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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)
2 Growth Story 2.Table of Contents Title Executive Summary Chapter 1: Oil and Gas Industry the driver of the Energy Sector 1.1 Biggest Wealth-Creator for Stakeholders 2.2 Globalization in Oil and Gas Industry Chapter 2: ONGC: India’s biggest ambition 2.1 Strategic Globalization: An Industrial perspective 1.3 ONGC Videsh Limited Chapter 3: Way Forward Conclusion References Page No 3 4 5 6 7 7 7 8 12 14 15 Academic Group 03 Page 2 .
economic. The oil and natural gas industry is at crossroads. technological environments drive the company’s strategies in the global scenario. 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.Executive Summary The best method to study the processes of international business would be to understand an industry that drives the world economy. The project involves analysis in terms of current trends of globalization in the industry and in ONGC. We also analyze the implications of the impending divestment strategies of the Indian government on the firm. 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 (Oil and Natural Gas Corporation) is the highest profit making corporation in India. This paper aims to understand the processes involved in the international operations of India’s biggest oil and Natural Gas Company. The political. We also analyze the future prospects of the firm and make certain suggestions as to what they can do differently. 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. ONGC contributes to 77% of India’s crude oil production and 81% of India’s natural gas production. 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 Academic Group 03 Page 3 . diminishing resources and ever increasing demand has made it one of the most volatile industries of the world.
The Indian oil & gas industry pegged at US 110 bn . in India. has created challenges for the sector. 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 Academic Group 03 Page 4 . which grew at a compound annual growth rate of 4.57% between 1996 and 2006 as compared to the global average of 2. In the last five years. oil and natural gas. An expanding economy and a growing population have resulted in increased consumption of primary energy resources. The ever rising energy demand. Oil companies require security of demand to underpin long-term investments.is one of the focus industries in the county’s rapidly growing economy.which is about 15% of India’s gross domestic product . Currently.07%. the sector accounts for 36% of India’s primary commercial energy consumption.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. such as coal.
2009. However. 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. Firm Strategy Structure and Rivalry The ease of setting up businesses in Russia. Demand Conditions Since India is a rapidly growing nation. 1. It is their excessive availability of oil in their countries that gives OPEC countries a lot of bargaining power. 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. primarily due to supply side constraints. 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. Related industries Refineries are the supporting industries for drilling locations. in case of oil and gas industry. In this particular industry. Brazil and Argentina makes these nations good nations to invest in for Oil firms looking for cost advantage and good friendly contracts.  Factor Conditions Human Resources: Oil firms require highly skilled labor at drill stations and since the initial capital investment is very high. this share is quite low compared to the global average (24%). particularly in this industry. It also helps if the nation is culturally close to India and so ONGC has traditionally chosen Academic Group 03 Page 5 . India’s 44 cubic meters (cm) per capita of natural gas consumption also lags the global average of 429 cm per person. Our nation’s relations with these nations also matters a lot in this case as oil exploration is a largely political and social issue. So the demand conditions in the host country are not really what should be considered while thinking of investment in the particular country. The following would be a typical competitive advantage analysis involved generic to the industry before going for investments in a particular nation. natural resources play an important role. In selecting the country to invest in. For a firm seeking to invest abroad. 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.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. Vietnam. It also helps if the firm acquires a firm in a related industry to ease the refining process. the demand for oil has been on the rise over the past decade. The share of natural gas in the country’s primary energy mix increased from 8% in 2008 to 10% in 2009. 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.
Recently. 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.nations that have a long standing relationship with us rather than ones with whom we are still building relationships. Government Role •Political stability • Good International Relations Firm Strategy and Structure • Ease of establishing business Factor Conditions • Natural Resources: most important Related industries • Important to have successful related industries helps in functions Demand Conditions: •Demand for Crude oil neverending 1. Political stability is very important to be considered before investing in a nation’s oil exploration project. the political turmoil in Libya led ONGC to withdraw its officers from the country and rethink its global strategy. 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.2 Globalization in Oil and Gas Industry The degree of globalization can be understood by analyzing the following drivers in the industry : 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. In the oil industry. there is a lot of Academic Group 03 Page 6 . 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 A force that drives the above issues would be the home nation’s relations with the host country and its position on the development.
contributed over 2 years from 1959 to 1981. 342. ONGC has paid back so far: (a) Contribution to Exchequer: Rs. 36. mot oil and gas firms form cartels to ensure collective benefit from the industrial growth.486 Crore (Rs. Rs.852 Crore (c) Government of India realized Rs. ONGC continues to be a zero debt company. 45. 1.813 Crore to Central exchequer. government and the local markets drive the globalization in the Oil and Gas industry. Disinvestment in 2004 to raise further capital Academic Group 03 Page 7 . government drivers are extremely important Competitive drivers: The global competitors are very important in this industry.14% in stake by the Indian Government. Competitive Drivers. 14. 2. 9.1 Biggest Wealth-Creator for Stakeholders: The People of India (through Government of India) built ONGC with Rs. Chapter 2: ONGC: India’s biggest ambition Set up as a commission in 1956. the first offshore drill of ONGC 1990-2010: Growth in various parts of the country Inorganic growth globally through ONGC Videsh Ltd.673 Crore to State exchequers) (b) Dividend (cumulative): Rs. 46.2 Growth Story 1955: Oil and Natural Gas Directorate formed August 1956: Directorate raised to the powers of a commission October 1959: commission turned into a statutory body by an act of the Indian Parliament 1970: Discovery of Bombay High.212 Crore till FY2009( GoI: Rs.87.33.380 Crore through progressive Disinvestment in 2004.  2. 2.8 Crore.political issues involved in the oil trading between countries and thus.360 Crore +Other shareholders Rs. ONGC is owned 74. However.
