A Case Study on Multinationalization of Production by Santos

Abstract MNCs are gradually expanding its production activity outside it s parent country. Production is taking a more multinational form. This multinationalization of production has various reasons to take place. Some do it for cost advantage, some to avoid rising competition in domestic market and some want a wider reach of consumers. This case aims to explore the multinationallization of production activity by Santos a top ranking Australian Oil and gas Conglomerate with a US $ 12 billon capitalization. It is one of Australia leading Oil and Gas providers. This case explores how Santos is expanding its production facilities to more than 8 countries in the Asia Pacific region to meet the growing demands of natural gas in its parent country and its aims to expand its consumer base in developing countries like Bangladesh, India and Java etc. we also explore their contribution to reducing Carbon emission for a cleaner environment. Introduction Santos the word may sound Mexican or of any South American Country. However this exotic sounding name is in fact the name of an Australian energy conglomerate. Santos pioneered in the Australian oil and gas sector in 1954 (Santos Homepage). Santos is considered one of Australias leading gas producers. They produce, explore and supplying oil and gas to Australian and Asian customers. The company today is the largest producer of natural gas to the Australian domestic market, supplying 16% of the nations gas needs (Santos Homepage). Santos currently contributes 600 mmscf/d of gas and 30 kbbls/d of LNG to the global gas production (Santos Homepage). It is included among the Top-25 ASX listed companies and as of February 2011 Santos has a market capitalisation US$12 billion making it one of the top 30 of Australias conglobates (ASX Top 25). Santos has about 2,400 employees working across its operations in Australia and Asia and has an exploration portfolio by area of 146,800 square kilometers, considered as the largest for an Australian Exploration company (Santos Homepage). This case is an endeavor to probe the how conglomerates like Santos are multinationalizing their production facilities for various reasons like cost advantage, larger consumer base and higher production volume. The case is based on secondary information. Newspaper articles, journals, and company reports have been used as reference to develop this case. Exploration Acreage

For a Oil and gas Exploration Company like Santos it is always better when it is bigger. More exploration acreage or landmass it has better productive capacity it will posses. Hence successful

A Case Study on Multinationalization of Production by Santos

exploration is its fundamental growth strategy. Because larger land coverage will contribute value-adding reserve additions and creates options for future growth. In the pacific region they have one of the largest exploration portfolios by area of any company. The exploration coverage area stands to 146,800 square kilometers. In 2009 they spent $181 million in Exploration activities (Santos Homepage). Santos has oil, gas and condensate exploration and production licenses with the governments Australia for Amadeus Basin, Bonaparte Basin, Browse Basin, Carnarvon Basin, Cooper/Eromanga Basins, Gippsland Basin, Gunnedah Basin, Otway Basin, Surat/Bowen Basins. With the Government of Bangladesh for Sangu and Magnama Valley. With the Government of Vietnam for Beibuan Trough, Kutei Basin, Nam Con Son Basin, Phu Khanh Basin, East Java, India, Kyrgyz Republic, Papua New Guinea & West Papua, Timor Gap, Timor Sea (Santos Homepage). We can see they have vast access to the natural resources of 8 countries which defiantly increases their productive capacity. Global Reach In Production & Processing

