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ONGC GLOBALIZATION STRATEGY ANALYSIS

Arundhati Govekar (PGP-10-011)

Archit Mishra (PGP-10-012)

Kirthiga Sridhar (PGP-10-026)

Sayan Majumder (PGP-10-062)

Swati Thampan (PGP-10-077)

Venkatesh Boddepalli (PGP-10-087)


Table of Contents
Title Page No
Executive Summary 3
Chapter 1: Oil and Gas Industry the driver of the Energy Sector 4
1.1 Strategic Globalization: An Industrial perspective 5
1.2 Globalization in Oil and Gas Industry 6
Chapter 2: ONGC: India’s biggest ambition 7
2.1 Biggest Wealth-Creator for Stakeholders 7
2.2 Growth Story 7
2.3 ONGC Videsh Limited 8
Chapter 3: Way Forward 12
Conclusion 14
References 15

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Executive Summary
The best method to study the processes of international business would be to understand an industry
that drives the world economy. The oil and natural gas industry is at crossroads, diminishing resources
and ever increasing demand has made it one of the most volatile industries of the world. This paper
aims to understand the processes involved in the international operations of India’s biggest oil and
Natural Gas Company. ONGC (Oil and Natural Gas Corporation) is the highest profit making corporation
in India. This paper aims at mapping the international growth of ONGC over the past 10 years and aims
at understanding the strategic initiatives taken up by its international subsidiary ONGC Videsh . The
project is also aimed at understanding various frameworks that define business strategy by applying the
framework in the current context.

ONGC contributes to 77% of India’s crude oil production and 81% of India’s natural gas production. The
political, economic, technological environments drive the company’s strategies in the global scenario.
We also analyze the implications of the impending divestment strategies of the Indian government on
the firm.

This project hopes to impart a better understanding of the oil and gas industry and the various strategies
oil firms employ to gain competitive advantage in a volatile industry.

The project would first analyze the industry and the global forces that drive it and then move on to
ONGC’s place in the sector and the strategies it should follow in the future.

The project involves analysis in terms of current trends of globalization in the industry and in ONGC. We
also analyze the future prospects of the firm and make certain suggestions as to what they can do
differently.

Some of the suggestions given here have not been implemented by any other oil and gas firms and
could give a considerable competitive advantage to ONGC in the future

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Chapter 1: Oil and Gas Industry: the
driver of the Energy sector
Oil and natural gas industry is an extremely volatile industry driven directly by the crude oil prices and it
is an important industry.

Current oil and gas price volatility and


uncertain demand are making it more
difficult for oil companies to plan
forward investments. Oil companies
require security of demand to
underpin long-term investments.

The Indian oil & gas industry pegged


at US 110 bn - which is about 15% of
India’s gross domestic product - is
one of the focus industries in the

county’s rapidly growing economy.

The ever rising energy demand, which


grew at a compound annual growth rate
of 4.57% between 1996 and 2006 as
compared to the global average of
2.07%, has created challenges for the
sector. Currently, the sector accounts for
36% of India’s primary commercial
energy consumption.

An expanding economy and a growing


population have resulted in increased
consumption of primary energy
resources, such as coal, oil and natural
gas, in India. In the last five years, the
country’s primary energy consumption
increased at a compounded annual
growth rate (CAGR) of 7% to reach 469
million tonnes of oil equivalent (MTOE) in

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2009. The share of natural gas in the country’s primary energy mix increased from 8% in 2008 to 10% in
2009. However, this share is quite low compared to the global average (24%), primarily due to supply
side constraints. India’s 44 cubic meters (cm) per capita of natural gas consumption also lags the global
average of 429 cm per person.[1]

1.1 Strategic Globalization: An Industrial perspective

The strategy implied in globalization for the Oil and Gas industry is specific to nation’s competitiveness
in terms of the resources it provides. The following would be a typical competitive advantage analysis
involved generic to the industry before going for investments in a particular nation. [2]

Factor Conditions

 Human Resources: Oil firms require highly skilled labor at drill stations and since the initial
capital investment is very high, cheap labor is generally preferred
 Material Resources: The natural resource is probably the most important aspect of choosing a
nation to invest for an Oil and Gas firm. In this particular industry, natural resources play an
important role. It is their excessive availability of oil in their countries that gives OPEC countries
a lot of bargaining power.

