Beruflich Dokumente
Kultur Dokumente
Kannan Ramaswamy
Copyright 2008 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor
Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective
management. Mr. Jitendra Singh, MBA 2008, provided research assistance.
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Name of Company
Cairn Energy
Reliance Industries Ltd.
ONGC
Gujarat State Petroleum
Essar Oil Ltd.
Focus Energy
BG Exploration
Niko Resources
Hardy
Total
Oil
19
3
0
4
1
0
1
0
0
28
Gas
4
20
5
2
0
1
0
2
1
35
Relinquished
1
0
0
0
0
0
0
0
0
1
No. of Discoveries
Commercial
Approved
Total
22
9
23
9
5
0
6
0
1
1
1
0
1
0
2
2
1
0
62
21
Development
Approved
8
2
0
0
0
0
0
2
0
12
Under
Evaluation
13
14
3
6
0
1
1
0
0
41
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rights in 34 domestic blocks and two foreign properties in Yemen and Oman. It was also active in five
coal-bed methane projects in India. The pride of place in its E&P stable belonged to its properties in the
KG basin off the eastern coast, where it had found gas estimated to be around 7 trillion cubic feet, the
biggest find in 2002 worldwide. It reported a success rate of 74% for all wells drilled, a feat that remained unmatched in the country. Its foray into the E&P sector was matched by an equally audacious
position in the refining segment. Its refinery in Jamnagar in the state of Gujarat processed 660,000 bpd
(barrels per day), was the third largest such facility in the world. In August 2007, the company had
announced a plan to invest $14 billion over the next few years to intensify its exploration activities. It
had entered into several partnerships with ONGC, Niko Resources, BG Exploration, and other E&P
companies to bolster its exploration program in the country. It planned to dig more than 100 wells in
three to four years, and had initiated actions to procure seven rigs, mostly for deepwater use.
Although the Director General of Hydrocarbons (DGH) had intended to launch the seventh
round of NELP in August 2007, the process appeared to be delayed. Given the worldwide rig shortage,
the DGH felt that successful bidders might not be able to complete test wells in the time frame stipulated on winning bids. There was another complication regarding the sanctity of PSAs. The concern
arose from pricing gas that was to be produced by Reliance at its find in the KG basin. The original
terms that were offered at the time of bids stipulated that gas and oil when found and produced from
the leased properties could be sold at prevailing market prices. However, when Reliance was ready to
produce gas from its KG basin asset, it encountered stiff opposition from the fertilizer companies and
power generation units, two of the largest buyers for its gas. Ironically, one of the leading voices of
protest was that of the Anil Ambani Group, a company that had cleaved from the original Reliance
Group when the Ambani brothers had a public feud over the ownership of the company upon their
fathers death. The Anil Ambani Group had banked on lower gas prices to fuel a mega power plant that
it was commissioning.
The government had appointed a ministerial-level commission to examine the pricing structure
for Reliances gas. Seeing the writing on the wall, other NELP block holders protested loudly. The
managing director of BG Exploration, William Adamson, wrote to the cabinet secretary, saying that
this prelude to a renegotiation of gas prices would dampen the pace of exploration and erode the
confidence of the international companies in forthcoming bidding rounds.8 Hardy exploration vice
president Ashu Sagar said, Any action to renege on commitments will weaken investor confidence, not
only in NELP but also in Indian contracts.9 BP country head Ashok Jhawar said, Subsidies in energy
pricing should come at the consumer end; otherwise, countries which set an unrealistic wellhead price
for gas will suffer from lack of exploration and development since exploration investment tends to flow
to higher priced locations.10
Double Jeopardy in Oil and Gas. The Press Trust of India. August 17, 2007.
Ibid.
10
Ibid.
11
www.kwrintl.com/library/2007/indiamajorfuelexporter.htm.
9
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Exhibit II. Installed Capacity and Throughput for the Refining Sector
Refiner
IOCL
HPCL
BPCL
CPCL
MRPL
RPL
1991
23742
9230
6957
5698
-
2006
38522
14229
10298
10362
12014
Installed Capacity
2006
Cap. Utln%
41350
93.2
13000
109.5
12000
85.8
10500
98.7
9690
124.0
26033
33163
33000
29654
30544
32345
34309
100.5
Indian Oil Corporation (IOCL) was Indias largest refining and marketing company (R&M).