Santos has an annual global production of 54.4 mmboe. Out of its 146,800 square kilometers exploration portfolio actual production is conducted in 34,210 sq km (approx). this huge portfolio of production acreage gives Santos access to 1,440 mmboe of natural gas as reserve for future production and sale (Santos Homepage). Hence this huge reserve and production facility makes Santos Australia's largest domestic gas producer. They produce a wide variety of natural gas to all mainland Australian states and territories. they have diverse natural gas products for example ethane which they supply to the consumers in Sydney, they supply oil and Liquefied Natural Gas (LNG) to domestic and international customers. Santos is creating value from its production assets through optimization programs, operational excellence and cost leadership. All these strategies are what we have learned as sustainable competitive advantages that a company must develop to curb the rising global competition. Santos has production facilities in Ballera, Barrow Island, Bayu-Undan, Brantas, Casino, Cooper Basin, Denison, Trough, East Spar, Fairview, Jackson, John Brookes, Maleo, Mereenie, Minerva, Moomba, Moonie, Mutineer-Exeter, Oyong, Patricia-Baleen, Port Bonython, Roma Scotia, Stag, Thevenard Island (Santos Homepage). These production facilities are located across 8 countries. They have applied a multinational production system to meet the need of their target consumers in their parent country Australia and the consumers of the Asia Pacific region. They are utilizing the strategy we have come to learn in IPLC theory i.e. to move to foreign locations for production to meet the growing need of the consumers eventually they will stop domestic production and import from the foreign production locations to the domestic consumers.

A Case Study on Multinationalization of Production by Santos

Santos Exploration and Production activity in Bangladesh Bangladesh has a per capita commercial consumption of Energy of 141.6 (kg of oil equivalent) per $1,000 GDP (World Bank, 2008). In the total Bangladeshi energy picture, the countrys natural gas endowment stands out as a bright spot. Natural gas is most important indigenous source of energy that accounts for 75% of the commercial energy of the country (EMRD, 2010). Bangladesh has an average daily gas production capacity of approximately 2000 mmcfd. From the total production capacity International Oil Companies (IOC) contribute 1040 mmcfd in production and State Owned Companies (SOC) produce 960 mmcfd (Petrobangla Annual Report, 2010). As of 2010 gas production was 1996.7 MMCFD. At present the daily approximate projected gas demand throughout the country is 2500 MMCFD (CIA Fact Book). The demand is increasing day by day. Bangladesh has initiated many steps to match to this deficit in supply to meet the ever increasing population of a country on a growth phase. Among those many steps initiation of Santos in Bangladesh oil and gas sector was a key step. In 2007 Santos established its exploration and production activity in Bangladesh by its acquisition of Block 16 one of the two yet discovered offshore gas fields located in Bangladesh. It is located in the Sangu valley. The first ever exploration activity in Block 16 was imitated by Shell that lead to the Offshore Gas discovery in 1996. The first ever off shore gas field of Bangladesh to be discovered was Block 16. Incidentally it is also the first and only offshore gas producer since 1998. (Jasim Uddin Khan, 2010). Santos entered in Bangladesh through acquisition of another multinational Oil and Gas company Cairn Energies interests in Block 16 in 2007. Santos bought 37.5% stakes in the UK Giant Cairn Energys Bangladesh operation at Block 16. By 2010 Santos acquired 100% of Cairn Energies interests in Bangladesh (Christine Foster, 2010). In this short term of introduction Santos is already considered a long term committed investor in Bangladesh. This status was achieved due to their Total Gross Investment of the Joint Venture to date that stands to $1 billion. This series of Joint ventures have lead to 19 wells drilled and 10 Development wells. Circa 10,000 sq. km of 2D Seismic testing has also been acquired from block 16 that is crucial data base for future exploration work. Santos provided circa 470 Bcf to the National grid. It is also an important source of natural Gas is the Chittagong region of Bangladesh with a demand supply gap of circa 200 MMscfd at present (Santos Homepage). Santos has plans in motion for further drilling activity. The countrys Prime Minister, Sheikh Hasina, who is also energy minister, has approved a request by Santos to amend an existing Gas Purchase and Sales Agreement (GPSA) with Bangladeshs state-owned Petrobangla. Santos