Iraq (1 project). transportation and export of oil and gas. and natural gasoline. 1975 and was renamed ONGC Videsh Limited on June 15.the flagship national oil company of India. development. natural gas. 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. Government of India granted a special empowerment that allowed OVL to facilitate the smooth functioning of the company in the international environment. Iran (1 project).3 ONGC Videsh Limited ONGC Videsh Limited (OVL) is a wholly-owned subsidiary of Oil and Natural Gas Corporation Limited (ONGC) . Libya (3 Academic Group 03 Page 8 . Russia (2 projects). It became a public limited company on April 1.  2.Going International: Hydrocarbons India Private Ltd was incorporated in March 1965 as an ONGC subsidiary. a major breakthrough was achieved by OVL in 1992 in Vietnam with the discovery of two major free gas fields. Sudan (3 projects). in partnership with British Petroleum and PetroVietnam. 2.1 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. The primary business of OVL is to prospect for oil and gas acreages abroad including acquisition of oil and gas fields. production. 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. namely LanTay and LanDo. 1989. The company explores for crude oil. The string of acquisitions post Jan 2000 is proof that OVL is looking for inorganic growth.3. OVL presently has participation either directly or through wholly owned subsidiaries/joint venture company in 40 E&P projects in 15 countries namely. In Jan 2000. The main objective was to augment ONGC's production of hydrocarbons by sourcing equity oil and gas from abroad. exploration. Vietnam (3 projects).
Out of 40 projects.3. Cuba (2 projects). 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 Academic Group 03 Page 9 .pdf] Over the past 6 years. 2. Nigeria (2 projects). Brazil (5 projects). OVL now has a global footprint across 15 countries with 39 projects. Syria (2 projects). Myanmar (5 projects).projects). [reference 2 the report.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. Nigeria Sao Tome Principe JDZ (1 project). this year OVL registered the highest ever production of 8.87 MTOE of oil and gas. 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. OVL is operator in 17 projects and joint operator in 6 projects. Colombia (6 projects). Since its first hydrocarbon revenue from overseas in 2002-03 from Vietnam. and Venezuela (2 projects) and is actively seeking more opportunities across the world. Egypt (2 projects).
ONGC wouldn’t have issues with weak intellectual property rights laws. that said. This was ONGC’s opportunity to establish presence in the Western Siberia.3.3 Current Developments and Future Plans Dec 2010. was a good region to invest in. it is much easier to go through with such acquisitions in developing nations as they are willing to invest in new projects.7 billion to buy a 20% stake in the Sakhalin-1 field in Russia. On 19th Jan this year. OVL swapped its Russian stake of Imperial Energy with Sistema for a 25% stake in Sistem-owned JSC Bashneft.The Ownership Advantage in this case would be strategic assets that Imperial Energy has in Russia and Kazakhstan. 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. Transportation costs are also a good consideration and it would be profitable to invest in countries in the Asian region. by acquiring an asset with significant long-term production and reserves potential. Since it is not really a technology innovation firm. and hence. one of the world’s largest oil and gas producing regions. 2. Location in the Imperial Energy was extremely strategic. The ownership advantage here implies the long term profitability of the project and most similar acquisitions. The Page 10 Academic Group 03 . crucial for ONGC’s presence in the region as it was trying to build up resources in the oil-rich Siberian blocks. Other location advantages involve the attitudes of the government towards the industry in the respective nations. 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. OVL and its partners Indian Oil Corp. 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. In Jan 2011. 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. This was OVL’s biggest overseas acquisition since it spent $1. Imperial Energy’s block was then the platform for its expansion in the future auctions of hydrocarbons block. Location Advantage: There is a reason why OVL always went to the Russian government and not the Middle Eastern nations. OVL has also had investments in Latin America proving that transportation costs are not what really give a location advantage for a deal. 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. Russia as a nation has always been willing to encourage development and industrial process in its country. The relations with the respective countries are extremely important. The agreement would give OVL access to Sistema’s oil fields in Arctic. OVL showed interests in acquiring strategic equity stakes in Russian government owned companies such as Rosneft Oil Company and JSC "Zarubezhneft".
