the provident and gratuity payments as a majority of the workers are
involved with factories which have strict rules about such payments.

Employee Costs Number of employees and units which produce oil/ natural gas /
electricity.
Exploration Costs Number of sites under review both independent and under joint
ventures.
Plant and Machinery Capacity of the company and whether it has plans on expanding
Costs or shrinking current capacity.
Depreciation, Technology is the major cost driver here. If machinery is of the
Depletion, latest technology it will last longer and will produce better quality
Amortisation output as compared to old machines. Newer technology will also
last longer and can be depreciated over a larger period of time.
Rates and Taxes Depends on capacity of production available and actual capacity
utilised and the amount of crude oil produced.
Purchase of Licenses Licenses purchased from the Government of India as well as
jointly purchased through other governments internationally.
Research and In an effort to improve cost efficiencies, companies invest in
Development research for producing better output of crude oil based on poor
quality of crude extracted from the earth.
Rates and Taxes continue to be a major cost driver as the government’s constant control and steady
increase in taxes on production of crude oil and natural gas over the years has led to companies
looking at ways to reduce such costs.

22
4) Cost Audit Requirements
Company is required to maintain cost records as per Section 148 of Companies Act, 2013, for all
those falling under regulated sector like Petroleum products regulated by the Petroleum and Natural
Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of
2006): and having aggregate turnover of Rs. 35 Crores or above in the previous financial year.

As per Section 148 of Companies Act, 2013, Companies (Cost Records and Audit) Rules, 2014,
Rule 4- For regulated sectors like Telecommunication, Electricity, Petroleum and Gas, Drugs and
Pharma, Fertilizers and Sugar, Cost audit requirement has been made subject to a turnover based
threshold of Rs. 50 crores for all product and services and 25 crores for individual product or
services. For Non-regulated sector the threshold is 100 crores and 35 crores respectively.
All companies under review have appointed cost auditors.
In the past when the market for oil crashed in 2013-14 with the introduction of shale as an alternate
source of fuel, the upstream oil companies started adoption of the lean management systems which
led to an incredible $2-$3 reduction per barrel of oil produced. They have removed 20-30% of their
overall workforce by employing better technologies and continue to drive costs down. It is the
operational costs which continue to remain high.
The industry continues to rely on conventional methodologies and complex supply chain models
which are hindering its ability to fully adopt the lean platform of production. Companies have
brought their costs down over the years with the use of latest technologies and investing heavily in
research and development.

23
 JOINT VENTURES, MERGERS AND ACQUISITIONS

Joint Ventures

As much as 71% of upstream investment is spent through alliance or JV relationships. The

participants in these relationships (as in other industries) contribute assets, capital, unique expertise or
labour to access diverse advantages such as scale, risk sharing, market entry, optionality, tax benefits
and access to others’ unique capabilities.

Why Joint Ventures are formed?

The energy industry is the king of joint ventures. There are two driving forces behind this
phenomenon.

 First, energy exploration and production is very, very expensive.

 Many smaller firms simply cannot afford to develop the resources they’ve discovered. Energy
exploration is also a very risky business. Joint ventures are great for spreading around that
risk. This risk sharing and additional route to capital funding is particularly attractive to oil
and gas companies as they attempt to deliver major capital projects in an environment of
increasingly uncertain geopolitics and market price instability.
Relationship between average joint venture project size and number of companies involved
in oil & gas industry

The project size increases, so too does the number of partners typically involved in a project,
although, due to the impact of company size on perceived risk, the relationship is not absolutely
linear (Figure). While a larger organization may feel less pressured to engage partners to share risk,
a smaller company on the same project (where the project makes up a far larger portion of the
organization’s overall portfolio) may see risk sharing, through a JV, as critical to its involvement.

Merger and Acquisitions

In 2018, the United States accounted for more than two-thirds of the total oil and gas deal value—
a record-high share. Each of the top 10 oil and gas deals in 2018 involved acquisitions of North
American assets.

3
Oil and Gas sector-040213

24
 Top 10 upstream M&A deals of 2018:

 BP purchases $10.5 billion in assets from BHP Billiton – July 26

 Concho Resources purchase of RSP Permian Inc. for $9.5 billion – March 28
 Diamondback Energy buys Energen Corp. for $9.2 billion – August 14
 Encana acquires Newfield Exploration Inc. for $7.7 billion – November 1
 Chesapeake Energy buys WildHorse for nearly $4 billion – October 30
 TPG Pace Energy purchases Eagle Ford and Austin Chalk acreage from EnerVest Ltd. for
$2.66 billion – March 20
 Encino Acquisition Partners buys Utica shale assets from Chesapeake Energy Corp. for $1.9
billion – July 26
 Flywheel Energy purchases Southwestern Energy’s Fayeteville Shale business and midstream
assets for $1.865 billion – September 4
 Denbury Resources purchases Penn Virginia Corporation for $1.7 billion – October 28
 Vantage Energy Acquisition Corporation buys Williston Basin assets for $1.65 billion–
November 7 4

Two deals were notable for being more than $10 billion:

I. The Marathon Petroleum/Andeavor transaction

 The $35 billion merger between oil refiner Marathon Petroleum Corporation and Texas-based
rival Andeavor, announced on Apr 30 and closed on Oct 1, is one of the highest valued deal
among energy firms in recent times.
 The transaction created the largest U.S. refiner in terms of refining capacity, surpassing
Valero Energy. The new Marathon Petroleum also created a nationwide refining giant in
terms of market capitalization, taking over the crown from Phillips 66.
 The deal expanded the geographical footprint of Marathon Petroleum in attractive markets,
bolstering its foothold in the Permian Basin, thereby creating an enviable retail and marketing
portfolio.

II. BP’s $10.5 billion acquisition of BHP Billiton’s US onshore unconventional assets.
 UK-based energy giant and LNG player BP has completed the $10.5 billion acquisition of
BHP’s U.S. unconventional assets in a deal that will boost BP’s U.S. onshore oil and gas
portfolio.
 The acquisition adds oil and gas production of 190,000 barrels of oil equivalent per day and
4.6 billion oil-equivalent barrels (BOE) of discovered resources in the Permian and Eagle
Ford basins in Texas and in the Haynesville natural gas basin in East Texas and Louisiana.
 BP’s Lower 48 business also decided to change its name to BPX Energy.

