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STRATEGIC MANAGEMENT
PROJECT REPORT
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EXECUTIVE SUMMARY
Companies in the oil and gas industry are facing many challenges in last five years.
Various companies have gone from boom to bust within few years. This cyclical
phenomenon is attributed to factors like price volatility of crude oil. In recent years there
has been a growing negative sentiment towards this industry due to industrial disasters,
rising trends towards renewable and alternative energy, tightening of environmental
norms and price volatility of crude oil. Also competition between the rivals has increased
forcing many companies to search for various strategies to adapt to the changed
environment in the industry.
Reliance Industries Limited is chosen as the firm for analysis and the study is limited to
only its refining business. With the help of strategic tools like Porter’s five forces, strength
of various forces is found out which affects the profitability of oil and gas industry. Through
the internal analysis various capabilities Reliance Industries Limited across the value
chain are identified which gives it a competitive advantage over other companies in the
industry. Reliance demonstrates cost leadership as a business strategy and various
drivers like economies of scale, effective capacity utilization supports its business
strategy.
Through the analysis it is found out that threat of substitutes is a major challenge which
all companies in the industry are facing. Renewable energy and electrical vehicles act as
substitutes for traditional fuels and has potential to disrupt the industry. In the end various
recommendations coming out from the study are discussed.
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INTRODUCTION
Oil & Gas industry is one of the biggest sector in rupees’ value in India and also contribute
significantly to country’s GDP. Oil & Gas industry basically consists of three areas namely
upstream, midstream and downstream.
Upstream: This area is known as exploration and production (E&P). This area deals with
search of underwater and underground crude oil and natural gas fields.
Midstream: Midstream area deals with the transportation, storage and processing of oil
and gas. After the recovery of resource, it is transported to the refinery.
Downstream: Downstream area deals with the refining of raw products obtained from
crude oil and gas to more valuable products like fuels. This area also deals with the
marketing and distribution of products to the customers.
In recent years there has been a growing negative sentiment towards Oil & Gas industry
due to industrial disasters, rising trends towards renewable and alternative energy,
tightening of environmental norms and price volatility of crude oil.
With the help of various strategic tools like Porter’s five forces, PEST analysis we will try
to find out that how various forces affect the profitability of oil and gas industry. Reliance
Industries Limited is chosen as the firm for analysis and the study is limited to only its
refining business.
The firm chosen for the study is Reliance Industries Limited. It is India’s largest private
sector company generating revenues of 3,06,095 Crore (2017-2018) with earnings before
interest and tax (EBIT) of 25869 Crore (2017-18). Reliance was founded as textile
company in 1980s.It was able to successfully complete a backward integration strategy
which helped it to transform into country’s oil and gas leader. Reliance has its presence
in other businesses as well like Media and telecommunication, petrochemicals,
entertainment.
Focus of this study will only be on refining business as it contributes majorly to its revenue
Total refining capacity of India is 247 MMTPA to which Reliance contribution is 60
MMTPA.
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Rivalries:
PSUs like Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL),
Hindustan Petroleum Corporation Limited (HPCL) are Reliance major competitor’s along
with few private companies like Essar Oil.
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INDUSTRY ANALYSIS
2) Threat of substitutes: A large portion of major oil and gas companies are looking
at electric cells, biofuels and chemical products as possible alternatives to fossil fuels.
According to Porter (2008), the threat of substitutes is the maximum when the
switching cost of the buyers is the lowest or if it offers a significant price gain that
would affect the crude oil prices. A massive example is the case where China National
Petroleum has changed its strategy to keep up with the Government’s agenda to make
biofuels a significant chunk account for its total transportation fuel usage by 2020.
3) Power of suppliers: The worldwide surge in the nominal price of oil per barrel
was caused by the reduction in oil production across the globe due to the embargo
put in place by the oil producing countries. This proves that suppliers with significant
clout can affect the market by limiting production, charging higher prices, and/or
vertical integration. Oil and gas companies can use international vertical integration to
bring power to the recipient countries as well as to maximize profitability at every stage
of the value chain. Thus, it helps the oil companies to protect themselves from markets
instabilities like fall in crude oil price and thus, balance their operations.
4) Power of buyers: Oil companies have the power and position to bargain with the
oil and gas service companies to whom they outsource much of their field and supply
operations. The can demand lower prices, additional service or better quality from
them. The trend of Joint Ventures which is prevalent in this sector, increases the
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buyer’s bargaining power as they have a leverage over their suppliers. But the
bargaining power is relatively small due to price benchmarking in the industry, which
has restricted their bargaining power to only on quality.
5) Rivalry amongst competitors: Most of the major oil and gas companies are
comparable in their availability of resources, strength and ability. As a result, any
attempt to influence prices can lead to intense competition, especially upstream. But
joint ventures have led to reduction in rivalry as it has become difficult to distinguish
rivals.
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PESTEL ANALYSIS
● Political: Throughout the industry exists non-regulatory and legal frameworks. The
hydrocarbons are in control of the government which can impact the industry and
enhance the quality of infrastructure. However, in spite of favorable policies
broader risks may hold back investments caused by internal politics.
