Shri Ram Case Competition

Preliminary Round - 1

Contact:
jij Atharv Saxena - +91-89562-01785 || Chaitanya Gupta - +91-95822-99361
Page [Type text]0
 SHRI RAM CASE COMPETITION || PRELIM 1

Instructions

o This document consists of one case study, followed by 4 questions and 5 exhibits.

o Teams can use real-world data to back up their analysis, provided that such data is
sourced (Wikipedia not allowed). Please mention and explain assumptions wherever
required.

o Teams will be judged on the basis of innovation, logical reasoning, analytical skills
and feasibility of solutions.

o Teams must send their solutions to bc.shriramcase17@gmail.comby 11:59 PM, 11th

January, 2017. Entries received after this deadline will not be accepted.

o All solutions must be in PDF format.

o The solution document and the subject of the mail must be in the following format:
‘Shri Ram Case_Team Name’ (For example: Shri Ram Case_Business Conclave). The
body of the mail must include the team name, the names of all team members and
their contact details (phone numbers and email addresses).

o There is no word limit for the solutions.

o The shortlisted teams would be sent an email, and subsequently a list of such
participants will be put up on the Facebook Event page.

o The decision of the organisers shall be final and binding on all participants.

Happy Solving!

SRCC BUSINESS CONCLAVE 2017 1

 SHRI RAM CASE COMPETITION || PRELIM 1

Industry Overview: Issues and Opportunities

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world
runs out of oil”, -Sheikh Ahmed Zaki Yamani, former Saudi Arabian oil minister

The oil and gas industry is responsible for nearly 2.5% of the world GDP. The significance of
this industry cannot still be articulated. Around two-thirds of oil in the U.S. and Canada is
used for transportation purposes. In other countries, it is mostly used for power generation
and space heating. Moreover, oil is a valuable product for the agriculture industry, which
provides food for people across the globe. Apart from these uses, oil forms an integral part
of global economies.

The oil industry, providing 60 percent of global energy needs, is currently undergoing one of
the most transformative periods, tackling geopolitical, technological and regulatory
challenges. A price war between the OPEC countries and US shale gas industry has led to a
downward price spiral, thereby taking away a large part of 4331.3 metric tonnes of global
demand for oil.

The 3D problems of increased oil reserves being Deep underground, Difficult to drill and
Distant from companies’ existing sites are making investment scarce and costly.
Furthermore, the newly developed fracking technology is drawing away investment from
crude oil. This technology, developed to extract shale gas from rocks, involves the injection
of water, sand and chemicals to stimulate the release of gas. According to recent reports,
this industry has the potential to reach production levels of 14 million barrels per day.
Estimated decrease in prices at this level is anywhere between 25 to 40 percent.

There are various environmental concerns attached to the oil industry. Oil has major
potential for hazards to the environment, with different impact levels for the air, soil, water
etc. The oil industry is also infamous for being an unsafe industry to work in, especially at
refineries and rigs. The industry faces many problems in trying to insulate their employees
from risks at work. These issues have also resulted in ire from the government and other
international bodies who have become increasingly committed to reducing carbon
footprints and regulating the sector.

The oil industry is undergoing a transformative stage. The newly developed hydraulic
fracturing (fracking), as well as re-fracking technology have changed the landscape of the oil
industry. As this phenomenon takes place, traditional companies in the petroleum industry
are moving towards pragmatic cost-cutting and balancing production levels with reducing
carbon footprints. In order to tackle the decreasing investment flow, companies now focus
on quality investment by matching opportunities and risks with sources of funds.
Also, despite newer methods being developed to decrease dependence on fossil fuels, it will
be decades before their usage can become economical and common. Increasing use of
software, sensors and specially developed microbes is reshaping the way oil companies
form strategies and pricing structures. The industry is also looking at more partnerships and
consolidations with consumers, other industries or corporate organisations.