International Alliances: OVL wants to continue forging international alliances to attain a collaborative approach to value creation. This has to be taken into consideration before going into any country. The global oil demand continued to remain subdued during most of the current year. OVL needs to look at consistently consolidating its current assets to improve the bottom line. Sustained OPEC production cuts and improving economic prospects however resulted in upward movement of prices in 2009-10. 2. Global Upstream M&A activity began to pick up pace. This comes as a follow up of the firm’s framework agreement. 3. therefore posting advantage of reduced valuations and less competition for opportunities. this might be attributed to the recession. 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. The following key areas have been identified in OVL’s Management Discussion and Analysis Report of 2009-10 as important for the future outlook of the company 1. its profits have declined from 2008 onwards. 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. 4.4 Risks and Concerns Financials: While ONGC has been posting profits for all this years. However. 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. 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. Academic Group 03 Page 11 . 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. increasing in volume quarter by quarter with improved access to funding and relative economic stability.3. 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.  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.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 stability of the firm becomes a challenge. ONGC’s reaction towards recession was contrary to the conventional processes. 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. the OVL financials show a consistent increase in PAT. 4. The volatility of the oil and gas industry is a big challenge that has to be addressed. it has ensured security in its dealings with this strategy and it should continue pursuing it. Innovation through cost leadership: Though cost leadership is difficult in an industry as capital intensive as this. it needs to maintain a stable structure domestically else. the picture however still seemed to be blurred with 124 deals in 2009 versus 160 in 2008 and 168 in 2007. Domestic Support: The ONGC financials showed a slowdown in 2009-10 with PAT decreasing considerably. Team up with the strong players: ONGC should make deals only with firms that are stable and are from “politically stable” nations. the domestic arm of ONGC is not cost effective.1 billion). the acquisition of assets would further help our country’s cause. Currently. 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 Academic Group 03 Page 12 . 3. 2. 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. that of Imperial Energy ($2. OVL could have however. However. 5. While other oil firms sought to consolidate their assets. This proves that while OVL is doing extremely well. 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. This was a strategic move in line with the long term vision of the firm and was a good move. This is where OVL can play a key role. 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. The following are some suggestions that could help its globalization strategy: 1. For any firm before going global. 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. If the bottomline of the consolidated financials is not lucrative. ONGC went ahead and signed its biggest acquisition deal to date. OVL’s source of funds might dry up and this could be dangerous for ONGC as a firm. however. it is disturbing to note that it always seeks inorganic growth towards developing its resource base.while 2007 data is similar representation for comparison). Chapter 3: Way Forward ONGC Videsh has grown a lot over the past years. The low costs in these regions would help improve its bottom lines and give a certain competitive edge. Tracking on the deal count numbers of actual transactions above the $100 million mark.
Dealing with price volatility: Re-evaluate all investment strategies. This would involve scenario planning for investments and divestments against low to moderate prices even if current prices are high. There should be policy advisors that should drive suggestions towards investing in nations that have a certain stance in terms of their energy policies. 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.across the world) towards adopting a standard procedure. It also involves having plenty of liquidity before investing in a project as protection against any potential volatility. Academic Group 03 Page 13 . Reserves oriented approach: Instead of looking at competition as a competition. 6. 7. including the balance between oil and natural gas investments.
Out of 40 projects. its global footprint has been growing ever since its modest beginnings at Vietnam in1992-93.1 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. 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). 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.Conclusion Oil and Gas industry is a very volatile industry with difficult entry barriers and requires capital intensive investments. OVL’s strategy is in line with its vision of being a global power in terms of acquiring assets. The most important deal ONGC has had in the recent past that of Imperial Energy. 40 E&P projects in 15 countries and is actively seeking more opportunities across the world. It is driven by the country’s political and economic stability and its success determines the nation’s competitive advantage. economically. socially and culturally. The essential globalization strategies simply involve acquiring as many assets and reserves as possible across the world. In true sense. OVL is operator in 17 projects and joint operator in 6 projects. security is what provides stability and globalization in this context would mean looking at high potential high return areas that are stable politically. Academic Group 03 Page 14 . ONGC. ONGC is indeed a global company which has great potential. Its global strategies have been extremely fruitful so far. Globalization strategies for such an industry are interestingly. 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. But in an industry so volatile. However. 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. This inequation often causes difficulties for firms in going global. worth $ 2. This is the strategy followed by ONGC. driven by local demand and global supply. ONGC currently has a very strong global footprint.
com/features/industryhandbook/oil_services. J. D.aspx “Global and Transnational Business: Strategy and Management” by G. T.com/Performance.asp “The Vietnam connection” http://www. Purdie Academic Group 03 Page 15 . 5.com ONGC Annual Reports 2008-09.eia.com/fline/fl2001/stories/20030117003811200.doe.ongcvidesh.gov/emeu/cabs/India/Oil. 8.hinduonnet. 7. 4. 3. Campbell.ongcindia.investopedia. 2. 2009-10 Management Discussion and Analysis Report of 2008-09. Hamill. 6. “US Energy Information Administration: India” http://www.References 1. 2009-10 “OVL Financials” http://www.html “The Industry Handbook: The Oil Services Industry” http://www.htm www. Stonehouse.
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