With annual turnover of approximately $51 billion (2006), it was ranked 135th in the Fortune 500
index of global corporations and as the 20th among petroleum companies worldwide. Its assets were
spread across 10 refineries, a pipeline network spanning 9300 kilometers, and 11,739 retail gasoline
outlets. In recent years, IOCL had set out to explore new horizons in both downstream and upstream
operations. It had already enhanced its capabilities in the area of petrochemicals, and was exporting
significant volumes to neighboring countries in Asia and the Middle East. It had expanded its retail
network to reach Sri Lanka and its bunkering business into Mauritius, the Middle East, and East Africa.
Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL),
two other major state-controlled12 companies, were active in refining and marketing. HPCL had two
refineries that controlled roughly 10% of overall refining capacity. A third refinery was in the planning
stage. It had also invested in a minority share of another state-owned refiner, Mangalore Refinery and
Petrochemicals Ltd. (MRPL). Given the liberalization of constraints governing state-controlled companies in the country, HPCL had evinced keen interest in pursuing a strategy of vertical integration. It was
not only expanding its refining potential, but was also entering the exploration arena through alliance
relationships with other firms.
Exhibit III. Retail Outlets for State-Controlled
Downstream Companies
BPCL
25%
HPCL
25%
IOCL
38%
IBP
12%
BPCL was the third state-owned refinery that managed two refineries, and it also managed 2,123
gasoline retail outlets. It had evolved from the old Burmah Shell that was nationalized by the government in the 1970s. It, too, was building a third refinery with six million tons per annum capacity in
Madhya Pradesh.
12
The government holds controlling interests in these entities and has allowed public shareholding. These are
consequently listed on the local stock exchanges.
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Collectively, the state-controlled refiners had a lock on domestic refining capacity. They had enjoyed a protected status for a fairly long time and had built mini-empires in both the refining and retail
ends of the industry. However, private competition was already on the horizon. Since many of the
existing state-owned refineries were old, they did not have the ability to handle complex crude, further
exposing them to downside risks.13 This was an area in which private players were seeking to gain an
advantage.
Reliance Petroleum Ltd. (RPL) had emerged as one of the formidable players in the downstream
business. Reliance Industries, one of Indias largest companies that had made its fortune in textiles,
polyester filament yarn, and associated petrochemicals, had floated RPL to establish a foothold in the
refining business. It complemented Reliances efforts upstream. It had an installed capacity of 30 million tons per year (0.6 million barrels per day), making it the worlds third largest refinery. It was in the
midst of doubling that capacity and was set to commission a second refinery that had a Nelson complexity rating of 14, thus enhancing its ability to process heavier, sour crudes that traded at a discount
compared to the light, sweet variety. Chevron-Texaco, the U.S. major, had invested 5% in Reliances
refining venture, and it was expected that RPL would export up to 40% of its refined output to developed markets, mostly in the U.S.
Historically, refining investments had been the Achilles heel of petroleum companies. Integrated
super majors in the U.S. and elsewhere had been quite reluctant to invest in downstream refining after
having suffered serious losses in the 1980s-1990s when worldwide capacity overhangs combined with
declining demand to wipe out profits. Environmental regulations and mandates had made it extremely
difficult to establish greenfield refineries in the U.S. The refiners had become particularly adept at debottlenecking and technology improvements to increase yields from their historical refining investments. However, there was periodic overcapacity in the Middle East and Singapore, two locations
within easy reach of India.
Some industry watchers had predicted an average refining surplus of 17.5% by the end of the
decade, even assuming that the massive capacity that Reliance was bringing online would be mostly
exported.14 The optimists, however, were touting Indias growing demand for refined products, widely
expected to accelerate at an average annual rate of 4.5%.15 Competing projections at that rate of growth
showed that a substantial capacity increase would be needed even for the domestic market.
The Indian government had historically maintained an Administered Price Mechanism (APM)
that included a complex system of subsidies and shadow prices in order to insulate local prices from the
vagaries of international market fluctuations. This usually resulted in the upstream exploration and
production companies having to foot a significant portion of the oil bill by pricing their production
lower than world market prices. Pure refiners were also called upon to support the system of artificial
prices and hence shared in the subsidies. In 2002, the country announced that it was dismantling the
APM approach, although within two years of doing so, the government was intervening once again to
keep prices low when crude prices started to move upwards quickly. This new round of intervention was
less transparent and more ad hoc. For example, customs duty on imported crude was pegged at 5%,
while refined product imports were charged 10% duty. This assured that the refiners would be well
protected from foreign competition. It was widely believed that the refiners would be less profitable if
market prices were introduced along with a level playing field that was not punitive to imports. It was
reported in 2006 that ONGC alone was subsidizing consumers to the tune of $1 billion annually, and
the marketing companies were losing $51 million a day.16
13
Shenoy, B., and G. Glen. What should Indias long-term refining strategy be? www.beg.utexas.edu/energyecon/
thinkcorner/indian_refining.pdf.
