Group 3 Oil & Gas

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 byATULYA SACHAR MIDHILA ER MOKSHA SHAH SIDDHARTH KUMAR SONALI HOODA VAISHWI SINHA VIGNESH S

A017 A032 A034 A060 A061 A067 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.

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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.

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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

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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

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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.

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Plateau production, when output stabilizes. This stage also lasts two to three years, or sometimes longer in the case of larger fields.

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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 drillbit,” 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

Return on Equity = Net Income / Shareholders' Equity Net Profit Margin = Net Profit After Tax / Net Sales Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity Return on Equity = Net Income / Shareholders' Equity Net Profit Margin = Net Profit After Tax / Net Sales

OIL OIL OIL OIL HOECL HOECL

Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity Return on Equity = Net Income / Shareholders' Equity Net Profit Margin = Net Profit After Tax / Net Sales Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity Return on Equity = Net Income / Shareholders' Equity Net Profit Margin = Net Profit After Tax / Net Sales Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity Return on Equity = Net Income / Shareholders' Equity Net Profit Margin = Net Profit After Tax / Net Sales Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity Return on Equity = Net Income / Shareholders' Equity Net Profit Margin = Net Profit After Tax / Net Sales Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity Return on Equity = Net Income / Shareholders' Equity

HOECL HOECL BPRL BPRL BPRL BPRL GAIL GAIL GAIL GAIL ONGC ONGC ONGC ONGC CAIRN CAIRN CAIRN CAIRN ESSAR OIL ESSAR OIL ESSAR OIL ESSAR OIL

Net Profit Margin = Net Profit After Tax / Net Sales Total Assets Turnover Ratio = Net Sales/ Total Assets Financial Leverage = Total Assets/ Total Equity

For the year ended 31st March, 2013

0.187 0.361 0.401 1.290 -0.839 -5.071

For the year ended 31st March, 2014 0.144 0.311 0.275 1.684 -0.236 -2.086

0.062 0.036 2.663 3.125 -1.159 24.140 NA NA 0.000 0.000 5.505 -0.079 0.166 0.162 0.085 0.076 1.064 1.155 1.844 1.840 2.454 2.883 3.666 5.040 0.468 0.392 1.431 1.458 0.434 0.192 1.603 0.751 0.241 0.225 1.124 1.140 -0.482 0.052

For the year ended 31st March, 2015 0.117 0.258 0.269 1.684 -4.490 30.307 0.095 1.554 -9.148 NA 0.000 1.167 0.091 0.047 1.073 1.816 1.836 3.196 0.399 1.439 0.036 0.169 0.184 1.144 0.283

For the year ended 31st March, 2016 0.094 0.240 0.249 1.571 0.012 0.123

For the year ended 31st March, 2017 0.053 0.163 0.210 1.559 0.110 1.454

For the year ended 31st March, 2018 0.096 0.250 0.242 1.578 0.101 0.777

0.059 1.621 -0.228 NA 0.000 1.175 0.075 0.044 0.980 1.733 1.540 2.977 0.355 1.459 0.023 0.184 0.111 1.127 NA

0.049 1.555 -0.902 -4.273 0.101 2.094 0.092 0.073 0.870 1.451 1.360 3.239 0.317 1.326 NA NA NA NA NA

0.091 1.434 -0.044 -1.775 0.019 1.330 0.114 0.086 0.924 1.440 1.031 2.346 0.292 1.506 NA NA NA NA NA

-0.020

0.001

0.015 NA

NA

NA

1.235

1.701

1.705 NA

NA

NA

19.440

21.419

10.772 NA

NA

NA

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500% 0%

-500%

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

-1000% -1500% -2000% -2500% -3000% OIL

HOECL

BPRL

ONGC

CAIRN

ESSAR OIL

GAIL

Return on Equity has been consistent over the years for all companies with the exception of BPRL which saw a sharp decrease in March 2014 due to a provision for impairment loss of Rs.8300 crores.

Figure 3 Return on equity

Accounts Payable Ratio represents 40.000 the how quickly companies are able 30.000 to pay their 20.000 respective suppliers. HOECL 10.000 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 small size, but we Figure 4 Accounts payable turnover ratio 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 50.000

Accounts Receivable 25.000 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 of the biggest OIL HOECL BPRL GAIL ONGC CAIRN ESSAR OIL players in the market maintains a Figure 5 Accounts Receivable Turnover Ratio consistent ratio over the years, despite dynamic changes in the market. This shows the goodwill the firm enjoys in the marketplace. 30.000

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7.000

6.000 5.000 4.000 3.000 2.000 1.000 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 6 Current Assets Turnover Ratio

Current Assets Turnover Ratio represents the how efficiently a firm utilises its current assets to generate revenues. GAIL has outperformed the industry standards throughout the years under review due to its efficiency in operations and proper management of current assets. Fixed Assets Turnover Ratio represents how efficiently a firm uses its Fixed Assets to produce revenues. ONGC is the industry leader again in this Ratio.