In both cases, as well as all six of the upstream deals among the overall top 10, the acquirer’s
shares fell following the deal, indicating a predominantly seller’s market for most of the year.

4
https://www.rigzone.com/news/bhp_agrees_to_sell_us_onshore_assets_for_108b-27-jul-2018-156429-
article

25
Recent M&A activities in the Indian oil and gas upstream sector – past 5 years

Date Acquirer name Target name Value of

announced deal (US$
million)
Feb 2018 ONGC HPCL (51.11 per cent 57,020.39
stake)
Feb 2018 ONGC Videsh Abu Dhabi National Oil 600
Co (10 per cent stake in
offshore oilfield)
Aug 2017 Rosneft Essar Oil (49 per cent 1,290
stake)
Dec 2016 Oil and Natural Gas Gujarat State Petroleum 1200
Corp's Co's
Dec 2015 ONGC Videsh Ltd Vankor oil field 1260
(OVL)
Jan 2015 Bharat Forge Mecanique Generale 12.82
Langroise
Oct 2013 ONGC Videsh Ltd Parque das Conchas, 529
Brazilian Oilfield
Jun 2013 ONGC Videsh Ltd (in Rovuma Area 1 Offshore 2640
partnership with Oil Block
India Ltd)

Upstream M&A volume and value fell (2018)

 A consistent recovery for about 10 months should have boosted upstream M&A activity, but
companies remained cautious about the sustainability of this trend and were proved correct
when oil prices fell at year end.
 The second quarter was the weakest, with a total deal value of about $18.7 billion—a level
last seen in the first quarter of 2016, when oil prices dropped to about $28/bbl.
 Price volatility, poor quarterly results, and divergent views on the existence of a new oil price
floor contributed to this fall.

26
 5

Figure 15 , upstream M&A volume for 2018 was 12 percent lower than 2017

Reasons for Mergers & Acquisitions:

 M&A activity in the global oil and gas industry in recent years was largely driven by the oil price
crash, as companies attempted to survive through one of the most severe downturns in decades.

 Oil prices plummeted from $100 a barrel in 2014 to around $30 in 2016, eroding revenues for
companies across the oil and gas value chain and leaving thousands of people unemployed.
Falling revenues and rising debts compelled oil and gas companies to realign their strategic
objectives and reshape their portfolios, leading to a large number of M&A deals.

 Oil and gas companies executed around 10,000 M&A deals in the five years to November 2018.
More than 60% of the deals that were completed were in the upstream sector. The shale
patches in the US and the oil and gas fields in the North Sea continental shelf featured
prominently in these upstream deals.

 Oil majors, especially Total, ExxonMobil, Chevron, Equinor, and Shell, were involved in a
number of deals as they acquired companies and assets at attractive valuations, while also
offloading the ones that could impact profitability.

 The slowdown in upstream activity due to low oil prices also had a drastic impact on the
equipment and services sector. As oil and gas companies scaled back their operations and
postponed expansion plans, number of market opportunities declined considerably for oil field
service providers, leading to an industry-wide consolidation.
Potential M&A targets in the oil and gas industry over the next two years: Upstream companies,
such as, Felix Energy, Endeavor Energy Resources, and Laredo Energy as potential acquisition
targets in the oil and gas industry over the next couple of years.

What’s ahead for M&A in oil and gas?

With deteriorating market conditions on the horizon, caution and closed equity markets will likely
continue to shape M&A activity in 2019. Several trends seen in 2018 will likely play out over the
course of the next year:

5
Merger and acquisition article , scholarworks.waldenu.edu

27
 US shale production is set to grow, but it may be undercut by falling prices, infrastructure
constraints, and/or a demand slump—upstream companies will need to remain financially
prudent and continue delivering sustainable returns to shareholders.

2019 holds promise for well-capitalized players, as well as consolidation to drive deal flow, which
may remain muted as the return of confidence is delayed. To be ready for 2019, it is important to
take stock and gain a better understanding of 2018 oil and gas M&A activity.

One theme that may emerge in 2019 is the IOCs' ability to adopt technology that can differentiate
relative performance on any reserve. This would provide them with a significant competitive
advantage, potentially underpinning their buy-side M&A activity in the future.

However, to pursue this opportunity, the IOCs' investment community must decide how they want
leadership to prioritise growth investment versus near-term cash returns through dividends and
share buybacks. For the last decade, the emphasis has been very much on the latter. Oil and gas
companies across the sector are increasing their investment in digital capabilities, which will
likely be a notable driver of acquisitions in 2019.

Altered alliances:
 With electrification now also primed for high growth, the majors are exploring options to
increase their footprint in alternative energy projects. While cross-sector deals have been
limited to date, the coming years could see a significant increase in deals between renewables
and utility companies, and oil and gas companies. From a capital deployed perspective,
however, the principle beneficiary may well be increased investment in natural gas.
 Independent upstream operators are increasingly moving away from the more traditional
exploration-led strategy toward repositioning themselves as niche players in some basins. As
a consequence, they are likely to form more alliances and joint ventures to cut costs, drive
efficiencies and deliver returns, while maintaining their core IOC strategies.

28
 HUMAN RESOURCE ANALYSIS

Human resource management of oil & gas industry is significantly distinguished from the projects
in other industries, because of their prevailing severe circumstances. Most of the time job sites are
located in remote geographical areas with harsh weather and poor infrastructure and transportation
facilities available. Major industry players such as OIL, ONGC, GAIL have some promoted
directors and several functional directors. There are two government nominee directors Shri
Amarnath and Mr, Sanjay Sudhir that regulate the workings of ONGC and OIL. HR’s of this
industry are facing many challenges such as managing globalisation, change management,
leadership development and succession planning, work diversity, creating consistent corporate
culture based on ethics and transparency, and talent management.

