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Business Strategy and Tectics through Business Game

byDr. Mansor

Abdul Rahman

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Business Game,

Strategy, and

Tactics in Oil and Gas

Industry

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Oil and Gas is a Critical Source

of Energy that Drive and Move

the Global Economy

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OPEC

• Organization of the Petroleum Exporting Countries.• It is an oil cartel whose mission is to coordinate the policies of

the oil-producing countries. • The goal is to secure a steady income to the member states

and to secure supply of oil to the consumers. Those who invest in petroleum activities should receive a fair return on their investments.

• OPEC is an intergovernmental organization that was created at the Baghdad Conference on September 10–14, 1960, by Iraq, Kuwait, Iran, Saudi Arabia and Venezuela.

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OPEC…cont

• Later it was joined by nine more governments: Libya, United Arab Emirates, Qatar, Indonesia, Algeria, Nigeria, Ecuador, Angola, and Gabon

• It is about production sharing among member countries to stabilize the global oil market price

• the price of oil was allowed to rise before the adverse effects of higher prices caused demand and price to fall. The OPEC nations, which depended on revenue from oil sales, experienced severe economic hardship from the lower demand for oil and consequently cut production in order to boost the price of oil.

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Production Sharing (b/d)

a. Saudi Arabia (8,800,000 )b. Iran (4,172,000)c. Iraq (3,200,000)d. UAE (2,798,000 )e. Venezuela (2,472,000)f. Kuwait (2,494,000 )g. Nigeria (2,211,000)h. Algeria (2,125,000 )i. Libya (2,210,000 )j. Angola (1,948,000 )k. Qatar (1,213,000)

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OPEC…cont

• In the 2000s, a combination of factors pushed up oil prices even as supply remained high. Prices rose to then record-high levels in mid-2008 before falling in response to the 2007 financial crises.

• OPEC’s summits in Caracas and Riyadh in 2000 and 2007 had guiding themes of stable energy markets, sustainable oil production, and environmental sustainability.

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Petroleum Politics

• Petroleum politics have been an increasingly important aspect of diplomacy since the rise of the petroleum industry in the Middle East in the early 20th century.

• As competition grows for an increasingly scarce but vital resource, the strategic calculations of major and minor countries alike place more prominent emphasis on the pumping, refining, transport and use of petroleum products.

• Saudi Arabia, Venezuela, Iraq, Syria, Nigeria, Iran, ….political hotspots

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National Oil & Gas Cos

• The four surviving original seven (7) sisters are BP,

Chevron, Exxon Mobil, and Royal Dutch Shell

• The most influential national oil and gas companies based in countries outside of the OECD are; China National Petroleum Corporation (China), Gazprom (Russia), National Iranian Oil Company (Iran), Petrobras (Brazil), PDVSA (Venezuela), Petronas (Malaysia), Saudi Aramco (Saudi Arabia)

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The Great Game Board

• China Oil import would be double the United States’ by 2035

• Tension within countries in the Middle East and North Africa deeply rooted: religious and tribal in nature……….

• World population continue to grow surpassing 7b mark reaching 8b by 2030

• More interestingly 60% living in cities…., emergence of mega-cities (35), 77% in emerging economies.

• As a result of population growth, urbanization, and emergence of mega-cities would lead not only economic growth, but also the need for energy and petroleum product.

• No other region has experienced this more than ASIA.

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The Great Game Board

• In 2012 demand for petroleum product in Asia was 1.3 times that of North America, 1.5 times that of Europe, and 8.3 times of Africa.

• In fact, for the first time in history last quarter, non-OECD economies overtook OECD….

• Global Financial Architecture ….World Bank, IMF, USD/Euro, .. Yuan/Yen?

• Uncle Sam…US hegemony…. China, the reluctant bride mate…technology-wise, civil society, politics?

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The Great Game Board

• Economic factors plus US pressures lead to faster pace of economic liberation

• Access to new market & strategic assets opportunity challenge by the slow progress and stiff competition globally

• Global political tension (hot spots countries in the Middle East, North Africa, Afghanistan, Pakistan, Korean Peninsula, Spartly the overlapping claim areas by Malaysia, Vietnam, China, Philippines, Taiwan, Brunei),

• Iran/Russia/EU/US game plan in Syria conflict.

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The Great Game …cont

• terrorism, piracy….• Slow economic growth in EU countries,

US..worldwide• Rising stakeholders’ pressures such as

environmentalists , put pressures on oil companies growth performance and rate of return

• Exploration and Production provides high returns compared to other sectors, but pose higher risk.