14
Sabnis, A. 2006. India: Goodbye to pricing reforms? ABN-AMRO. 6 June.
15
Ibid.
16
Burnout: Oilcos lose $51 m/day. The Economic Times, May 18, 2006.
6
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www.ongcindia.com/history.asp.
Subir Raha made ONGC a force to reckon with. http://news.moneycontrol.com/india/news/smartmanager/
subirrahaongc/subirrahamadeongcforcetoreckonwith/market/stocks/article/191666.
18
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consequence. This had crippled the organization, and many technology vendors had balked at the
prospect of bidding for ONGC contracts. All contracts were subject to tendering, and technology firms
were reluctant to submit their technologies to the tendering process given the inherent competitive
secrecy involved and the long gestation period for such tenders. They preferred negotiated contracts
instead. When ONGC had resorted to such contracts, it was constantly second-guessed by the Ministry
of Petroleum. As a result of these systemic problems, some believed that ONGC was behind in technology by 5 to 10 years.19
One of Rahas very early moves as the new CMD was to revamp the entire decision-making
structure of the company by eliminating bureaucratic layers of staff approvals. He sought to create a
more flat structure that could make decisions quickly. In achieving this end, he sought to push autonomy down the chain. These changes resulted in significant improvement with respect to the tendering process. New tenders were being decided on in a matter of weeks as opposed to months under the
old system.
It seemed evident that ONGC would have to improve the quality of its talent pool if it were to
realize the vision that Raha had created. In boosting high-performance behaviors, the company instituted incentive plans targeting innovation and productivity. These incentives were targeted at both
individual and group performance. The organizational structure was reworked to allow for autonomous decision-making within the constraints of state ownership. A comprehensive redesign of the
entire performance appraisal process was also initiated. The resulting process won ISO 9001 certification and spanned all key elements of the HR discipline from learning benchmarks and work culture
analysis to succession planning and leadership development. Four new performance reward schemes
were also simultaneously launched to infuse the company with a performance orientation. ONGC
created a management development institute, christened as the ONGC Academy, to focus on providing
leadership and technical training to its employees.
The company also moved swiftly to put its financial house in order. It had a very heavy interest
and tax burden, especially because of the significant foreign loans it had to service. R.S. Sharma, then
CFO of ONGC, recommended that the company use its plentiful but idle cash reserves to pay off its
foreign debt. The remaining cash was plowed back into the business. These actions resulted in significant savings in terms of both taxes and interest. In 2004, the government decided to sell off a portion of
its holdings as a move to attract private capital to ONGC. The initial public offering for the 10% stake
was oversubscribed three times in a span of 20 minutes, a record for the Indian stock market. As of
2007, the government of India owned 74% of ONGC; IOCL and Gas Authority of India Limited held
7.69% and 2.4%, respectively, as a result of cross-holding agreements; while institutional investors,
employees, and the public held the remaining shares. In 2007, ONGC represented 10% of the market
capitalization represented by the Mumbai Stock Exchange, the largest stock market in the country.
Ganguly, S. 2007. The ONGC: Charting a new course? The James A. Baker Institute for Public Policy. Houston,
Texas.
8
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operator in many of the projects. It reported reserves of 206,109 MMTOE (million metric tons of oil
equivalent) and production of 6.34 MMTOE in 2006. The goal was to produce 20 MMTOE by 2010
and 60 MMTOE by 2025.
OVL had formed a joint venture with the highly successful Mittal group, the steel company that
had an enviable record in oil-rich emerging markets. Named ONGC Mittal Energy, this partnership
was born from a promise to open doors in challenging markets using the relationships that the Mittals
had established in building their steel empire. Despite the potential of this alliance, OVL faced stiff
competition for acreage.
China and its national oil companies had shown a voracious appetite for prospecting acreage, and
hence had gone head-to-head against India and OVL in several auctions. While China had the financial
strength in foreign exchange reserves to pay high prices, OVL was forced to rely on Indias diplomatic
standing and goodwill. China had increasingly shown an ability to package development assistance
innovatively to resource-rich countries in Africa and elsewhere as a means of obtaining favorable terms.