5.000 4.000 3.000 2.000 1.000 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 7 Fixed Assets Turnover Ratio

Inventory Turnover Ratio represents how well a firm manages its inventory. BPRL has not been able to manage its inventory properly and neither does HOECL. Smaller firms have difficulty maintaining this ratio.

250.000 200.000

150.000 100.000 50.000 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

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This ratio represents how well a firm utilises its Total Assets to generate Revenue. GAIL is the industry leader here.

1.800 1.600 1.400 1.200 1.000 0.800 0.600 0.400 0.200 0.000 March'12 OIL

March'13 HOECL

March'14 BPRL

March'15

GAIL

March'16

ONGC

March'17

CAIRN

March'18

ESSAR OIL

Figure 9 Total Assets Turnover Ratio

It indicates the extent of total 1.000 funds invested 0.800 for the purpose of working 0.600 capital and 0.400 throws light on 0.200 the importance of current assets 0.000 of a firm. It March'12 March'13 March'14 March'15 March'16 March'17 March'18 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. 1.200

30.000 25.000 20.000 15.000

10.000 5.000 0.000 March'12 OIL

March'13 HOECL

March'14 BPRL

March'15 GAIL

March'16

ONGC

CAIRN

March'17

March'18

ESSAR OIL

Usually Current Ratio is 2:1. It represents how many times the current liabilities of a company can be paid using the current assets. CAIRN has too high a current ratio indicating poor management of its current assets.

Figure 11 Current Ratio

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ESSAR OIL has a very high Debt Equity Ratio which led to its sale in March 2016. This ratio represents the long term borrowings as a percentage of the total equity.

8.000 6.000 4.000 2.000

0.000 March'12 March'13 March'14 March'15 March'16 March'17 March'18 -2.000 OIL

HOECL

BPRL

ONGC

CAIRN

ESSAR OIL

GAIL

Figure 12 Debt Equity Ratio 35.00 30.00 25.00 20.00 15.00 10.00 5.00 March'12 OIL

March'13 HOECL

March'14 BPRL

March'15 GAIL

March'16

ONGC

March'17

CAIRN

March'18

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

ONGC

CAIRN

ESSAR OIL

GAIL

Figure 14 Working Capital

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Growth Rate Particulars

Company

Operating Cycle OIL OIL Cash Cycle Operating Cycle HOECL HOECL Cash Cycle Operating Cycle BPRL BPRL Cash Cycle Operating Cycle GAIL GAIL Cash Cycle Operating Cycle ONGC ONGC Cash Cycle Operating Cycle CAIRN CAIRN Cash Cycle Operating Cycle ESSAR OIL ESSAR OIL Cash Cycle Company As at As at 31st 31st March, March, 2013 2014 9.92% 10.04% OIL -23.61% HOECL -83.91% BPRL GAIL ONGC CAIRN ESSAR OIL

For the year ended 31st March, 2013 49.801 40.710 163.874 125.128 NA NA 28.009 6.792 51.691 29.724 23.074 14.965 40.621 5.211 As at 31st March, 2015 7.48% 449.02% 914.77% 4.97% 11.70% 2.75%

- 2414.02% 115.94% 11.52% 11.43% 24.06% 19.46% 13.56% 658.12% NA NA NA

For the year ended 31st March, 2014 48.513 37.271 282.975 197.853 NA NA 28.601 6.483 57.080 31.960 45.345 30.885 49.467 8.831 As at 31st March, 2016 5.05% 1.18%

For the year ended 31st March, 2015 80.219 65.332 263.890 154.321 NA NA 32.450 9.337 69.299 44.827 50.864 25.714 68.714 1.178 As at 31st March, 2017 0.50% 10.98%

For the year ended 31st March, 2016 93.817 76.980 248.712 156.161 NA NA 33.366 11.986 65.642 42.793 38.340 -9.869 NA NA As at 31st March, 2018 1.87% 10.13%

For the year ended 31st March, 2017 72.223 54.042 234.235 128.513 NA NA 32.912 12.276 50.369 28.420 NA NA NA NA

For the year ended 31st March, 2018 68.968 51.872 225.259 116.896 36.002 33.026 31.382 9.349 53.250 28.712 NA NA NA NA

-22.79%

- -4.40% 90.24% 2.75% 3.08% 7.12% 11.81% 13.51% 12.98% 1.05% NA NA

NA

NA

NA

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

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

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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.

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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.

3

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

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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.

  

II.   