• Gas and power return appears to offer superior returns but such may not be sustainable as greater competition put downward pressure on price.

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The Great Game …cont

• The LNG trade prospects are extremely bright, expected to double in less than a decade

• Asia Pacific continue to lead but Europe and US is catching up

• Asia Pacific region will continue to be the world’s major LNG importing sector with Japan, Korea, Taiwan, India, and China are significant importers

• Eventhough LNG ships (drop in shipbuilding costs) are operated on dedicated routes, speculators (oil majors BP and Shell) are buying for speculative purposes.

• They are principals in the LNG business and would utilize the vessels when opportunity arises

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The Great Game …cont

• The VLCC are the most exposed to the OPEC cutbacks

• Directly dependent on lifting from Middle East Gulf, the rate have taken a dive as a result of economic slowdown

• Newbuilding deliveries set to outpace higher level of removal and with a slowdown in the global economy is expected to have a negative effect, thus a slide in rates are expected to continue

• The GAME CHANGER!!• WHAT IF US BECOME THE NET EXPORTER OF

OIL?• Currently consumes not less than 25% of

world’s supply• Obama administration is embarking deepwater

E&P

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Strategic Positioning

Politically, Asian players increasingly exposed to rising US HEGEMONY

Creation of alternative blocs further promotes M&A and alliances among companies within its blocs to better position themselves

Significant transactions between Europe & Russia, China & Russia.

Petronas/Petrovietnam (USD 15b), Petronas/China in Sudan (USD 23b), Petronas/Enggan South Africa (USD 25b), ConocoPhillips (USD 23.5b), BP/TNK (USD 6.75B), Germany’s RWEAG/Czech Transgas (USD 4.0b), Rurhgas, Gaz De France/Gazprom/Slovensky of Slovakia (USD 3.2 b)

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Strategic Positioning…cont

Strategic positioning effort continues on 1) asset acquisition, 2) Downstream consolidation, and 3) Restructuring, 4) Trading Bloc/JV

The growth theme is focusing on securing LNG, infrastructure and pipeline integration.

Economically, there seem to be widespread of expansion through Merger & Acquisition, and Joint Ventures

Asian buyers lead acquisitions of upstream assets in Asia, Middle East, Africa, Canada, both in number of deals completed and in term of value of deals

Petronas/Canada (USD 6b)

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Stiffer competition ahead………different players employ different strategies

Key bargaining power is 5) TECHNOLOGY, MARKET, and RESOURCES

Japan, India, and China leveraged on their market potential

Post Iraq war- ‘Strategic Fit’ importance increased. Players background and reputation are increasingly prominent and G2G role is intensified

Key challenge is getting others to see your worth

Strategic Positioning…cont

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Analysis of Key Business Case Study of O&G Players

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Heightened Stakeholders’ Expectation

• Project attracts higher visibility, political sensitivity, and public scrutiny

• Heightened expectation of host government, employees, customers,

shareholders, society, reputation, and morale.

• ExxonMobil in Nigeria accused of indiscriminate security force

• ExxonMobil alleged that Indonesian Military provided security service for

EM JV that they committed genocide, torture, crime against humanity, and

sexual violence

• Human right issues, Greenpeace, environmentalists, and governance

issues

• ExxonMobil…. Oil for arms deal in Angola

• ExxonMobil in Chad…NGO continued to harass on human right issues

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Currently Under Scrutiny: Enron,

Yukos

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Case Study

• Internationalization heightened expectation

• Companies: Enron, Global Crossing, Yukos

• Financiers: JP Morgan, CitiGroup, Credit Suisse

• Regulators: Auditors AA, Wall Street US, IAS

• Rules & Regulations: a) Consolidation-Treatment of

Liabilities, b) Company-Director Relationship & Transactions,

c) Disclosure Requirements, d) Employee Retirement Funds

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Business Case Study on PETRONAS

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Case Study

• Petroliam Nasional Berhad, is a Malaysian oil and gas company that was founded

on August 17, 1974.

• Wholly owned by the Government of Malaysia, the corporation is vested with the

entire oil and gas resources in Malaysia and is entrusted with the responsibility of

developing and adding value to these resources.

• PETRONAS is ranked among Fortune Global 500's largest corporations in the world.

• Fortune ranks PETRONAS as the 68th largest company in the world in 2012.

• It also ranks PETRONAS as the 12th most profitable company in the world and the

most profitable in Asia.