The battle for reserves between China and India came to a head when both OVL and China National
Petroleum Company (CNPC) bid for PetroKazakhstan, a Canadian-owned company with assets in the
Central Asian Republic of Kazakhstan. CNPC was allowed to re-bid after all bids were unsealed and,
having offered $4.18 billion, was declared the winner. Although OVL was also given an opportunity to
re-bid, the offer was summarily withdrawn and CNCP was awarded the rights. The petroleum minister,
Mani Shanker Iyer, complained, The goalposts are being changed after the match has begun.20 OVL
had lost to CNPC in Myanmar and to Sinopec in Angola. Reflecting on these losses, India and China
forged a bilateral partnership agreement where both countries had decided to cooperate in future bids.
Following this agreement, OVL and CNPC won a bid for 38% of Al Furat Production Company,
Syrias largest oil producer, and later with Sinopec for 50% of Omimex de Colombia.
Gupta, A. 2005. Big just became a lot bigger. Business Today. December 4, 2005.
Paise is the Indian monetary unit equivalent to a cent.
22
Gupta, A. 2005. Big just became a lot bigger. Business Today. December 4, 2005.
21
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Exhibit IV. Crude Prices and Refining Margins for Indian Producers
The vertical integration strategy was not without its detractors. There were loud complaints that
ONGC was entering into areas where it had no expertisecoal-bed methane, underground gasification
of coal, power generation, LNG, and petrochemicals were all uncharted territory for the company. The
major concern was that ONGC had lost its focus on exploration, the primary reason for its constitution. While many others had made sizable discoveries following liberalization, ONGC had lagged behind. Ironically, the major finds made by competitors originated in areas where ONGC had been active
for several years.
Some industry experts blamed the internal organization of ONGC and the quality of its geoscientists for the poor record. Unlike the oil majors who typically employed a multilayered system of evaluation, appraisal, and decision-making, at ONGC the team with the most clout, often comprising the
most senior staff or the local manager, made the call about where to drill. Absent a system of checks and
balances, it appeared that the company was relying on the power of a few to make good decisions. The
industry used an exploration ratio of 1:2 as a benchmark to evaluate drilling performance (drill two
wells to find one with potential). ONGC averaged 1:4 or 1:5 for on-shore and 1:10 or worse for deepwater.23 Eleven of its deep-water wells in the Sagar Samriddhi program came up empty, and overall
production had hardly budged from 30MMT per year. If one applies global averages, ONGC should
be producing 80 MMT per year, said V.K. Sibal, the director general of Hydrocarbons.24
Some analysts believed that ONGCs poor track record was due to its inefficient data analysis
structure. It lacked a central repository where all the data from its prospective fields were analyzed.
Instead, this was done in a piecemeal manner, reducing the flexibility and speed at which decisions
could be made. The expense of hiring drilling rigs was another key consideration. Since the rigs cost a
huge amount of money to deploy, ONGC did not take much time to evaluate data methodically.
Instead, it was focused on maximizing rig utilization, thus compromising its ability to strike oil. It had
also justified this approach based on the fact that there was a global drilling rig shortage, thus eliminating the possibility of thorough analysis. In contrast, companies like Reliance usually signed drilling
contracts on a job charter basis only after they had completed exhaustive seismic data gathering and
interpretation. By 2006, ONGC had spent Rs. 3000 crores (roughly $616 million) in three years and
had drilled an embarrassing 20 dry wells.25 To complicate matters further, the company had lost more
than 200 engineers, geologists, and geoscientists to Reliance, a trend that promised to accelerate further.
23
www.indiareacts.com/
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Raha was widely seen as being very dismissive of Indias potential for oil and gas, and even the
official company Web site characterized Indias prospects as limited. In contrast, Bill Gammell, CEO
of Cairn India, after striking oil in Rajasthan, observed, Ive always said for years that India is hugely
unexplored.26 Expressing a similar point of view, Petroleum Minister Mani Shankar Iyer observed,
We have 26 sedimentary basins, which in absolute terms is huge. But ONGC, far from being a failed
company, is a company with lots of potential. I want ONGC to focus on its core competence. Instead
of trying to make up its perceived losses in exploration by opening up petrol pumpsand worse,
fertilizer plants and power plantsI want ONGC to prove to me that its spending on exploration has
reached optimal level and the next rupee spent would be a waste.27
The combative Raha pointed out, We are not making soap, textiles, or aluminum ingots. In any
given process, you know what the inputs are and, if you do so, you will get steel, glass, soap, or 20 cars
rolling out or so many meters of cloth. Exploration is not that kind of business. Exploration is a risky
business. It is unique. When you therefore talk of exploration, we accept that certain wells will go dry.
It took almost 200 dry wells before North Sea oil was established.28
26
Ibid.
Saran, R. 2005. We are in the global league. Business Today, 13 March, 2005.