Workforce

It is well known that there is a worldwide shortage of qualified engineers. Major oil & gas producers
are competing heavily for these scarce resources. The worldwide shortage of engineers in this
highly competitive market is also increasing competition for high potential employees and the
situation is getting worse. Many clients in the oil & gas sector complain about the difficulties of
filling vacant positions and particularly about the quality of applicants, indicating that acquiring
skilled people is becoming increasingly harder. Shortage of qualified human resources is not limited
to the as it is also experienced in other parts of the world.
Permanent workforce employed by India’s state-run oil and gas companies has declined 13 per cent
in the past 15 years through 2017 to 110,000, an analysis of oil ministry’s data on manpower
strength of the sector’s Public Sector Undertakings (PSUs) shows. Also, taking into account
contractual workforce too, the overall employee strength across 12 PSUs remained stagnant
between 2002 and 2015, growing a mere 0.30 percent.

Human resource analysis of year-wise data on permanent manpower employed in the government-
owned petroleum companies since 2002 reveals interesting trends. The decline in the manpower
employed by oil PSUs has been the steepest -- 59 per cent -- in the clerical category while jobs in
the executive or managerial category grew 32 per cent during the period. Similarly, while
manpower in the exploration segment dipped 33 per cent, number of persons employed in the
pipeline segment has jumped 40 per cent. With a combined workforce of about 1.4 lakh – ONGC
and Indian Oil alone contribute over 33,000 regular employees each – these PSUs face unique
challenges.

Talent shortage and talent acquisitions

Automation, data analytics, the Internet of Things—you name it, the oil industry wants it. Oil
companies are increasingly relying on things like cloud computing and Internet of Things to stay
ahead of the competition. This means they need more and more software engineers to keep the
whole thing going, Because of the nature of the oil and gas business, the rush to adopt cloud
solutions, IoT connectedness, and machine learning is understandable. Managing hundreds of wells
across hundreds of acres, monitoring well flows and predicting well performance are just a few
examples of how instrumental digital technology has become for the fossil fuels industry. It saves
money, it boosts efficiency, and it makes work in the field and on the platforms safer. The five key
challenges companies needing to hire engineers encounter. These include lack of experience as
number one, lack of hard job and technical skills, too-high salary demands, lack of soft skills, and
lack of formal engineering educations. Each of these is tough enough on its own. Taken together,
they suggest the talent shortage problem will only become worse in the future.
50% of oil and gas hands-on technical workforce will need to be replaced in the next decade; 68%
of oil and gas employees are over 40 years of age; 33% of oil and gas employees are expected to
retire by 2020.To overcome the shortage for talent, there are various training programmes such as

29
Graduate Trainee programmes, Functional Training programmes, Management Development
programmes, Quality Management programmes, International Certification programmes initiated
by the companies to upskill their employees and strive for excellence. Some of these programmes
are:

 ONGC Academy: Executive Induction and Management Development Training and

Nodal Centre
 Institute of Drilling Technology: Certified Training on Drilling and Well Control
 Geo-data Processing & Interpretation Centre: Seismic Data Processing & Interpretation
and Seismic Software Development
 Institute of Reservoir Studies: Training on Reservoir Modelling & Management
 Institute of Safety Health & Environment Management: Safety Training
 Institute of Oil & Gas Production Technology: Training of Production Technology
 Institute of Engineering & Ocean Technology: Training on Geotechnical & Structural
Engineering
 School of Maintenance Practices: Certified training courses of Oil Field Equipment
maintenance
 RTIs: Training for Staff

30
 OPERATIONAL ANALYSIS

Oil and gas are the fuels driving the modern world. Even with all the talk about moving away from
fossil fuels by harnessing solar and wind power, oil and gas are still employed in massive amounts
to power our world, to travel and keep us warm. However, it is a fact that these are difficult times
for people employed in the oil and gas industry as the demand has decreased because of factors like
an increase in American, Iranian and Iraqi production while the industrious China has seen a
decrease in the demand for fuel.

DIGITAL OILFIELDS

In order to remain viable businesses, the industry needs to cut down operational expenses. These
goals can only be achieved if the sector embraces technology in order to improve efficiency. The
Modern computational methods and fast processing systems combined with a wealth of data has
made ‘digital oilfields’ a reality where engineers, geophysicists and geologists can simulate an
entire oilfield. These simulations can help in finding the most optimal spots for oil extraction with
lowest costs in drilling and getting maximum output in extraction. These big data analytics can
reduce the need for hiring a large number of data operators thus reducing staffing costs while
improving the overall efficiency of the industry.

MAKING INACCESSIBLE ACCESSIBLE

There used to be a time, before the industrial revolution, when oil wasn’t something worth fighting
over and oil wells were easy to find and drill however it isn’t the case anymore. Since the industrial
revolution and our hunger for energy, we’ve depleted a very large amount of our oil reservoirs and
this demand is still something which moves the world. Our powerful modern computers and the
pool of data available make it possible to find reservoirs which may not have been possible to find
just a decade ago

NOTHING IS REMOTE

With the drying up of wells in areas close to ports and cities, we’re increasingly moving towards
the trend of offshore drilling. Technology is powering these extractions by eliminating the need to
establish expensive bases in remote areas and to the point that even doctors are contacted through
video conferencing to diagnose workers in remote areas instead of transporting them to shore in an
emergency.

FUEL CONVERSIONS

In a world where a lot is being said about the harms of using hydrocarbons, the technologies which
are employed in the discovery and extraction of oil and gas can also be used for the discovery and
extraction of other minerals. It is believed that if automobiles running on electricity are going to
become popular and we’re going to widely use wind turbines to power our world then the demand
for certain rare metals is going to increase exponentially.

Latest technological improvements at different stages of production

Exploring
KYMERA XTREME
The Baker Hughes, a GE company, Kymera XTreme hybrid drill bit was designed with difficult
drilling environments such as hard and abrasive carbonates and interbedded formations in mind.
The bit’s design combines the shearing action and speed of polycrystalline diamond compact (PDC)
bits with the stability control of tri-cone bits. This hybrid design allows the roller cone to pre-crush

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the rock, weakening the formation and allowing the PDC portion to improve upon shearing
aggressiveness over conventional bits while minimizing vibrations with fewer downhole tool
failures.