• Highest margin (32/100)

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Case Study

• The group is engaged in a wide spectrum of petroleum activities, including upstream exploration and production of oil and gas to downstream oil refining; marketing and distribution of petroleum products; trading; gas processing and liquefaction; gas transmission pipeline network operations; marketing of liquefied gas; petrochemical manufacturing and marketing; shipping; automotive engineering; and property investment.

• Petronas provides a substantial source of income for the Malaysian government, with 45% of the government's budget dependent on Petronas' dividend, and Taxes

• Oil and gas already represented 24% of Malaysian exports, and the government decided to impose a tax on these exports at a 25% rate.

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Case Study

• PETRONAS have paid the government RM 403.3 billion, with RM 67.6 billion in

2008.

• The payment represents 44% of the 2008 federal government revenue.[9

• PETRONAS continues to focus on international exploration projects as 40% of

revenue in 2008 was derived from international projects such

as Iran, Sudan, Chad and Mauritania

• The company's international reserves stood at 6.24 billion barrels oil equivalent in

2008.

• In 2012, Petronas won a bid for gas producer Progress Energy Resources after

Canada blocked its bid earlier. The $6-billion bid was approved by Ottawa on

December 7, 2012

• Public listed Subsidiaries are MISC, P Dagangan, P Gas, P Chemical, KLCC

Properties, MMHE….

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Case Study

• Main Contributor to Malaysian Economy• Oil Reserve - 5.25 billion barrels( 34 yrs) • Gas Reserve – 87.9 trillion cubic feet (tcf)• 3rd Largest Exporter of LNG• Supply 15% of Global Demand for LNG• Bintulu- Biggest LNG Plant in the World• Export Mainly to Korea, Japan, Taiwan, China• Biggest Owner/Operator of LNG Vessels (38 LNG, 80 DH

Tankers) through 67% stake in MISC Bhd

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Case Study

• Estimated CAPEX of RM 150 billion between 2008 to 2013• Centered on 33 Deepwater Exploration-Kikeh, Kakap,

Malikai, Kamunsu, Jangas, Kebabangan, Ubah Crest, Piasangan

• Development of 80 Marginal Fields Trigger Demand for FPSO & PSO - MMHE

• Additional Demand for 60 platforms, 100 New Offshore Vessels, 15 Rigs

• Capital Intensive Stage 2009/2015• RAPID Penggerang Johor RM 60b• Tanjung Bin oil terminal/Vittol Holland RM 3.2b

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Case Study….Potential Beneficiaries

• Fabrication Works – Malaysian Heavy Engineering (MHE), Sime Engineering, Ramunia, Kencana Petroleum

• Construction of Deepwater Structure- MHE, Ramunia, Kencana Petroleum

• Deepwater Drilling Rigs & Fluids – Dialog Group, Scomi, Sapura Crest

• FPSO, FSO – MISC• Offshore Marine Vessels – Alam Maritime, Tanjong

Offshore, Petra Perdana• Except for MISC, Others need capital injection to take on

Large Jobs…..EQUINAS is coming in.

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Feasibility Study of Oil Rigs

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• An oil platform, (offshore platform or colloquially oil rig) is a large structure with facilities to drill wells, to extract and process oil and natural gas, and to temporarily store product until it can be brought to shore for refining and marketing.

• In many cases, the platform contains facilities to house the workforce as well.

• Depending on the circumstances, the platform may be fixed to the ocean floor, or may float.

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• An oil platform, (offshore platform or colloquially oil rig) is a large structure with facilities to drill wells, to extract and process oil and natural gas, and to temporarily store product until it can be brought to shore for refining and marketing.

• In many cases, the platform contains facilities to house the workforce as well.

• Depending on the circumstances, the platform may be fixed to the ocean floor, or may float.

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Types of Oil Rig

1. Fixed platforms2. Compliant towers3. Semi-submersible platform4. Jack-up drilling rigs5. Drillships6. Floating production systems..e.g FPSO7. Tension-leg platform8. Gravity-based structure9. Spar platforms

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• An oil platform, (offshore platform or colloquially oil rig) is a large structure with facilities to drill wells, to extract and process oil and natural gas, and to temporarily store product until it can be brought to shore for refining and marketing.

• In many cases, the platform contains facilities to house the workforce as well.

• Depending on the circumstances, the platform may be fixed to the ocean floor, or may float.

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• Royal Dutch Shell is currently developing the first Floating Liquefied Natural Gas (FLNG) facility, which will be situated approximately 200km off the coast of Western Australia and is due for completion around 2017.

• When finished, it will be the largest floating offshore facility.