28
Subramaniam, T.S. 2005. Growing into a global player: interview with Subir Raha, Chairman, Oil and Natural
Gas Corporation. Frontline, Vol. 22, Issue 10. May 07, 2005.
29
In wrong hands. The Public Affairs Magazine News Insight. www.indiareacts.com/
print_storydebate.asp?recno=1047.
30
ONGC Annual Report 2006-2007.
27
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11
The vertical integration strategy was steaming ahead alongside alternative energy projects. Two
global scale petrochemical complexes were being set up in Dahej (Gujarat State) and Mangalore (Karnataka
State). The Dahej facility was expected to cost approximately $2.8 billion and was scheduled to go
online by 2010. It was slated to use naptha feedstock from ONGC facilities close by in Hazira and
Uran. Due diligence studies were under way to explore feasibility for an additional refinery in Kakinada,
close to KG basin finds. The next major find, however, remained elusive.
R.S. Sharma had a lot of things on his plate and needed to make quick course corrections if that
was indeed his conclusion. These were the best of times or the worst of times depending on ones
perspective. Investors were eagerly awaiting Sharmas strategic vision for ONGC. Whether it would be
one cast within the shadow of Raha or one that would diverge from his grandiose integration and
diversification plans remained to be seen.
12
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Gas Authority of
India Ltd. (GAIL)
Reliance
Petroleum Ltd.
(RPL)
Hindustan Oil
Exploration Co.
Gujarat State
Petroleum Corp.
Essar Oil India
Ltd..
Cairn Energy
(India) Ltd.
Refining Companies
Indian Oil Corp.
Ltd. (IOCL)
Hindustan
Petroleum Corp.
Ltd. (HPCL)
Oil & Natural Gas
Corp. (ONGC)
Marketing
Companies
IOCL
ONGC
RPL
NRL
Bharat Petroleum
Corp. Ltd. (BPCL)
Reliance
Petroleum Ltd.
(RPL)
Chennai Petroleum
Numaligarh
Refinery Ltd.
(NRL)
HPCL
BPCL
MRPL
Shell India
MRPL
Premier Oil
Gazprom
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13
Appendix II. Map of India Showing Major Oil and Gas Fields
Source: DGH
14
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15
2006
2005
2004
2003
2002
2001
SALES VOLUMES
Crude oil (MMT)
Natural Gas (MMM3)
LPG ('000 tonnes)
NGL/Natptha/ARN ('000 tonnes)
24.42
20,306
1,033
1,442
22.45
20,500
1,084
1,578
24.09
20,644
1,086
1,567
23.94
21,103
1,161
1,656
23.90
21,110
1,198
1,642
22.86
20,446
1,157
1,681
23.36
20,501
1,211
1,514
FINANCIAL PERFORMANCE
Sales turnover
Statutory Levies
Operating Expenses
Operating Income (EBIT)
Capital Employed
590,575
122,516
102,016
211,471
540,744
494,397
99,138
76,762
199,158
493,763
472,454
103,258
71,397
184,768
419,926
329,270
89,156
58,848
125,349
395,299
353,872
92,334
70,855
149,053
352,170
238,574
59,742
49,084
90,880
329,061
242,704
55,515
51,594
86,932
310,331
EBITDA to Sales%
Profit Margin %
EPS (Rupees)
ROCE%
ROE%
Exchequer Contribution/Sales %
Employees
51.9
26.5
109.7
56.7
25.5
48.5
33,810
57.4
29.2
101.2
57.5
26.9
47.3
34,722
52.2
27.5
91.1
58.8
28.0
48.3
36,185
55.0
26.3
60.8
45.8
21.7
51.2
38,033
53.8
29.8
73.8
54.0
29.6
54.0
39,352
54.1
26.0
43.5
39.2
21.0
45.6
40,280
54.2
21.5
36.7
42.4
17.3
45.9
40,226
OVL Share
45%
25%
38.75%
20%
Colombia Onshore
Sudan Onshore
50%
24.13%
Brazil Offshore
Myanmar Offshore
Iran Offshore
Libya Onshore
Syria Onshore
Sudan Onshore
Egypt Offshore
Nigeria Offshore
15%
20%
40%
49%
60%
23.50%
70%
13.50%
Cuba Offshore
Sudan Pipeline project
30%
90%
Partners
BP (35%) Petrovietnam (20%)
CNPC (40%), Petronas (30%), Sudapet (5%)
Fulin (50%), Mittal (11.25%)
ExxonMobil (30%), SODECO (30%), SMNG
(11.5%), Astra (8.5%)
Sinopec (50%)
Petronas (68.875%), Sudapet (7%)
Project Status
Production
Production
Production
Production & Development
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