Engineering
• CASING DRILLING TECHNOLOGY
The main purpose of Casing Drilling, is to eliminate classic casing runs and isolate formations while
drilling. By using Standard casing string instead of conventional drill string, the drilling and casing
are executed simultaneously, section by section. Casing while Drilling is also a hazard mitigation
solution, having applicability in drilling soft shallow sections with high borehole instability and
known losses.
Maximizing efficiency
• Two operations in one, each meter drilled will be cased.
• Reduces time for tripping in and out, and the risk involved with it.
• Improves drilling efficiency by reducing of the non-productive time.
• Drilling time and cementing saving.
The smearing effect: Prevent and cure (or minimize) losses while drilling, i.e. good control of
the annular pressure losses. High applicability in drilling soft shallow sections (high borehole
instability with known losses).

Construction and commissioning

The Halliburton HCS Advantage- One offshore cementing system is designed to address the
complexities of deep-water and ultradeep water cementing with the versatility for use in shallow
waters. The system is optimized for an optional 20,000- psi manifold to allow work in water depths
that exceed the pressure limit of conventional equipment. This system enables remote operations
and features a 25-bbl three-compartment configurable RCM IIIr mixing system and an integrated
six-pump liquid additive system for precise slurry blending.

Operation and maintenance

SCADADRILL SYSTEM:
Automated drilling is one of the oil industry’s most important innovation targets. The sources now
being tapped, such as shale gas and coal-bed methane, require a very large number of wells, and
automating the drilling process would be an obvious way to keep the costs under control, and also
gets around a problem which many sectors of engineering are experiencing.

Production and Processing of OIL and GAS

Oil and gas processing normally occurs offshore on platform, unlike refining that takes place
onshore. The aim of processing is to take raw produce or well fluid and turn it into a marketable
product, i.e. crude oil, gas, and condensate

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 6

Figure 16 Christmas Tree To Production Separator

Between the Christmas tree and the production separator, the line pressure often has to be reduced
to a lower pressure by means of a choke valve. This is normally when the well is relatively new,
when there is enough downhole pressure to lift the produce. As the reserves start to deplete, the
pressure will drop to become low pressure (LP). A modern day well will reach a point in its life
when it is deemed necessary to inject either fluids or gas back in to the reservoir to increase pressure.
This is known as artificial lift or gas lift.

Production Separators
The first true part of the production process is when the raw produce hits the production separators.
At this point the fluid pressure can be up to 50 times atmospheric and have a temperature that is
likely to be above 100°C. In a typical gravity separator, the fluid remain inside for around 5 minutes,
allowing the gas to escape and rise above the oil content whilst the water content rests to the bottom.
The three main components, crude oil, gas and produced water then get released from the separator
to continue their process.
This process will be repeated, typically another two times before the raw well fluid is deemed to
have completely separated in to its three different products, each time the oil continuing to the next
separator.
The 2nd stage separator takes the oil from the 1st stage separator to further break down the different
products. It can typically receive the fluid at 10 times that of atmospheric pressure and at a
temperature below 100°C. It will also take fluid back off of scrubbers from gas processing.
The 3rd stage separator takes oil from the 2dn stage separator. At this stage the fluid will be at
atmospheric pressure. The 3rd stage separator is also known as the flash drum. In purely gas
processing, this can often be replaced by a knockout drum.

Oil Process
It’s common for crude oil to be put through a coalescer as its final stage of processing. Typically
an Electrostatic coalescer will get the water content in crude oil down to below 0.5% volume.

Gas Process

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Gas separated from oil and water within the separators must be further cleaned and compressed to
ready it for export.
Gas leaving the 1st stage separator will head to a scrubber, allowing further fluid to be removed
before it can enter the high pressure (HP) compressor. This must be done to remove any chance of
damage to the compressors. Fluid removed from this gas is returned to the 2nd stage low pressure
(LP) separator.
Gas separated via the 2nd stage LP separator will head to LP compression due to its low pressure.
It, like the gas from the 1st stage separator must go through a scrubber to remove further fluids.
Once this gas has been scrubbed and put through the LP compressor, it will rejoin the HP gas as it
enters the HP compressor.

Processed Water
All water removed from the well fluid is classed as produced water. This must be treated and
cleaned before it can be returned to sea.

Storage
It is common for offshore oil platforms to store crude oil produced, in tanks, within its legs. For
example the Hibernia, a concrete gravity base structure (GBS) platform offshore East Canada, has
a storage facility within its structure capable of holding 1.2 million barrels of crude oil.

Metering And Export

Metering, specifically known as fiscal metering is the last and arguably the most important stage of
the production process as effectively this is the point of sale. Each barrel or joule that leaves this
point would now have already been sold through exchanges across the world and it is at this point
ownership changes hand to the purchaser. It is also at this point that governments will collect tax
on production.
Metering at this point will also be able to provide full product data to clients to ensure the
specification is as benchmark i.e. Brent Crude or as ordered, including viscosity and water content

Value Chain Analysis

Figure 17 Value Chain

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The value chain starts with the identification of suitable areas to conduct exploration for oil and/or
gas. After initial exploration, petroleum fields are appraised, developed and produced. These
activities are generally called Exploration and Production (E&P), or referred to — analogous to
other industries — as "upstream" oil and gas. Oilfield services include a number of auxiliary
services in the E&P process, such as seismic surveys, well drilling, equipment supply or
engineering projects. They form an important part of the overall oil and gas industry (and over the
past years and decades have substantially gained in expertise and importance), but will not be the
focus of our overview. Infrastructure such as transport (pipelines, access to roads, rail and ports
etc.) and storage are critical at various stages in the value chain, including the links between
production and processing facilities, and between processing and final customer. These parts of the
value chain are usually referred to as "midstream". Oil refining and gas processing are required to
turn the extracted hydrocarbons into usable products. The processed products are then distributed
onwards to wholesale, retail or direct industrial clients (Refining and Marketing (R&M) is also
referred to as "downstream" oil). Certain oil and gas products represent the principal feedstock for
the petrochemicals industry, which explains the close historical and geographical links between the
two.