SRCC BUSINESS CONCLAVE 2017 2

 SHRI RAM CASE COMPETITION || PRELIM 1

After many years of absorbing losses due to low crude prices, the OPEC, Russia and 10 other
countries have recently agreed to decrease oil production. This will flush out approximately
46% of the 300 million barrel surplus and is bound to have an impact on competition,
demand and inflation.

Company Overview

Big Oil Ltd. is a newly incorporated company looking to take advantage of the boundless
opportunities and establish itself as one of the leading names in the oil industry. Based on
primary research and preliminary discussions the founders of the company have identified
three geographical locations for commencement of operations. Each one of these locations
is best suited for a particular segment in the value chain of the oil and gas industry.

They have now approached you, a consultant in the Oil and Gas Practice of Zenith and Co. a
leading consultancy firm. Your job is to determine a roadmap for Big Oil Ltd, keeping in mind
all possible external and internal forces which could affect the company’s operations.

Types of Companies

SRCC BUSINESS CONCLAVE 2017 3

 SHRI RAM CASE COMPETITION || PRELIM 1

Upstream Companies

The upstream sector is used to refer to, the search for and subsequent extraction and
production of crude oil. This sector is also known as Exploration and Production (E&P)
Sector.

Key upstream business activities include:

 Identifying underground or underwater oil and gas fields
 Drilling exploratory wells
 Determining feasibility and subsequently operating wells to bring oil to the surface

The key risks associated with this sector are deadloss on drilling of unfeasible wells. Ancillary
services in this sector include rig operations, feasibility studies, machinery rental and
extraction chemical supply.

Geographical Location: Brazil

With a population of 190 million Brazil is Latin America's largest market, the world’s fifth-
most-populous country and the tenth-largest world economy in terms of GDP. Brazilian oil
and gas sector is one of the most economically interesting sectors in the country backed by
the promising oil finds in recent years and consequent increase in investment planning.

Brazil, until a few years back, had an oil trade deficit of more than $3 billion. This was
primarily because most of Brazil’s crude oil production is offshore in deep-water resources
and requires refining abroad. Of the $174 billion investment plan in 2009-2013, only 25%
was invested into domestic refineries.

The leading companies operating in the upstream sector in Brazil are Petrobras, BP Brasil,
Repsol, Queiroz Galvao and Devon. Petrobras, the state-owned company, which had
monopolised the sector (controlling over 20% of world’s deepwater production), is now
faltering. Plagued with a debt of almost $126 billion, the company is having trouble raising
further investment for expansion.

Additionally, the Brazilian parliament has recently passed an act which takes away
monopoly control of Petrobras over the Subsalt Polygon area. At a time when Brazil is
undergoing one of the worst economic downturns in recent years, with increasing inflation,
high debt and a lower credit rating (now ‘junk’ status), this move is aimed at bringing in
foreign competition to revive the sector and the economy.

This deregulation also provides a brilliant opportunity for new exploration companies.
However, the Brazilian economy is still plagued with corruption which may be a deterrent to
the entry of foreign companies. Along with this, the country suffers from a complex tax
system and slow customs clearances. Additionally, the government’s local content
requirements for such pre-salt projects are a cause for concern.

SRCC BUSINESS CONCLAVE 2017 4

 SHRI RAM CASE COMPETITION || PRELIM 1

The economy’s supply chain, accounting for 10% of Brazil’s economy, is also plagued with
various labour shortage problems. Due to the highly complex nature of the upstream
process, the need for an educated workforce is growing exponentially. On this front, the
country is showing improving literacy and education attainment levels. However, it is still
lagging far behind other OECD countries.

The Pre-salt layer is a geological formation of carbonate composition. The layer consists of
oil-bearing rock and is found under thick layers of salt. Some of the petroleum that was
formed in the pre-salt layer has not leaked upward to the post-salt layers above. Most of
the oil found in pre-salt layers such as in Tupi is medium quality oil as per the American
Petroleum Institute (API) scale.

