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Assignment No.

Case Study: The Global Oil and Gas industry

Group 5

Q.1 Describe the characteristics of the oil and gas industry?

1. According to ONGC chairman “Oil and gas industry is where the big boys play”.
2. Oil and gas industry is an important industry for a common industry as it touches his life in
many aspect from fuel, to petrochemical products like polyethene, eyeglasses etc.
3. Oil and gas industry is characterised by high margin and high political and economic risk.
4. This industry has a long product life cycle and huge capital investment.
5. This industry is a capital intensive industry with capital requirement at each and every point of
the cycle.
6. According to an estimate this industry has an ROI (Return on investment) of 10% as compared
to rest of the manufacturing sector which gives only 8%.
7. Oil and gas as a fuel was first discovered by Colonel Edwin Drake in 1859 as steadily Mr. John D
Rockefeller mould it into an industrial sector by formation of Standard Oil Trust in 1882.
8. Oil and gas industry is a very volatile industry and is affected by many factors which are listed
below:
(1) Geopolitics
(2) Currency Exchange rate
(3) Supply and Demand
(4) Local Government Policy/Sanctions/Taxes
(5) Weather Conditions
(6) Investment bankers.
(7) World bodies/OPEC

9. Oil and gas industries importance can be judged from the fact that this industry impacts the
national policy of local government, world policy, and structural framework of economy,
national security, geopolitics and international conflicts.
10. The prices of crude oil is something that the whole world keeps its eye on and slight change
here or there makes the economy goes into spiral.
11. In this industry there are a handful number of exporting countries (19) and who supply the
needs of a major importing countries like India and china.
12. Oil and gas industry has always been written off with statements like the oil is going to finish
soon and that this industry is in deep trouble and theories like Peak oil and Hubbert Peak theory
but as the time is progressing this industry is growing leaps and bounds.
13. Oil and gas industry is growing by leaps and bounds with discovery of new assets in
conventional and unconventional fields like oil sands in Canada.
Q.2 What is the basis for competitive advantage?

1. Competitive advantage is the term which explains the parameters or factors through which
a company gains advantage over another company.
2. Competitive advantage in the oil and gas industry comes what and how they do.
3. This advantage is established by how integrated the company is from investment in
upstream to midstream to downstream
4. This Integrated Oil Company helps to hedge the various risk.
5. Every IOC has some advantage through which they have a competitive advantage and are
able for over a century.
6. Like for example Exxon has the advantage of financial management, Royal Dutch shell has a
coordinated and a decentralized global network, BP is famous for elephant hunting which means
they target bigger companies and ENI can strike a deal in tense political situation. These are some
of the advantages that these IOC have over their competitors.
7. Now, coming to National Oil Company (NOC) they have the advantage they have maximum
resources of any country at their peril and also they can mould the government policy easily. They
understand the local conditions, govt. policy, tax policy etc. and so they can easily score over their
foreign competitors. According to an estimate NOC control over 90% of the world reserves.
8. Next comes the independents, these independents are the one which have some expertise in some
particular segment. They give their service to that particular segment and earn windfall profit from
that particular segment.
9. Take an example of CNOOC ltd. It is the largest independent player in china and has an expertise in
upstream. Apart from china it has expertise in Africa, down Latin countries etc.
10. They have some fixed investment and some particular area of interest and that gives them the
profit.
11. Like independents we have companies like Halliburton, Baker Hughes who are in oil field services.
12. These companies do not have share in any particular field and their business is limited to giving
services and earning their profit. They have a patented expertise in their field.

Q.3 What are the main factor that impact the structure and competitive dynamics?

1) Structure and competitive dynamics of firms can be defined as the factors which separate two firms
from each other.
2) These factors are listed below
1.1. Size of the firm
1.2. Market dynamics
1.3. Segment in which particular firm is in
1.4. Technological expertise
1.5. Intelligent workforce
1.6. Financial strength
1.7. Competitors strength/no. of competitors
1.8. Policy alignment with the local government/ servicing company
1.9. Understanding of demand and supply/market forces and ability to change it.
1.10. Forecasting of market
1.11. Pioneer in Advancement in technology
1.12. Tie/JV with local companies

Q.4 Why many of the large competitors in the industry are vertically integrated?

1. Oil and gas industry is a very capital intensive industry which requires capital in each and every step
of the cycle
2. This industry is affected by price cycle which affect its profitability and margins. Sometimes the
prices of crude oil gets very high as was the case in 2014 or after 9/11 or during Arab war, but at
other times the prices are low which affect its margin and its ROI.
3. To avoid this factor companies hedge their investment. If the prices are high they will earn from
upstream and when the prices are low they will earn from the downstream sector.
4. Also geopolitical and world bodies play an important role in this industry
5. For e.g. In Iraq war in 2002 the price escalated to something like USD 120 and after that in 2014
due to investment opportunity of investment bankers (world market) there was a price rise in up
to USD 141 and when the investors earned their profit their decreased rapidly. So therefore
artificial rise in price can also be created.
6. These are some of the reasons why large competitors are vertically integrated. One thing to note
is that every large competitor integrated in a different manner.

Q.5What will this industry look like in next 5 or 10 years?

1. Oil and gas industry is a major contributor to world GDP and it has employed a large workforce
2. Technological innovation and emphasis on wireless technology has a huge impact on the oil
and gas industry and further development of technology will only boost the oil industry.
3. Also there has been a huge investment in green field refineries in developing nation (import
driven nation) which also gives a flip side to oil and gas industry. Adding to it the population of
these countries are growing and it will have a huge demand leading to growth of the industry.
4. Development of unconventional assets in shape of oil sands or coal bed methane is also
increasing the longevity of the industry.
5. According to International Energy Agency the oil reserves are sufficient for up to 2040.
6. There has been a slight effect due to renewable energy which is growing but due to poor
infrastructure and less awareness they are not much of a threat.
7. Thus by concluding it can be predicted that the future of oil and gas is much brighter with oil
majors investing in the industry taking a long term view and the consumers of developing
nation like India and China will drive this industry in the coming decade