Demand Conditions

Since India is a rapidly growing nation, the demand for oil has been on the rise over the past decade. It
has already been observed that the demand will only increase and the growth of an Indian firm will help
its cause in terms of becoming a competitive force in the world. For a firm seeking to invest abroad,
particularly in this industry, the home demand conditions don’t matter as much as the exploration and
production is done with the objective of shipping oil to the home country. So the demand conditions in
the host country are not really what should be considered while thinking of investment in the particular
country.

Related industries

Refineries are the supporting industries for drilling locations, in case of oil and gas industry. In selecting
the country to invest in, it is important for an exploration firm to have enough successful refining firms
in the nation so that it can perform all upstream processes in the country before shipping it to the home
nation. It also helps if the firm acquires a firm in a related industry to ease the refining process. While
most of ONGC’s work involves exploration and production it has a lot of tie ups with refining firms in the
respective countries it operates in.

Firm Strategy Structure and Rivalry

The ease of setting up businesses in Russia, Vietnam, Brazil and Argentina makes these nations good
nations to invest in for Oil firms looking for cost advantage and good friendly contracts. Our nation’s
relations with these nations also matters a lot in this case as oil exploration is a largely political and
social issue. It also helps if the nation is culturally close to India and so ONGC has traditionally chosen

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nations that have a long standing relationship with us rather than ones with whom we are still building
relationships.

Government

A force that drives the above issues would be the home nation’s relations with the host country and its
position on the development. ONGC Videsh Limited looked overseas for stake in the countries that had
their oil exploration projects still in the nascent stages and that helped them get a stronghold in these
nations. Political stability is very important to be considered before investing in a nation’s oil exploration
project. Recently, the political turmoil in Libya led ONGC to withdraw its officers from the country and
rethink its global strategy.

Government Role
•Political stability
• Good International Relations

Firm Strategy and Factor Conditions


Structure • Natural Resources: most
• Ease of establishing business important

Related industries Demand Conditions:


• Important to have successful •Demand for Crude oil
related industries helps in neverending
functions

1.2 Globalization in Oil and Gas Industry

The degree of globalization can be understood by analyzing the following drivers in the industry [8]:

Market Drivers: The market drivers in most cases here are local as most nations across the world
(except the OPEC) are importers of oil and the domestic consumption fuels a firm’s willingness to go
global.

Cost Drivers: Low costs can’t really drive the industry as Oil and Gas industry as a whole is a capital
intensive industry so firms do not mind paying up the initial capital to reap long term benefits.

Government Drivers: This is the key in this industry as ONGC as a strategy only goes for countries that
encourage industrial set up and have good trade relations with India. In the oil industry, there is a lot of

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political issues involved in the oil trading between countries and thus, government drivers are extremely
important

Competitive drivers: The global competitors are very important in this industry. However, mot oil and
gas firms form cartels to ensure collective benefit from the industrial growth.

Competitive Drivers, government and the local markets drive the globalization in the Oil and Gas
industry.

Chapter 2: ONGC: India’s biggest


ambition
Set up as a commission in 1956, ONGC is owned 74.14% in stake by the Indian Government. [4]

2.1 Biggest Wealth-Creator for Stakeholders: The People of India (through Government
of India) built ONGC with Rs. 342.8 Crore, contributed over 2 years from 1959 to 1981.
ONGC has paid back so far: (a) Contribution to Exchequer: Rs. 2,33,486 Crore (Rs.
1,87,813 Crore to Central exchequer, Rs. 45,673 Crore to State exchequers) (b) Dividend
(cumulative): Rs. 46,212 Crore till FY2009( GoI: Rs. 36,360 Crore +Other shareholders Rs.
9,852 Crore (c) Government of India realized Rs. 14,380 Crore through progressive
Disinvestment in 2004. ONGC continues to be a zero debt company.

2.2 Growth Story

1990-2010:
1970: Discovery Growth in
of Bombay High, various parts of
the first the country
October 1959:
offshore drill of Inorganic
commission
ONGC growth globally
turned into a
statutory body through ONGC
August 1956:
by an act of the Videsh Ltd.
Directorate
raised to the Indian Disinvestment
powers of a Parliament in 2004 to raise
1955: Oil commission further capital
and
Natural Gas
Directorate
formed

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Going International:

Hydrocarbons India Private Ltd was incorporated in March 1965 as an ONGC subsidiary. The main
objective was to augment ONGC's production of hydrocarbons by sourcing equity oil and gas from
abroad. It became a public limited company on April 1, 1975 and was renamed ONGC Videsh Limited on
June 15, 1989. [3]

2.3 ONGC Videsh Limited

ONGC Videsh Limited (OVL) is a wholly-owned subsidiary of Oil and Natural Gas
Corporation Limited (ONGC) - the flagship national oil company of India. The
primary business of OVL is to prospect for oil and gas acreages abroad including
acquisition of oil and gas fields, exploration, development, production,
transportation and export of oil and gas. The company explores for crude oil,
natural gas, and natural gasoline.