Recently discovered pre-salt layers present a new opportunity for the growth of the oil
sector. This layer is almost 800 km in length between the states of Espirito Santo and Santa
Catarina, and is estimated to contain about 1.6 trillion cubic meters of gas and oil. This
number is more than five times the current oil reserves in the country and is considered the
largest oil province found in the world in the last 30 years. Due to this discovery, the IEA has
estimated Brazilian production which was about 2 million barrels per day in 2015 to expand
to about 6 million barrels per day by 2035.

Midstream Companies

As its name implies, the midstream oil and gas segment encompasses facilities and
processes that sit between the upstream and downstream oil and gas segments.
Key midstream business activities include:
 Transportation
 Storage
 Wholesale Marketing to Oil Refineries

In most cases, oil and gas reserves are not located in the same geographic location as
refining assets and major consumption regions. Transportation is a big part of midstream
activities and can include using pipelines, trucking fleets, tanker ships, and railcars.

Geographical Location: Alaska (USA)

Alaska has been the pioneer of oil exploration and production since 1958, boasting of the
largest oil fields in the continent of North America. Alaskan waters are believed to contain
more than 30 percent of the nation’s known recoverable offshore resources. Alaska’s oil and
gas industry has produced more than 17 billion barrels of oil. It houses more than 30 oil
drilling and exploration companies; including the largest companies in the industry such as
ExxonMobil, Chevron and Shell in addition to small and intermediate companies. The vast
availability of companies drilling for crude oil presents the perfect opportunity for the
introduction of a Midstream Company.

SRCC BUSINESS CONCLAVE 2017 5

 SHRI RAM CASE COMPETITION || PRELIM 1

Alaska is located at the crossroads of the Eastern and Western Hemisphere, with the
availability of developed markets and refineries in the United States of America, Canada,
Russia and East Asia. The growth of domestic markets allows the company to leverage
technological advancements as well as infrastructural support required to set up the
company from its very foundations. Alaska provides the perfect ground for acquiring
unskilled labour given that 1/3rd of the total labour (over 110,000 jobs) in Alaska is
employed in the oil and gas industry. However, skilled labour is hard to come by and needs
to be recruited primarily from the mainland leading to increased costs of acquiring and
retaining human resource. The continuous production process of crude oil by numerous
upstream companies in the vicinity insulates the company from supply shocks. However,
most large companies have already integrated or outsourced this process to large
midstream companies, giving rise to difficulties in formulating a sound market entry
strategy.

Alaska experiences some of the harshest weather conditions on the planet, leading to
regular complications in both, production and transportation. The Alaska State Legislature
has designated 32 state game refuges, critical habitat areas, and wildlife sanctuaries across
the state, totalling over 3.2 million acres, leading to a highly fragmented state through
which creating pipelines may prove to be extremely costly and time-consuming. The lack of
proximity to the mainland also leads to an increased transportation cost which needs to be
borne by the company. A history of oil spills has also tarnished the reputation of oil
transportation companies in the state. The Exxon Valdez oil spill led to the spillage of
anywhere between 11 and 38 million gallons of oil, and $125 million in criminal fines, and
over $900 million in civil penalties. This has led to an increasing amount of activism against
entrants and incumbents. In addition to the lack of public image, it also increases the risk
that a company will face on an operational basis.

An increasing focus on shale oil has led to diverting of investments away from the crude oil
industry in the domestic sector. The nature of the sector requires large capital investment to
set up operations and is responsible for bearing risk during the process of transportation
and storage.

Downstream Companies

Processing, transporting and selling refined products made from crude oil are the business
of the downstream segment of the oil and gas industry.
Key downstream business activities include:
 Oil Refining
 Supply and Trading
 Product Marketing and Retail

The downstream industry provides a myriad of products to end-user customers around the
globe. 90% of these products are fuels such as gasoline, aviation fuels, distillate and residual
oil, liquefied petroleum gas (LPG), coke and kerosene. Others are not as familiar such as
lubricants, synthetic rubber, plastics, fertilisers and pesticides.

