Bharat Petroleum and Corporation Limited, a fortune 500 Indian company, was primarily a refining and marketing company. On April 2010, the company’s chairman, Mr. Ashok Sinha, contemplated the company’s corporate strategy for the next five years. Its previous corporate strategy, which primarily consisted of diversifying into exploration and production (E&P), was a huge success. He had the following questions in mind for the proposed strategy: Let us look at those questions and analyse plus evaluate them with reference to the case and facts-figures.
Sustain the pace in E&P or wait for more results?
The success ratios in E&P were such that 100 contracts resulted in one producing well. But in the entire petroleum value chain , E&P was the most profitable. In 1998, BPCL had realised that the greatest margins lay upstream, and decided to execute a vertical integration strategy where it aligned with ONGC and acquired three blocks in India in 2004. From 2004 till 2010, company gradually started taking bigger steps by acquiring block on foreign shores. In 2006, Bharat Petro Resources Limited (BPRL) was created which struck gold in 2006 when there was as huge discovery in one of the blocks that it had won. Its consortium with Anadarko in 2008 was successful, and they made one of the biggest gas discoveries in the E&P history in Mozambique.
Considering their past success, it is evident that the BPCL/BPRL may be tempted to further increase the pace of E&P activitiy. They should sustain the pace of their E&P activities because of the specialized team force that the company now possessed. BPRL had been building a new cadre of in house specialists and in February 2010, its first batch of geologists and geophysicists joined the company. Earlier, they had pursued opportunities in countries with low political risk, used strategies such as bidding and farming in and stayed out of producing fields. Their next step needs to be to pursue their chances in other countries and come out of their present comfort zone. They must also focus on the producing fields since they have the necessary technical capability to achieve it.
Moreover, more than 21% of the company’ business was driven by new business in 2010, so the company has to continue with its sustained efforts in the E&P sector. During 2005-2010, the company’s refining and marketing business was growing with three fully operational refineries and one under construction. Its retail and marketing business was generating a steady stream of revenues for the company. Moreover, the burden of under recoveries was borne by the Indian government in form bond issuances.
Should BPCL/BPRL remain a non-operator, work with fewer operators or become an operator?
As on 2010, BPCL/BPRL had 20 partners in 12 countries and was working with 10 operators and had made 10 discoveries. As the company was currently growing in the upstream sector, it had a participating interest of 10 to 40 % in various blocks from 2004 to 2009. The company should work with fewer operators because it had to stick to its earlier strategy for. When BPCL had contacted some of the worlds leading E&P companies, those companies were not interested to tie up with BPCL in a technical collaboration or decision making. This was because BPCL was primarily a retail & marketing company and has taken some earlier steps in the E&P sector.
BPCL’s chairman had earlier realised that an alliance with bigger companies or operators would bring credibility and lower the risk, but if BPCL was unable to effectively co-ordinate the relationship, it would remain a financial investor and would not develop as per its strategic capability. BPCL tied up with the likes of Videocon, created BPRL and adopted a lean organisational structure. It engaged Indian geoscientists on contracts and based on geographic locations; it used the services of international consultants such as Gaffney and Cline & Associates. BPCL/BPRL must, therefore, continue to tie up with selected operators at present and apply similar winning strategy.
Should BPCL/BPRL explore shale?
The oil and gas industry all across the world are obsessed about an ‘unconventional’ source of energy. Oil ‘Shale’ is a sedimentary rock that contains ‘kerogen’. Through the use of modern technology like multistage hydraulic fracturing or ‘fracking’ on the horizontal plus multilateral wells, ‘shale oil’ and ‘shale gas’ is extracted from oil shale. This technology ,however, is pretty expensive as compared to conventional oil and gas recovery methods and requires drilling more wells along with huge quantities of the ground water (3-4 million gallons per well). According to EIA (Energy Information Administration), India’s sedimentary basins have huge potential of shale oil reserves measuring up to 63 trillion cubic feet (TCU) that is greater than 20 times the output of country’s largest gas block. This clearly proves that Shale gas- shale oil is the future of the energy industry across the world.
In India, where around 30 % of total energy requirement is met through oil, shale can be a great alternative as it has lower emissions and pollution levels as compared to conventional oil and gas. Also, India depends upon external sources for 80% of its total crude oil requirements; the effective shale exploration could reduce the import burden and even reduce oil prices. Looking at this situation, BPCL/BPRL should invest in exploring of Shale oil /shale gas in India. It must form a consortium with established operators like ONGC, which has several onshore/offshore blocks that can have shale trapped inside it.
Shale oil/ gas can be a game changer for BPCL/BPRL.
Should BPCL enter Midstream Sector?
The midstream or the transportation sector in India is needed for the transportation and distribution of the petroleum products to the retail outlets. Gas Authority of India Limited (GAIL) and IOCL are state owned companies whereas Reliance Industries Limited, Shell, EOL and Petronet India Limited are the private players in the country’s midstream sector. Oil India Limited has a huge pipeline network of almost 1200 kilometres. Petroleum is one of the most mobile commodities, which is in constantly moving from the reservoir oil fields/jetty to the refiners, from the refineries to the Oil Marketing Companies, from OMCs to Oil terminals, from Oil terminals to the retail outlets and from the retail outlets to the final consumer. Since it is highly flammable, it is essential to ensure safe and non hazardous way of transport. BPCL/BPRL must enter the midstream sector as it will make them a ‘Fully integrated oil and gas company’, which is into all the three sectors of oil and gas; 1. Upstream sector 2. Midstream sector 3. Downstream sector; which is marketing and retailing sector. Pipeline is the most crucial and safe mode of transportation as oil and gas companies like HPCL, IOCL, ONGC and OIL have increased their pipeline networks across the country. The pipeline network in India is thus growing at a rapid pace, and BPCL must build it. It must also build liquefaction plants that breaks down petroleum into smaller components and which can be transported through its own pipelines to its own retail outlets.
Conclusion and Recommendations:
If we compare the past performance of oil and gas companies such as BPCL, HPCL and IOCL from 1997 to 2002, we find that the total income of BPCL increased from $4035.2 million in 1997 to $9457.12 million. Its rate of growth was better than that of IOCL for the same period and similar to HPCL. Moreover, BPCL’s average stock price was 68% higher that its peers. This proved that the company’s past strategy was successfully executed by its top management. The company must now try to become a fully integrated oil and gas company and continue with its market expansion strategies. It must keep on working with select operators in the upstream sector, and try to enhance its technical expertise with every discovery. By being an “active non producer,” BPCL found that its joint venture relationships had made it possible for the company to enter into newer territories.
U.S. has made rapid development in the Shale oil technology and is the leading producer of Shale Oil and Shale gas in the world. India also houses several shale formations which indicate the presence of shale gas and shale oil in oil, gas and coal sedimentary basins; BPCL needs to grab this opportunity and reap its benefits in the coming years. Pipelines are the most cost effective medium for transporting crude oil or petroleum products. As per petroleum planning and analysis cell (PPAC), in 2010-2011, about 48% of crude oil was transported through pipelines. Transportation through the pipelines offer several advantages such as lesser transportation costs, minimum chances of breakdowns, less transit losses, lesser energy consumption and better safety. BPCL must invest in pipelines for the transportation of its oil and gas to retail outlets.
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