Being a public sector company OVL has quite an advantage over its competitors with government
passing laws to better facilitate the growth of the company. In Jan 2000, Government of India granted a
special empowerment that allowed OVL to facilitate the smooth functioning of the company in the
international environment.

2.3.1 Growth in E&P global footprint

Starting with the exploration and development of the Rostam and Raksh oil fields in Iran and
undertaking a service contract in Iraq, a major breakthrough was achieved by OVL in 1992 in Vietnam
with the discovery of two major free gas fields, namely LanTay and LanDo, in partnership with British
Petroleum and Petro-
Vietnam.[5]

The string of acquisitions


post Jan 2000 is proof that
OVL is looking for inorganic
growth. This is a strategic
move because the industry is
too capital intensive and
instead of discovering fresh
projects in other countries it
is much easier to acquire
existing projects and grow
inorganically.

OVL presently has


participation either directly
or through wholly owned subsidiaries/joint venture company in 40 E&P projects in 15 countries namely,
Vietnam (3 projects), Russia (2 projects), Sudan (3 projects), Iran (1 project), Iraq (1 project), Libya (3

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projects), Myanmar (5 projects), Syria (2 projects), Egypt (2 projects), Cuba (2 projects), Nigeria Sao
Tome Principe JDZ (1 project), Brazil (5 projects), Nigeria (2 projects), Colombia (6 projects), and
Venezuela (2 projects) and is actively seeking more opportunities across the world.
Out of 40 projects, OVL is operator in 17 projects and joint operator in 6 projects. [reference 2 the
report.pdf]
Over the past 6 years, the overseas production of oil and gas production for ONGC has been on the rise
and the recent developments of mergers and joint ventures with companies abroad has helped this
purpose.[5]

OVL now has a global footprint across 15 countries with 39 projects. Since its first hydrocarbon revenue
from overseas in 2002-03 from Vietnam, this year OVL registered the highest ever production of 8.87
MTOE of oil and gas.

2.3.2 Imperial Energy Acquisition

OVL’s acquisition of Imperial Energy in January 2009 got a mixed response from critics as some said it
was taking a huge gamble and its ROI might be affected in the short term others welcomed the move as
it would help the dwindling outputs back home and would help increase ONGC’s reserves. The strategy
behind ONGC’s process of acquisition can be explained by the standard framework used to understand
the globalization policies used by various firms

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The Ownership Advantage in this case would be strategic assets that Imperial Energy has in Russia and
Kazakhstan, crucial for ONGC’s presence in the region as it was trying to build up resources in the oil-rich
Siberian blocks.[8]

This was ONGC’s opportunity to establish presence in the Western Siberia, one of the world’s largest oil
and gas producing regions, by acquiring an asset with significant long-term production and reserves
potential.

Imperial Energy’s block was then the platform for its expansion in the future auctions of hydrocarbons
block. This was OVL’s biggest overseas acquisition since it spent $1.7 billion to buy a 20% stake in the
Sakhalin-1 field in Russia. The ownership advantage here implies the long term profitability of the
project and most similar acquisitions, while requiring high amounts of capital are done by OVL with the
idea of reaping long term benefits of acquiring the natural assets and resources in various countries.

Location Advantage: There is a reason why OVL always went to the Russian government and not the
Middle Eastern nations. The relations with the respective countries are extremely important. The only
Middle Eastern country where OVL has a global footprint is Iran and the reasons to that effect are simply
the good relations the country has had with Iran in the recent past.

Other location advantages involve the attitudes of the government towards the industry in the
respective nations; it is much easier to go through with such acquisitions in developing nations as they
are willing to invest in new projects. Russia as a nation has always been willing to encourage
development and industrial process in its country, and hence, was a good region to invest in.

Transportation costs are also a good consideration and it would be profitable to invest in countries in
the Asian region, that said, OVL has also had investments in Latin America proving that transportation
costs are not what really give a location advantage for a deal.