SRCC BUSINESS CONCLAVE 2017 6

 SHRI RAM CASE COMPETITION || PRELIM 1

Geographical Location: India

India holds the world's fifth biggest refinery capacity with 4.1 million barrels per day in
2012, claiming 4.4% of the global refinery capacity per day. It is the fourth biggest consumer
of oil after the US, China and Japan, and imports most of its crude oil from the Middle East.
India is an insatiable consumer of crude oil (70% of crude oil requirement is imported) with
approximately 18.81 million tonnes of crude oil imported in August 2016 alone. As a
developing economy, it is quintessential for India to have a continuous source of crude oil
products to ensure the smooth growth of the economy.

India has a vast coastline giving it strategic access to both developing and developed
markets along the Arabian Sea as well as in South-East Asia, in addition to the large
domestic markets. India’s push to rebrand itself as a manufacturing hub in recent years has
led to various developments in terms of FDI. The availability of the various byproducts from
the refining process of crude oil allows a huge market for downstream companies. A large
albeit underdeveloped transport infrastructure network provides companies with various
opportunities as well as problems. The Indian subcontinent though strong in human
resource lack the technological advancements necessary to ensure the availability of state
of the art technology to set up the company. Current refineries in India are not efficient as
per global standards and present an opportunity begging to be exploited. However, the
downstream sector in India is an oligopoly making them extremely hostile and competitive.
Moreover, the ratification of the Paris Climate Agreement may spell disaster for
downstream companies in terms of excessive costs to cut greenhouse emissions and greater
regulation and scrutiny from the government. India, in addition, has been making
tremendous developments in the production of renewable energy. 100 GW would be from
solar power, 60 GW from wind, 10 GW from biomass and 5 GW from small hydropower,
according to the Union ministry of new and renewable energy by 2022.

The downstream segment is a margin business. The margin is defined as the difference
between the price realised for the products produced from the crude oil and the cost of the
crude delivered to the refinery. Although the price of crude sets the absolute level of
product prices, it may or may not affect refining or marketing margins. Downstream margins
tend to be reduced, or squeezed when crude price increases often cannot be recovered in
the marketplace. On the other hand, margins tend to hold, or even increase, when crude
prices drop and the marketplace more slowly adjusts to these lower crude prices. Most of
the crude oil will need to be imported, since India currently doesn’t have substantial oil
reserves, leading to a decrease in margins.

SRCC BUSINESS CONCLAVE 2017 7

 SHRI RAM CASE COMPETITION || PRELIM 1

Questions:

1. Each of the options presented has its own benefits and disadvantages. With
adequate reasoning and analysis, decide which sector would you, as the co-founder
of Big Oil Ltd. want to venture into. Since the industry is one of high gestation, long-
term sustainability is of utmost importance. Using a 360 degree perspective, clearly
explain how you have arrived at your decision. Also elaborate the various steps you
would take to mitigate the existing threats and capitalise on the opportunities
available in the respective sectors. Support your answer through a PESTLE Analysis.

2. Develop a growth strategy for the next 5 years, keeping in mind the long-term
sustainability of the company. In brief, delineate the objectives that the company
can pursue and chalk out an implementation strategy.

3. The oil industry is essentially an oligopolistic space with a high degree of

competition, as well as cartelisation between existing companies. Keeping this in
mind, identify an ideal market entry strategy to combat the incumbents and create a
position for yourself in the industry.

4. Suggest strategies by which Big Oil Ltd. can better prepare itself for the inevitable
growth of dependence on renewable sources of energy, and briefly analyse the
outcomes for the company’s future prospects.

SRCC BUSINESS CONCLAVE 2017 8

 SHRI RAM CASE COMPETITION || PRELIM 1

Exhibits

SRCC BUSINESS CONCLAVE 2017 9

SHRI RAM CASE COMPETITION || PRELIM 1

SRCC BUSINESS CONCLAVE 2017 10