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. 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-2018-156429article

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

Acquirer name

Target name

Feb 2018

ONGC

Feb 2018

ONGC Videsh

Aug 2017

Rosneft

Dec 2016

Jan 2015

Oil and Natural Gas Corp's ONGC Videsh Ltd (OVL) Bharat Forge

HPCL (51.11 per cent stake) Abu Dhabi National Oil Co (10 per cent stake in offshore oilfield) Essar Oil (49 per cent stake) Gujarat State Petroleum Co's Vankor oil field

Oct 2013

ONGC Videsh Ltd

Jun 2013

ONGC Videsh Ltd (in partnership with Oil India Ltd)

Dec 2015

Mecanique Generale Langroise Parque das Conchas, Brazilian Oilfield Rovuma Area 1 Offshore Block

Value of deal (US$ million) 57,020.39 600

1,290 1200 1260 12.82 529 2640

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.

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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

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

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.

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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 governmentowned 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

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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

 

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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 6

Sitesources.worldbank.org

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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

7

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 resupplied, 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 supplychain 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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7.

8.

9.

10.

11.

12.

preferential treatment. Therefore, one method for improving a supply-chain is to select an excellent corps of suppliers. 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. 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. 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. 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. 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. 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.

8

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

9

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:

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Petroleum and Natural Gas Regulatory Board (PNGRB) Act, 2006 Auto Fuel Policy, 2003



Regulate refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas



Provide a roadmap to comply with various vehicular emission norms and corresponding fuel quality upgrading requirements over a period of time

Freight Subsidy (for far-flung areas) Scheme, 2002



Compensate public sector Oil Marketing Companies (OMCs) for the freight incurred to distribute subsidized products in far-flung areas

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Domestic Natural Gas Pricing Formu10la, 2014 Marginal Field Policy



New domestic natural gas pricing formula has been formed, which will be revised on a half yearly basis.



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 Proposes an indicative target of 20 per cent blending of 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. In 2014, the pricing for CNG (transport) and PNG (domestic) were examined by the Ministry of Petroleum and Natural Gas while the disclosure of prices of the CNG and PNG commodities were made compulsory



National Policy on Biofuels, 2018

 

Pricing of CNG and PNG by CGD Entities (2014)



The Policy on Shale Gas and Oil, 2013



Open Acreage Licensing



Integrated Energy Policy (IEP), 2006



Allows companies to apply for shale gas and oil rights in their petroleum exploration licenses and petroleum mining leases Launched in June 2017, it allows companies to carve out 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 Outlines goals to deal with challenges faced by India’s 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 (CBM)



Underground Coal Gasification (UCG)



Open Acreage Licensing Policy





The CBM policy was designed to be liberal and investor 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. UCG is currently the only feasible technology available 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. The Open Acreage Licensing Policy (OALP), which 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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

Diversification





Investments to enhance production

  

Move to nonconventional energy resources



More focus upon small companies Pilot project Initiated for Shale Gas Production in India







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. 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. Indian companies are enhancing production through redevelopment plans to increase recovery rates of hydrocarbon from oil wells; 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. Companies are looking forward to developing JVs and technical partnership with foreign companies to improve capabilities to develop shale reserves. The Government of India is planning to set up around 5,000 compressed bio gas (CBG) plants by 2023. Private sector units like Adani, Sun Petrochemicals and few new entrants have bagged 1/3rd of small oil and gas fields. Oil and Natural Gas Corp (ONGC) has started Shale Gas exploration by spudding the first Shale Gas well RNSG-1 in Burdwan District of West Bengal.

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DECISION Sr. No

Factor to be considered

Weigh tage %

Invest

Don’t Invest

Inv. Weigh tage

Don’t Inv Weitage

Justification for the score

1

Capital investment required (minimum)

17

2

8

0.34

0.16

The upstream oil and gas industry is capital intensive. Lot of investments have to be made for oil blocks, drilling equipments, technology, labour etc.

2

Working capital requirements

12

4

6

.48

0.24

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

3

Profitability in terms of Profit margin/operating profit margin

5

6

4

0.3

0.24

The Profit Margins are good for a capital and labour industry such as oil 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 terms of ROE

5

8

2

0.4

0.16

Return on Equity for the 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 doing business

8

6

4

0.48

0.24

Though the upstream oil 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 Pressures

5

3

7

0.15

0.21

The competitive 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 regulations and controls

12

8

2

0.96

0.16

Government is eager to reduce import dependency 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 process issues

7

7

3

0.49

0.21

Given the investment on 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 – SCM

3

6

4

0.18

0.24

Supply Chain used to be 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 / foreign investment or funding

7

8

2

0.56

0.16

The Government of India has eased the regulations on foreign investment and allows 100% FDI in the E&P Sector making this an attractive investment opportunity.

14

Innovations possible

7

8

2

0.56

0.16

Lot of technological 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.

5.6

2.87

Total %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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