Location in the Imperial Energy was extremely strategic, which is why OVL was willing to pay such a high
price for the deal as western Siberia is a hot bed of untapped resources.

Internalization Advantage: The internalization advantage can be understood in this context where there
would cases where OVL might have to step back from a deal as the host country has very weak labor
laws or does not have similar work culture. Since it is not really a technology innovation firm, ONGC
wouldn’t have issues with weak intellectual property rights laws.

2.3.3 Current Developments and Future Plans

 Dec 2010, OVL swapped its Russian stake of Imperial Energy with Sistema for a 25% stake in
Sistem-owned JSC Bashneft. The agreement would give OVL access to Sistema’s oil fields in
Arctic.
 In Jan 2011, OVL and its partners Indian Oil Corp. were in the last lap of negotiations for
developing a gas field off the coast of Iran with an estimated investment of over $ 5 billion.
 On 19th Jan this year, OVL showed interests in acquiring strategic equity stakes in Russian
government owned companies such as Rosneft Oil Company and JSC "Zarubezhneft". The

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strategy behind this has been explained by an OVL executive as wanting a share of their assets
and the consultation for the acquisition is still going on. This comes as a follow up of the firm’s
framework agreement.
 The following key areas have been identified in OVL’s Management Discussion and Analysis
Report of 2009-10[6] as important for the future outlook of the company
1. New Ventures: OVL intends to maintain its trend of adopting a balanced portfolio
and continue acquiring producing properties and a lot of emphasis is being given to
increasing the company’s reserves
2. Exploration: The state-of-the-art data center and a knowledge team have both been
set up to scan and identify value in the existing exploration assets.
3. International Alliances: OVL wants to continue forging international alliances to
attain a collaborative approach to value creation.
4. Geographic spread: OVL will continue to consolidate its positions where it has
already gained presence and would make consistent approach of finding attractive
acreages in other hydrocarbon rich countries

2.3.4 Risks and Concerns

 Financials: While ONGC has been posting


profits for all this years, its profits have
declined from 2008 onwards; this might be
attributed to the recession. However, the
continuous acquisitions and expensive
deals that have very little ROI in the short
term could cause the company to go into
heavy debts and could be a source of
trouble. OVL needs to look at consistently
consolidating its current assets to improve
the bottom line. [7]

 Political Unrests: The recent uprising in


Egypt has shown that a political unrest can change the outcome of the country’s future in a
matter of days. This has to be taken into consideration before going into any country.

2.3.5 Recession and the volatility of the industry

The deep economic recession that had spread worldwide in the past year has taken a severe toll on
global oil demand during 2009-10. The global oil demand continued to remain subdued during most of
the current year. Sustained OPEC production cuts and improving economic prospects however resulted
in upward movement of prices in 2009-10.
Global Upstream M&A activity began to pick up pace, increasing in volume quarter by quarter with
improved access to funding and relative economic stability, therefore posting advantage of reduced
valuations and less competition for opportunities. The oil and gas deals in 2009 totaled $153 billion and
surpassed the pre-crash levels of 2007 (2008 data has visible impressions of the rise and fall of oil prices,

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while 2007 data is similar representation for comparison). Tracking on the deal count numbers of actual
transactions above the $100 million mark, the picture however still seemed to be blurred with 124 deals
in 2009 versus 160 in 2008 and 168 in 2007.

ONGC’s reaction towards recession was contrary to the conventional processes. While other oil firms
sought to consolidate their assets, ONGC went ahead and signed its biggest acquisition deal to date, that
of Imperial Energy ($2.1 billion).

This was a strategic move in line with the long term vision of the firm and was a good move. OVL could
have however, foreseen the development of the Arctic fields and wouldn’t have had to swap its stake in
Imperial Energy to the resource rich Arctic fields.

The volatility of the oil and gas industry is a big challenge that has to be addressed. OVL addresses this
concern by ensuring all its assets are raised in a safe and secure manner. It ensures security to its
shareholders by having an optimum D/E ratio.