Individual companies can cover one or more activities along the value chain, implying a degree of
vertical integration ("integrated" firms are engaged in multiple successive activities, typically E&P
as well as R&M), and/or can seek to expand within a given activity, implying horizontal
consolidation (business scale). On the country level, horizontal scale in the upstream is limited by
natural resource endowments, and further downstream by the size of the domestic market and/or
the ability to export goods and services. Vertical portfolio choices at the country level can be made
using regulatory and licensing tools, e.g. approval (or not) to build certain processing facilities or
infrastructure such as pipelines.

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 SUPPLY CHAIN MANAGEMENT

Supply- chain management (SCM) can be defined as the configuration, coordination and continuous
improvement of a sequentially organized set of operations. The goal of supply- chain management
is to provide maximum customer service at the lowest cost possible. In a supply-chain, a company
is linked to its upstream suppliers and downstream distributors as materials, information, and capital
flow through the supply-chain. The oil and gas industry is involved in a global supply-chain that
includes domestic and international transportation, ordering and inventory visibility and control,
materials handling, import/export facilitation and information technology.

Supply Chain Drivers and Decision Points

 What product-service bundle to produce
 What portions of the bundle to produce in house and what portion to purchase from others
 Facility capacity
 Location of facilities
 Type of technology to adapt
 Handling communications between suppliers and customers
 Standards expected of customers and suppliers

SUPPLY-CHAIN LINK IN THE OIL AND GAS INDUSTRY

Exploration → Production → Refining → Marketing → Consumer

The links shown above represent the major supply-chain links in the oil and gas industry. The links
represent the interface between companies and materials that flow through the supply-chain. As
long as oil companies have needed a phalanx of vendors to keep their systems continuously re-
supplied, there has been a supply-chain.
In the industry supply-chain link, exploration operations create value through seismic analysis and
identifying prospects.

Supply Chain Strategies

In recent times, there have been concerns and many have argued that the oil and gas industry may
have entered an era of very scarce resources. In reality however, the resources are not the cause of
supply constraints, given the enormous potential still available including, currently known and
booked reserves, the increasing scope for recovery from existing fields with new technologies,
further potential discoveries, and the new frontier of vast oil sands and oil shale reserves that are in
the money at today’s prices.
Essentially, according to a good majority of the industry’s research, we have enough resources left
to sustain current production levels for at least the next 50 years. Therefore, the main challenge
facing the oil and gas industry is not the availability of oil and gas resources, but putting these
reserves into production and delivering the final products to consumers at the minimum cost
possible. Thus, a solid supply-chain management program will enhance this goal.
In the oil and gas industry recent developments also prevail. Depleting the existing oil and gas
assets is forcing many companies to find new oil and gas in new frontiers. These new frontiers
are often found in more challenging environments, thereby forcing firms to drill deeper and further
offshore. These recent developments have increased not only the technical and operational

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difficulties, but also the costs and risks associated with the development of new assets. In response
to these changes, many forward-thinking oil companies are moving away from being just oil drilling
companies to seeing themselves as reservoir development and resource management companies.
Supporting this necessary and important shift in strategy requires or calls for a need to visualize,
link, and manage the acquisition, exploration, and production functions of an oil company in a more
integrated, cohesive, and balanced manner. A supply-chain configuration strategy for oil and gas
companies involves the development of boundaries and parameters that determines the
relationships within its chain of customers and suppliers. Acquisition, exploration and production
functions are strongly interrelated, yet traditionally; they are usually conceptualized and managed
as independent areas.

Some of the Supply Chain Strategies are:

1. Vertical Integration- Recent developments highlight the need to manage a company’s

supply-chain in an integrated and cohesive manner. These developments include the increased
demand for better and faster customer service, globalization of the oil and gas business,
competition, and the availability of information technology to facilitate information exchange.
Therefore, integration and cohesiveness will reduce costs if it leads to a more efficient
system.
2. Outsourcing- As an alternative to vertical integration, outsourcing is the process of
contracting with third parties to furnish some aspects of the product-service bundle.
Outsourcing benefit’s a firm in different ways. First, it provides a firm the opportunity to
focus on what it does best - its core competences. Next, it allows the firm to add capacity
without added overhead and fixed costs. Finally, outsourcing fosters market agility and
corporate growth. Thus, it allows a firm to grow without undertaking large capital
investments and in addition provides more flexibility during periods of economic downturns.
Outsourcing has become one factor in creating a global supply-chain management.
Outsourcing may provide much better quality and supply-chain performance. The big
question is “what should the company outsource?” The big answer appears to be anything that
can be done more effectively by another provider.
3. Segment Customers Based Upon Service Needs- Different customers have different and
sometimes unique requirements and meeting these requirements may necessitate different
approaches to supply-chain configuration and coordination. Overall performance can be
improved through effective matching of what is produced, when it is produced and the
quantities to be produced to the specific customer requirement.
4. Customize Your Logistics Network- In addition to producing or providing the good or
service a customer wants, it is very important to deliver the product-service bundle in the
quantities and particularly, timing requirements set by the customer. Improvement of the
supply-chain implies customization of the logistics network.
5. Form Partnerships to Enhance Supply-Chains- As was shown earlier, relationships
management is a two-way traffic. The oil and gas industry is involved in a global supply-
chain that involves domestic and international transportation, value-chain strategic warehouse
management, order and inventory visibility and control, materials handling, import/export
facilitation, and information technology. This means in effect that the shipper and the oil
company are jointly and mutually involved and intertwined with each other, end-to-end in
transportation management from the moment an order is placed by the vendor to the day it is
unloaded from the supply basket on the offshore platform.
6. Apply Strategic Sourcing- Strategic sourcing implies that suppliers who have consistently
demonstrated superior performance deserve a favorable status, including customer loyalty and