A Case Study on Multinationalization of Production by Santos

needed a government decision before it could begin further exploration in the offshore gas fields. Santos has plans to begin the drilling of three exploration wells Sangu 11, South Sangu and Magnama in block 16. Santos has made provisions for all necessary deals with rig, helicopter and ship providers, which will enable drilling to commence on schedule (M Azizur Rahman, 2011) Santos has also made community impacts in Bangladesh too. Block 16 JV contributes to the fields of education, bio-diversity conservation, skill development training and health in partnership with NGOs in Chittagong and Coxs Bazar. Santos is also a major contributor in the areas of medical aid and education. They have built Cyclone Shelters, Training centres and Schools for the development and sustainability of the poor masses of Bangladesh. Environment Protection Initiatives By Santos Preservation of our environment and rise of environmental hazards has been a major concern for global policy makers. The rising carbon emissions and unethical practices of Multinational companies have further added to it. As of 2009 the global Carbon emission is 29,888,121 Metric tons (World Bank 2009). Being a responsible business organization that gives high level of importance to Health, Safety and Environment Santos has taken a initiative to help reduce Carbon emission. They have developed a Carbon capture and storage plant in Moomba, Australia. Carbon capture and storage (CCS) is a technology option which aims to reduce greenhouse gas emissions from point sources such as coal-fired power stations and major industrial plants. CCS involves the capture and separation of CO2 at its source, transportation via dedicated pipelines to a storage location and injection into deep geological reservoirs. The Moomba Carbon Storage project has the long-term objective of establishing a large-scale carbon storage hub at Moomba, which could eventually store up to 20 million tons of carbon dioxide per year and 1 billion tones over the life of the project (Congreve and Doman, 2010). It would do so by injecting carbon dioxide into the depleted and/or depleting oil and gas reservoirs of the Cooper Basin, thereby providing a secure storage solution for major carbon emitters in Australia (Santos Homepage). Capturing and securely storing carbon dioxide deep underground is one of the most practical and efficient responses to combating climate change. This will surely help reduce global carbon emission and help develop a better environment for us to live on. Conclusion From what we have come to learn in our case study of Santos, MNCs not only multinationalize their product reach they eventually multinationalize their production efforts too. This is

A Case Study on Multinationalization of Production by Santos

definitely in line with the IPLC theory which we have come to learn in International Business. Companies like Santos look for foreign locations where they can look for better and less expensive locations where they can produce their products to meet the growing needs of their domestic consumers thus get a sustainable competitive advantage over their rivals. Their ideal foreign production location is developing or least developed countries were the natural resources are not properly utilized, competition is less and cost of production is less. Santos expansion activities in locations like Bangladesh, India, Java, Timor, Indonesia and Vietnam further establishes this claim. Very soon they will only produce their natural gas from these locations and import them back to Australia as cost of production in Australia will rise. Reference

Santos. (2011). Company Profile. Available: http://www.santos.com/company-profile.aspx Santos. (2011). Key Facts & Statistics. Available: http://www.santos.com/company-profile/keyfacts-statistics.aspx. ASX. (2011). ASX Top 25. Available: http://www.asx.com.au/ Santos. (2011). Exploration Acreage. Available: http://www.santos.com/explorationacreage.aspx Santos. (2011). Production & Processing. Available: http://www.santos.com/explorationacreage/production-processing.aspx. World Bank. (2008). Commercial Consumption of Energy . Available: http://data.worldbank.org/ Petrobangla. (2010). Annual Report. Available: http://www.petrobangla.org.bd/annual%20report%202009.pdf CIA. (2010). Country Economic Indicators . Available: https://www.cia.gov/library/publications/the-world-factbook/report%202009.pdf Jasim Uddin Khan . (2011). Oil, Gas Exploration PSC . Available: http://www.thedailystar.net/newDesign/index.php. Christine Forster. (2011). Australia's Santos buys Cairn stakes in Bangladeshi gas field. Available: http://www.platts.com/Home M Azizur Rahman, (2011). Santos to Sell Gas In Bangladesh. Available: http://www.platts.com/Home World Bank. (2009). Carbon Emission Data. Available: http://data.worldbank.org/ Mike Congreve, Matthew Doman. (2011). Moomba Carbon Storage project. Available: http://www.santos.com/exploration-acreage/moomba-carbon-storage-project.aspx