Chapter 3: Way Forward


ONGC Videsh has grown a lot over the past years. However, it is disturbing to note that it always seeks
inorganic growth towards developing its resource base. The following are some suggestions that could
help its globalization strategy:

1. Team up with the strong players: ONGC should make deals only with firms that are stable and
are from “politically stable” nations. Currently, it has ensured security in its dealings with this
strategy and it should continue pursuing it.
2. Innovation through cost leadership: Though cost leadership is difficult in an industry as capital
intensive as this, ONGC can aim towards seeking areas that haven’t been discovered yet like
parts of Africa and some Asian nations that are rich in resources. The low costs in these regions
would help improve its bottom lines and give a certain competitive edge.
3. Aim at producing surplus: It would be impressive to see India become an oil exporter in spite of
not having enough resources of its own. This is where OVL can play a key role, the acquisition of
assets would further help our country’s cause.
4. Domestic Support: The ONGC financials showed a slowdown in 2009-10 with PAT decreasing
considerably; however, the OVL financials show a consistent increase in PAT. This proves that
while OVL is doing extremely well, the domestic arm of ONGC is not cost effective. This could be
dangerous as most of the funding used for new global acquisitions come from funds generated
internally through equity markets and debt raised by government entities. If the bottomline of
the consolidated financials is not lucrative, OVL’s source of funds might dry up and this could be
dangerous for ONGC as a firm. For any firm before going global, it needs to maintain a stable
structure domestically else, the stability of the firm becomes a challenge.
5. Energy Policy: Given the uncertain energy policies and the failure of COP15 summit, ONGC
should look at playing greater role in pushing the Indian Government (subsequently nations

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across the world) towards adopting a standard procedure. There should be policy advisors that
should drive suggestions towards investing in nations that have a certain stance in terms of their
energy policies.
6. Reserves oriented approach: Instead of looking at competition as a competition, we should look
at them as allies and seek to build more joint ventures as oil is a dwindling reserve and we need
to look at joint ventures for stability in the industry.
7. Dealing with price volatility: Re-evaluate all investment strategies, including the balance
between oil and natural gas investments. This would involve scenario planning for investments
and divestments against low to moderate prices even if current prices are high. It also involves
having plenty of liquidity before investing in a project as protection against any potential
volatility.

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Conclusion
Oil and Gas industry is a very volatile industry with difficult entry barriers and requires capital intensive
investments. It is driven by the country’s political and economic stability and its success determines the
nation’s competitive advantage.

Globalization strategies for such an industry are interestingly, driven by local demand and global supply.
This inequation often causes difficulties for firms in going global. The essential globalization strategies
simply involve acquiring as many assets and reserves as possible across the world. This is the strategy
followed by ONGC, its global footprint has been growing ever since its modest beginnings at Vietnam
in1992-93.

ONGC, a public owned subsidiary is India’s shining star when it comes to performance and has
attributed most of its high profits to its acquisition policies abroad with its international subsidiary
ONGC Videsh limited (OVL).

ONGC currently has a very strong global footprint, 40 E&P projects in 15 countries and is actively seeking
more opportunities across the world. Out of 40 projects, OVL is operator in 17 projects and joint
operator in 6 projects. OVL’s strategy is in line with its vision of being a global power in terms of
acquiring assets.

There has been an attempt to understand the industry through Porter’s Diamond Model and the degree
of globalization that is feasible and required in an oil and gas industry by examining the various drivers
of globalization in the industry.

The most important deal ONGC has had in the recent past that of Imperial Energy, worth $ 2.1 billion
has been examined to understand why Oil and Gas firms go for globalization models and acquisitions
instead of setting up at various locations themselves.

ONGC has become a global force to reckon with being the only Indian company to feature in the Fortune
500 in 2007 and it continues to be one of the top 50 oil companies across the world by size. Its global
strategies have been extremely fruitful so far. However, it needs to rethink its strategy in terms of the
domestic slump in production and political instability in the countries where it seeks to do business.

In true sense, ONGC is indeed a global company which has great potential. But in an industry so volatile,
security is what provides stability and globalization in this context would mean looking at high potential
high return areas that are stable politically, economically, socially and culturally.

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References
1. “US Energy Information Administration: India”
http://www.eia.doe.gov/emeu/cabs/India/Oil.html
2. “The Industry Handbook: The Oil Services Industry”
http://www.investopedia.com/features/industryhandbook/oil_services.asp
3. “The Vietnam connection”
http://www.hinduonnet.com/fline/fl2001/stories/20030117003811200.htm
4. www.ongcindia.com
5. ONGC Annual Reports 2008-09, 2009-10
6. Management Discussion and Analysis Report of 2008-09, 2009-10
7. “OVL Financials” http://www.ongcvidesh.com/Performance.aspx
8. “Global and Transnational Business: Strategy and Management” by G. Stonehouse, D. Campbell,
J. Hamill, T. Purdie

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