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 preferential treatment. Therefore, one method for improving a supply-chain is to select an
excellent corps of suppliers.
7. Adapt a Supply-Chain Wide Technology Strategy- Difficulties can arise when oil and gas
companies make technology decisions independently along their supply-chains. Thus, their
information systems are neither coordinated nor compatible, and information is not readily
shared back and forth along the supply-chain.
8. Increasing supply chain visibility: Supply chain must be smooth & visible to eliminate the
bullwhip effects. In petroleum industry operational activities need complete tracking and
monitoring. It can help in inventory management, controlling the supply and demand,
logistics and transportation issues etc. supply chain visibility can be increased by investment
in technology and open lines of communications among all parties.
9. Strategic Planning: Long term planning is essential for competitive advantage and success
of the organization. The petroleum industries require long-term strategic planning to survive
in global competition. Strategic planning is essential to maintain the correct chain of
information, financial and material flow.
10. Enhancing supplier collaboration: Supplier collaboration plays a vital role in the
optimization of supply chain management. By enhancing supplier collaboration cost will
decreased, cycle time will reduce, stability within the supply chain will be increased and a
mutual beneficial relationship will be established for the better future of business.
11. Effective use of information technology: The role of information technology is very crucial
to gain competitive advantage. Many petroleum industries have recently accepted that sharing
of information in their supply chain can lead to major reduction in the overall cost. It helps in
transportation and logistics, inventory planning and it also increases the speed of material,
financial and information flow.
12. Logistics management: Logistics management is a very essential for petroleum industry.
Remote locations and continuously varying freight costs can have a major impact on profit
boundaries and it makes logistics management more demanding. Efficient logistics
management maximizes the profit of the industry. Overall transportation cost will reduce and
customer services will also improve.

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 GLOBAL SCENARIO

Foreign direct investment (FDI)

The government allows 100% Foreign Direct Investment in upstream and private sector refining
projects. The FDI limit for public sector refining projects has been raised to 49% without any
disinvestment or dilution of domestic equity in the existing PSUs.
 FDI inflows in India’s petroleum and natural gas sector stood at US$ 7,002.27 million during
April 2000–June 2018.

Figure 18 FDI Inflows in the industry

Government initiatives:
 The government allows 100% Foreign Direct Investment (FDI) in upstream and private sector
refining projects via the automatic route and up to 26% in government-owned ones.
 100% FDI is also granted in cases of petroleum products, gas pipelines, exploration, and
marketing or retail via the automatic route.
 China is the biggest country in attracting FDI in the recent years.
Following are some of the major investments and developments in the oil and gas sector:
 In September 2018, the Government of Gujarat selected Energy Infrastructure Limited (EIL), a
subsidiary of the Netherlands-based Energy Infrastructure Butano (Asia) BV, to set up a
Liquefied Petroleum Gas (LPG) terminal at Okha with an investment of Rs 700 crore (US$
104.42 million).
 World's largest oil exporter Saudi Aramco is planning to invest in refineries and petrochemicals in
India as it looks to enter into a strategic partnership with the country.
 Foreign investors will have opportunities to invest in projects worth US$ 300 billion in India, as
the country looks to cut reliance on oil imports by 10 per cent by 2022, according to Mr
Dharmendra Pradhan, Minister of Petroleum and Natural Gas, Government of India.
 Oil and Natural Gas Corporation (ONGC) is going to invest Rs 17,615 crore (US$ 2.73 billion) on
drilling oil and gas wells in 2018-19.

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 Global suppliers, buyers, competitors

Global Suppliers
I. International and National Oil Companies
Some big suppliers in the oil and gas industry are fully integrated oil and gas industry (International
and National Oil Companies) which are active in the whole value chain of oil and gas sector.
 International oil companies: Chevron, Shell and Exxon Mobil.
 National oil companies: Saudi Aramco, Gazprom, and Petrobras.
The ability of these companies to affect oil prices and the industry is high due to their business
involvement on all of the business segments of oil and gas industry, so their bargaining power is
significantly greater than the buyers.
II. OPEC (Organization of the Petroleum Exporting Countries)
Another great player in the side of the suppliers are the oil rich countries or else OPEC that owns at
least 70% of the world’s oil proven reserves.
OPEC nations supply about 60 per cent of India's oil needs.
As of September 2018, the 15 countries accounted for an estimated 44 percent of global oil
production and 81.5 percent of the world's "proven" oil reserves, giving OPEC a major influence
on global oil prices and hence, high bargaining power.
Global Buyers
The main buyers of oil and gas products are:
 Refineries
 National Oil Companies
 International Oil and Gas companies
 Distribution companies
 Traders
 Countries (USA, China, Japan, countries of the EU, etc.) India is the world's third-largest oil
importer after China and the US. Japan is the fourth largest importer and South Korea is right
behind it. The four nations account for over a third of the oil imports in the world.
The bargaining power of buyers in oil and gas industry is relatively small due to the nature of this
industry. Buyers are interested in the price and the quality of a product. Higher bargaining power are
only with the buyers which consume enormous amounts of oil and gas such as EU, China, USA,
Japan, and India in comparison with other countries. Finally to mention that the only bargaining
power of buyers in the oil industry is only what quality of the oil they will buy.
So far, India has not been able to bargain better rates from the Gulf-based producers of the oil cartel,
OPEC. Instead of getting a discount for bulk purchases, West Asian producers, such as Saudi Arabia,
charge a so-called 'Asian Premium' for shipments to Asian buyers, including India and Japan, as
opposed to Europe.
Hence, with oil producers' cartel OPEC playing havoc with prices, India discussed with China (At the
16th International Energy Forum ministerial meet in April this year) the possibility of forming an 'oil
buyers club' that can negotiate better terms with sellers as well as getting more US crude oil to Asia
to cut dominance of the oil block.
Global Competitors

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The competitiveness of oil and gas industry and especially in the upstream sector of the industry is
significantly intensive.
There are three different type of players in the upstream sector:
The big IOCs or as we call it Integrated Oil and Gas Companies (private sector): Royal Dutch Shell,
Exxon Mobil from USA, BP from UK, Chevron from USA, Phillips 66 from USA, Eni from Italy etc.

Private Oil and Gas Exploration and Production Companies : CNOOC Ltd., ConocoPhillips, Oil and
Natural gas Corp. Ltd., Encana Corp., Canadian Natural Resources Ltd. etc.

National Oil Companies: These companies control more than 90% of the proven oil and gas reserves.
Examples: audi Aramco, Saudi Arabia, National Iranian Oil Company (NIOC), China National
Petroleum Company (CNPC), Petroleos de Venezuela (PDVSA), Rosneft, Russia, Gazprom, Russia
etc.