● Social: As societies are becoming more aware, there has been an increased focus
on adopting alternative sources of energies. However, more environment friendly
fuels with comparatively low cost of production likely to become a threat to oil
producers.
● Legal: The oil and gas industry comprises of special royalties and high upfront
concession fees. The degree of uncertainty relating to interpretation of related laws
and regulations is high resulting in additional costs.
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INTERNAL ANALYSIS
4. Marketing: The products are marketed by the Reliance team for delivering, and
exchanging offerings that have value for customers, partners, and society at large.
5. Service: Ensuring prompt response to cater the needs of differentiated and more
demanding product specifications of the customers.
4. Infrastructure: adequate port facilities for transportation and state of the art
refinery.
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VRIO Analysis
Refineries Yes, the Yes, the No, can be Yes, the Strong
complexity of refineries are imitable capacity Competitive
refineries future ready but would utilization is Advantage
helps in and can require around
processing produce any huge 110%
even cheap grade of investment
quality of gasoline and
crude oil. diesel
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BUSINESS STRATEGIES
Strategic positioning
Reliance Industries Limited achieves a superior industry position due to its ability to take
educated risks and yield management, well scheduled crude sourcing and lower freight
charge of crude. The vertical integration and its strategic locational advantages enables
it to be a cost leader. Cost leadership affects its rivalries causing reduction in market
share of rivalries. This strategy also increases the barriers for new player to enter into the
industry.
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KEY STRATEGIC CHALLENGES
● Emission Norms
Bureau of Indian Standards had declared that they have upgraded the standard
on fuels like diesel and petrol as per Bharat Stage (BS) VI fuel norms from BS IV.
Introduction of BS norms by government of India took place in 2000 which are
emission control standards. These norms derived from European emission
standards to promote air quality by controlling emission using internal combustion
engines including motor vehicles to a maximum of 10 PPM.
To meet the diesel and petrol quality specified in BS VI fuels, refining businesses
are undergoing major changes and up gradations is unavoidable. Hydrocracking
technology is expensive and operational and safety risk is also higher.
Hydrocracking will ensure reduction of sulphur content of diesel to meet the given
specifications. For gasoline catalytic cracking and desulphurization technology is
required to meet new criteria.
Production cost of BS VI fuels are clearly going to be more than current cost. It is
estimated that investment of over Rs 30000 crores are required for upgradation of
current refining technologies.
Though Indian environmental laws and policies are still lax compared to global
standards, in recent years environmental regulation has shown many progressive
steps in India.
Some industries like utility and power generation control norms were not updated
for a prolonged period of time.
Other developed economies like the EU, US, and Japan had similar challenges at
some point in time like weak institutions to implement environmental policies, lack
of transparency and uniform pollutions reporting and monitoring, loopholes in
norms. Following china’s example, they have made serious attempts to curb
pollution after suffering from serious environmental consequences.
One hand Union Ministry of Environment, Forest and Climate Change have made
attempt to promote and nurture existing businesses in India along with
implementation of stricter environmental norms. The ministry has also specified
new norms for refining industry in July 2016.
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● In house demand & Absence of Govt. subsidies
Reliance Industries Ltd had to shut down about 900 petrol stations because of
price competitions faced from subsidized state owned firms. This had made fuel
retail business unviable for private players like Reliance.
RIL captured 15% of the fuel retail market immediately after government has
ended monopoly of state run companies in this sector. But sales dipped as soon
as the government put price cap fuel prices to curb inflation in the country. With
rising crude prices private players could not cover their cost without rising fuel
prices. Influence of government policies regarding subsidiaries are major
challenges faced by RIL.
Indian government is ready to ease rules for private players to enter into Indian
market. Committee of economist is suggesting to facilitate the entry of multinational
companies. 49% Foreign Direct Investment (FDI) in retail and 100% FDI in oil
drilling has been sanctioned. British Petroleum has already received a license for
operating 3,500 fuel stations in India in Oct’ 2016. India being one of the major
global markets where demand for fuel is rising and attracted multinational fuel
retailers for exploring business opportunities in state owned company dominated
market.
KEY RECOMMENDATIONS
2. Clean Energy
Collaboration with the best technology licensors can help maximize the use of clean
energy across all operations. Moreover, ensuring the benchmarking of energy
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consumption on all work sites by capitalizing on emerging technologies can give an edge
to the company in the oil and gas industry.
3. Diversified Portfolio
The growing impact of energy transition has made it inevitable for the major oil players to
adopt non-traditional businesses and other utilities. Major competitors have begun
venturing into electrical vehicle charging stations and acquiring power utility companies
to capitalize on their low-carbon products which could complement with the existing
capabilities of the business. For example, BP, SHELL, Chevron has already invested in
EV charging stations.
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REFERENCES
1. https://www.greekenergyforum.com/publications/studies/2016/porters-five-forces-
model-for-the-oil-gas-industry/
2. https://energyroutes.eu/2016/05/23/porters-five-forces-model-for-oil-and-gas-
industry/
3. https://www.researchgate.net/
4. http://www.ril.com/ar2017-18/
5. https://www.ibef.org/download/Oil-and-Gas-Report-June-2018.pdf
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