• It is expected to be approximately 488m long and 74m wide with displacement of around 600,000 ton when fully ballasted.[

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• A typical oil production platform is self-sufficient in energy and water needs, housing electrical generation, water declinators and all of the equipment necessary to process oil and gas such that it can be either delivered directly onshore by pipeline or to a floating platform or tanker loading facility, or both.

• Elements in the oil/gas production process include wellheads, production separator, gas compressors, water injection pumps, oil/gas export metering and main line pumps

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Analysis of Net Present Value Business Ventures in O&G Industry

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PERSONNEL• Offshore installation manager who is the ultimate authority during

his/her shift and makes the essential decisions regarding the operation of the platform;

• Operations team leader (OTL);• Offshore operations engineer (OOE) who is the senior technical

authority on the platform;• Operations coordinator for managing crew changes;• Geologists• Mud engineers• Drillers/Pump operators

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• Dynamic positioning operator, navigation, ship or vessel maneuvering personnel, station keeping, fire and gas system operations in the event of incident;

• Automation system specialists, to configure, maintain and troubleshoot the process control systems , process safety systems, emergency support systems and vessel management systems;

• Second mate to meet manning requirements of flag state, operates fast rescue craft, cargo operations, fire team leader;

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• Ballast control operator to operate fire and gas systems;• Crane operators to operate the cranes for lifting cargo around the platform

and between boats;• Coxswains to maintain the lifeboats and manning them if necessary;• Control room operators, especially FPSO or production platforms;• Catering crew, including people tasked with performing essential functions

such as cooking, laundry and cleaning the accommodation;• Production technicians to run the production plant;• Maintenance technicians (instrument, electrical or mechanical).• MHS……TRI

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Analysis of Net Present Value Business Ventures in O&G Industry

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• O&G is a capital intensive industry

• Upstream exploration and production of oil and gas to downstream oil refining; marketing and distribution of petroleum products; trading; gas processing and liquefaction; gas transmission pipeline network operations; marketing of liquefied natural gas; petrochemical manufacturing

• RAPID RM 60 billion in Pengerang Johor as an example

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Financial Management deals with investment, financing,

capital market, shares and dividend

Payback Period

How long will it take for the project to generate enough cash to pay for itself?

Payback Period

• How long will it take for the project to generate enough cash to pay for itself?

0 1 2 3 4 5 6 7 8

Payback period = 3.33 years.

(500) 150 150 150 150 150 150 150 150

• Is a 3.33 year payback period good?• Is it acceptable?• Firms that use this method will compare the

payback calculation to some standard set by the firm.

• If our senior management had set a cut-off of 5 years for projects like ours , what would be our decision?

• Accept the project.

Payback Period

Drawbacks of Payback Period

Firm cutoffs are subjective. Does not consider time value of money. Does not consider any required rate of return. Does not consider all of the project’s cash

flows.

Other Methods

1) Net Present Value (NPV)2) Internal Rate of Return (IRR)

Each of these decision-making criteria:• Examines all net cash flows,• Considers the time value of money, and• Considers the required rate of return.

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Net Present Value The Time Value of Money

Compounding and Discounting Single Sums

Translate USD1 today into its equivalent in the future

(compounding).

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Net Present Value The Time Value of Money

Compounding and Discounting Single Sums

Translate USD1 today into its equivalent in the future

(compounding).

Translate USD1 in the future into its equivalent today

(discounting).

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Net Present Value

• If you deposit USD100 in an account earning 6%, how much would you have in the account after 5 year?

FV = PV (1+ i)n

FV = 100 (1.06)5 = USD 133.82

• If you receive USD100 five years from now, what is the PV of that USD100 if your opportunity cost is 6%?

PV = FV / (1+ i)n

PV = 100 /(1.06)5 = USD 74.73

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Net Present Value

How do we decide if a capital investment project should be accepted or rejected?

The Ideal Evaluation Method should:

a) Include all cash flows that occur during the life of the project,b) Consider the time value of money,c) Incorporate the required rate of return on the project.

NPV ExampleSuppose we are considering a capital investment that costs USD 250,000 and provides annual net cash flows of USD100,000 for five years.

PV of cash flows = USD 335,216- Initial outflow: (USD 250,000)= Net PV USD 85,216

Rule:Decision

• If NPV is positive, accept.• If NPV is negative, reject.• If IRR is greater than or equal to the required rate of

return, accept.• If IRR is less than the required rate of return, reject.

NPV = the total PV of the annual net cash flows – the initial outlay.

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THANK YOU

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