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 STRATEGIC ANALYSIS

Rising demand

Figure 19 Crude oil and natural gas consumption

 Energy demand of India is anticipated to grow faster than energy demand of all major
economies, on the back of continuous robust economic growth.
 Consequently, India’s energy demand as a percentage of global energy demand is expected to
rise to 11 per cent in 2040 from 5.58 per cent in 2017.
 Crude oil consumption is expected to grow at a CAGR of 3.60 per cent to 500 million tons by
2040 from 221.76 million tons in 2017.
 Natural Gas consumption is forecasted to increase at a CAGR of 4.31 per cent to 143.08 million
tons by 2040 from 54.20 million tons in 2017.
 Diesel demand in India is expected to double to 163 million tons (MT) by 2029-30.
 India is the world’s third largest energy consumer globally.
Favourable policies
Government has enacted various policies such as OLAP and CBM policy to encourage investments.
In September 2018, Government of India approved fiscal incentives to attract investments and
technology to improve recovery from oil fields which is expected to lead to hydrocarbon production
worth Rs 50 lakh crore in the next twenty years. Other regulatory overview of the industry are:

Petroleum and Natural  Regulate refining, processing, storage, transportation,

Gas Regulatory Board distribution, marketing and sale of petroleum, petroleum
(PNGRB) Act, 2006 products and natural gas
Auto Fuel Policy, 2003  Provide a roadmap to comply with various vehicular
emission norms and corresponding fuel quality
upgrading requirements over a period of time
Freight Subsidy (for  Compensate public sector Oil Marketing Companies
far-flung areas) (OMCs) for the freight incurred to distribute subsidized
Scheme, 2002 products in far-flung areas

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 Domestic Natural Gas  New domestic natural gas pricing formula has been
Pricing Formu10la, formed, which will be revised on a half yearly basis.
2014
Marginal Field Policy  Monetize discovered small oil and gas fields to augment
domestic production.
 Improved fiscal terms viz. no oil cess applicable on crude
oil production, no upfront signature bonus, pricing and
marketing freedom for oil and gas and no carried interest
by NOCs
National Policy on  Proposes an indicative target of 20 per cent blending of
Biofuels, 2018 ethanol in petrol and 5 per cent blending of biodiesel in
diesel by 2030.
 Promotes advanced biofuels through a viability gap
funding scheme of Rs 5,000 crore (US$ 745.82 million)
in six years for 2G ethanol Bio refineries, along with
additional tax incentives.
Pricing of CNG and  In 2014, the pricing for CNG (transport) and PNG
PNG by CGD Entities (domestic) were examined by the Ministry of Petroleum
(2014) and Natural Gas while the disclosure of prices of the
CNG and PNG commodities were made compulsory

The Policy on Shale  Allows companies to apply for shale gas and oil rights in
Gas and Oil, 2013 their petroleum exploration licenses and petroleum
mining leases
Open Acreage  Launched in June 2017, it allows companies to carve out
Licensing area for petroleum exploration and production. The
policy, Open Acreage Licensing launched under
Hydrocarbon Exploration and Licensing Policy (HELP),
has replaced New Exploration and Licensing Policy
under which bidders did not have the freedom of carving
out areas for E&P
Integrated Energy  Outlines goals to deal with challenges faced by India’s
Policy (IEP), 2006 energy sector

Opportunities in upstream segment:

 Locating new fields for exploration: 78 per cent of the country’s sedimentary area is yet to be
explored.
 Development of unconventional resources: CBM fields in the deep sea.
 Opportunities for secondary/tertiary oil producing techniques.
 Higher demand for skilled labor and oilfield services and equipment.
Looking at the above growth drivers, primarily the growing demand and the government
support in the form of various policies and FDI, we feel that this is an industry which has
tremendous growth opportunity and is worth investing.

Notable trends in the oil and gas industry

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 Coal Bed Methane  The CBM policy was designed to be liberal and investor
(CBM) friendly; the 1st commercial production of CBM was
initiated in July 2007 at about 72,000 cubic meters per
day. Production in 2017-18 stood at 2.01 million cubic
meters per day.
Underground Coal  UCG is currently the only feasible technology available
Gasification (UCG) to harness energy from deep unmineable coal seams
economically in an eco-friendly manner and it reduces
capital outlay, operating costs and output gas expenses
by 25–50 per cent vis-à-vis surface gasification.
Open Acreage  The Open Acreage Licensing Policy (OALP), which
Licensing Policy allows an explorer to study the data available and bid for
blocks of his choice has been initiated to increase foreign
participation by global E & P companies like Shell, BP,
Conoco Phillips etc.
 As of January 2019, the Government of India has put 14
blocks up for auction in the second round of OALP and
investments worth Rs 40,000 crore (US$ 5.54 billion) are
expected.

Recent strategies adopted:

Expansions  In September 2018, the Government of Gujarat selected Energy

Infrastructure Limited (EIL), a subsidiary of the Netherlands-based
Energy Infrastructure Butano (Asia) BV, to set up a Liquefied
Petroleum Gas (LPG) terminal at Okha with an investment of Rs
700 crore (US$ 104.42 million).
 H-Energy is planning to invest Rs 3,500 crore (US$ 540.62 million)
to build Liquified Natural Gas (LNG) terminals and lay down a 60
km pipeline.
 State run energy firms Bharat Petroleum, Hindustan Petroleum
and Indian Oil Corp plan to spend US$ 20 billion on refinery
expansions to add units, by 2022.
 The country’s state-owned oil companies aim to sustain spending at
a 3-year high due to increasing demand and declining oil services
costs. Indian Oil plans to expand its refining capacity and build new
businesses, for which it will be spending US$ 27.94 billion over the
next 5-7 years.
 Indian Oil Corp plans to make an investment of US$22.91 billion,
including US$ 7.64 billion for expanding its existing brownfield
refineries, in the next 5 to 7 years. Moreover, the company plans to
lay the nation's longest LPG pipeline of 1987 km, from Gujarat
coast to Gorakhpur in eastern Uttar Pradesh, to cater to growing
demand for cooking gas in the country.
 India targets US$ 100 billion worth investments in gas
infrastructure by 2022, including an addition of another 228 cities
to city gas distribution (CGD) network. This would include setting
up of RLNG terminals, pipeline projects, completion of the gas grid
and setting up of CGD network in more cities.
 Reliance Industries Ltd is planning to expand its Jamnagar oil
refining capacity by about 50 per cent. After the expansion, the plant
will then be able to process about 30 million tons crude oil per year.

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  As of January 2019, H-Energy is going to invest Rs 3,700 crore
(US$ 512 million) for construction of an LNG project in West
Bengal.
Diversification  Oil companies are focusing on vertical integration for next stage of
growth. For instance, oil producer Oil India Ltd is planning to build
and operate refineries, while Indian Oil is planning to enter oil and
gas exploration.
 As of March 2017, Bharat Petroleum Corp. Ltd. (BPCL), an Indian
state-controlled oil and gas company, plans to enter the country’s
travel business with the launch of its startup named as “Happy
Roads”. The application, which is available on Android Play Store,
documents itineraries and assists the users in planning a fun-filled
trip.
Investments to  Indian companies are enhancing production through redevelopment
enhance plans to increase recovery rates of hydrocarbon from oil wells;
production ONGC in Mumbai High achieved success in implementing this.
 Indian Oil Company (IOC) is planning to invest Rs 1.43 lakh crore
(US$ 22.19 billion) to nearly double its oil refining capacity to 150
million tons by 2030.
 Reliance Industries is planning to enter into a Joint Venture with the
world’s largest oil exporter Saudi Arabia in petrochemicals and
refinery projects.
Move to non-  Companies are looking forward to developing JVs and technical
conventional partnership with foreign companies to improve capabilities to
energy develop shale reserves.
resources  The Government of India is planning to set up around 5,000
compressed bio gas (CBG) plants by 2023.
More focus  Private sector units like Adani, Sun Petrochemicals and few new
upon small entrants have bagged 1/3rd of small oil and gas fields.
companies
Pilot project  Oil and Natural Gas Corp (ONGC) has started Shale Gas
Initiated for exploration by spudding the first Shale Gas well RNSG-1 in
Shale Gas Burdwan District of West Bengal.
Production in
India

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 DECISION

Sr. Factor to be Weigh Invest Don’t Inv. Don’t Justification for the
No considered tage Invest Weigh Inv score
% tage Weitage
1 Capital 17 2 8 0.34 0.16 The upstream oil and gas
investment industry is capital
required intensive. Lot of
(minimum) investments have to be
made for oil blocks,
drilling equipments,
technology, labour etc.

2 Working capital 12 4 6 .48 0.24 The working capital

requirements requirements are high as
this is a capital intensive
industry. Nonetheless, as

3 Profitability in 5 6 4 0.3 0.24 The Profit Margins are

terms of Profit good for a capital and
margin/operating labour industry such as oil
profit margin and gas E&P. On an
average there is 7-8%
profit for the industry as a
whole which makes it a
lucrative business.

4 Profitability in 5 8 2 0.4 0.16 Return on Equity for the

terms of ROE industry is at 6-7% and
due to a long break-even
period, the returns occur
at the later stage of the
business. Nonetheless, the
growth opportunities and
high demand volume
make it a good venture to
invest in.

5 Market structure 2 4 6 0.08 0.24 There are few strong

players in the industry
like ONGC, OIL, GAIL
etc which has captured
majority of the market
and has its own refineries.
This makes it difficult for
a new company to easily
do business in the
industry.

6 Ease of entry and 8 6 4 0.48 0.24 Though the upstream oil

doing business and gas industry is capital
intensive and the
company must be
functioning in the

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 industry for a while for it
to be benefiting from
economies of scale, it is
still preferred to invest
because of the various
government reforms that
will be put in place to
increase crude oil
production in India.

7 Competitive 5 3 7 0.15 0.21 The competitive pressures

Pressures are high in this industry as
there is possibility of
limited differentiation,
high exit barriers and the
company cannot dictate
its crude price.

8 Governmental 12 8 2 0.96 0.16 Government is eager to

regulations and reduce import dependency
controls of oil and gas. Hence lot
of reforms will be put in
place to increase
investments.

9 Marketing issues 2 7 3 0.14 0.21 Marketing issues in the

upstream industry are
very less as the refineries
are specific to the oil
companies.

10 HRM issues 8 6 4 0.48 0.24 Due to advancement in

technology, it is essential
to have skilled workforce
and also a chief HR
manager regulate the
working of the company.

11 Manufacturing 7 7 3 0.49 0.21 Given the investment on

process issues R&D in the recent past
has optimised the
manufacturing process
and made it safer for the
workers and inflicts lesser
damage to the oil
grounds.

12 Operational issues 3 6 4 0.18 0.24 Supply Chain used to be

– SCM the bane of the Oil sector,
but with the use of
technology both in
operations and supply
chain, the entire industry
has managed to make this

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 aspect of the business
their strength.

13 Collaboration / 7 8 2 0.56 0.16 The Government of India

foreign investment has eased the regulations
or funding on foreign investment and
allows 100% FDI in the
E&P Sector making this
an attractive investment
opportunity.

14 Innovations 7 8 2 0.56 0.16 Lot of technological

possible advancements have been
made in the field of
exploration, engineering,
construction and
maintenance. There is a
lot of scope for further
innovations which is
important to reduce
operational expenses.
Total 5.6 2.87

%Investment = (5.6/(5.6+2.87)) = 66.11%

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CONCLUSION

The oil and gas industry is an important part of the Indian economy as it permeates through every
sector of the economy. The demand of these fuels are rising and hence, the industry is sustainable.
Although the industry is capital and labour intensive, the ROE is high after the firm has broken
even. With advancements in technology, it is gradually becoming easier to explore oil fields and
reduce the operating costs.
The Indian Government is eager to reduce its dependency on Oil imports and therefore, has eased
the regulations to encourage investments. With the Government’s aim to reduce oil imports by
10 % by 2022, we recommend to invest the Oil and Gas upstream industry.

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