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INSTITUTE OF PROFESSIONAL
EDUCATION AND RESEARCH, BHOPAL
IPER PGDM TRIM II
OPERATION MANAGEMENT II
ASSIGNMENT I
Submitted To:
Prof. (Dr.) Hersh Sharma Vishal Singh
Vibhavary Shrivastava
Submitted By:
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Competitive analysis of world leading oil and Gas
Corporation, British petroleum and Royal Dutch Shell:
This comparison has been done on the basis of following topics:
Operational practices: Financial terms Market share Distribution network (SCM) Product range Environmental issues
BP Group background information
BP is one of the worlds leading international oil and gas companies. It operates or
markets its products in more than 80 countries, providing its customers with fuel
for transportation, energy for heat and light, retail services and petrochemicals
products for everyday items.
BPs worldwide headquarters is in London. The UK is a centre for trading, legal,
finance and other business functions as well as three of BPs major global
research and technology groups.
Royal Dutch Shell plc background information
From 1907 until 2005, Royal Dutch Petroleum Company (Royal Dutch) and the
shell Transport and Trading Company, p.l.c. (shell transport) were the two
public parent companies of a group of companies known collectively as the Royal
Dutch /Shell Group(Group). Operating activities were conducted through the
subsidiaries of Royal Dutch and Shell Transport. In 2005, Royal Dutch Shell plc
(Royal Dutch Shell)became the single parent company of Royal Dutch and Shell
Transport, the two former public parent companies of the Group.
Royal Dutch Shell plc(the company) is a public limited company registered in
England and Wales and headquartered in the Hague, the Netherlands.
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Shell is one of the worlds largest independent oil and gas companies in terms of
market capitalization, operating cash flow and oil and gas production. It aims to
sustain its strong operational performance and continue its investment primarily
in countries that have the necessary infrastructure, expertise and remaining
growth potential.
Operational practices:
A best operational practice is a technique or methodology that, through experience and
research, has proven to reliably lead to a desired result. A commitment to using the best
practices in any field is a commitment to using all the knowledge and technology at one's
disposal to ensure success. The term is used frequently in the fields of health care, government
administration, the education system, project management, hardware and software product
development, and elsewhere.
As per recent operational practices in the both companies are:
Royal Dutch Shell:
Shall adopt Global Supply Chain process to increase profitability Drive Enterprise first
strategy:
As part of Shells Global Supply Excellence Program, the company focuses on three key
management objectives: operational excellence, flexibility to respond to market opportunities,
and margin optimization across the supply chain. After the company identified uncommon
operating procedures at each of its many refinerieswhich led to inefficiencies and lowermargins-Shell launched Enterprise First, an initiative designed to standardize processes and
technology across the organization. Key to driving this strategyand meeting its objectivesis
an integrated aspen ONE Supply Chain solution that helps Shell optimize refinery production,
reduce costs, and increase margin.
British petroleum:
BP adopts safety and operational risk update:
Under this BP progress their safety and risk factor to at the level of excellence which providehighly flexible to respond to market opportunities and provides with the help of below digram
we can easy understand their practices:
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Financial Terms:
In accounting terms, profits are referred to as net income. Net income is total revenue minus
all costs of operation, interest on debt, and taxes. Net income is the amount available to
management to use for providing a return to shareholders, or pursuing strategic goals for thecompany. the net incomes of the five major oil companies from 2007 to 2011. The data
represent corporate earnings. Each business segment of the companies operations
contributes to the total. The most used aggregate measures of net income sources in the oil
industry are the upstream (exploration and production) and downstream (refining and
marketing) sectors.
Table . Net Incomes of the 3 Major Oil Companies
(millions of dollars)
2007 2008 2009 2010 2011
Chevron 18,688 23,931 10,483 19,024 26,895
BP plc 17,287 25,593 16,578 -3,719 25,700
Royal Dutch Shell
plc
27,564 26,277 12,518 20,127 28,625
source: Oil Daily,Profit Profile Supplements,various dates and company earnings reports.
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Notes: Net income is earned from global operations. BP plc and Royal Dutch Shell plc net incomes are
replacement cost profits and current cost of supplies profits, respectively, measures close to U.S.
accounting standards.
Upstream Net Incomes of the Five Major Oil Companies
(millions of dollars)
2007 2008 2009 2010 2011
Chevron 14,816 27,710 10,431 17,677 24,786
BP plc 26,927 37,915 24,942 30,970 30,500
Royal Dutch Shell 14,686 20,235 8,354 15,935 24,687
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Table Downstream Net Incomes of the Five Major Oil Companies
(millions of dollars)
2007 2008 2009 2010 2011
Chevron 3,502 3,429 565 2,478 3,591
BP plc 2,617 4,176 4,517 7,239 5,474
Royal Dutch Shell plc 6,951 446 3,054 4,448 4,274
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2007 2008 2009 2010 2011
Chevron
BP plc
Royal Dutch Shell
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2007 2008 2009 2010 2011
Chevron
BP plc
Royal Dutch Shell plc
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Return on equity
The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporations profitability by revealing how much profit a company generates with
the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
BPs return on equity in 2010 was -3.5%, while in 2009 was 16.4%. This means that the
companys ability to use shareholders money to generate profit has decreased as the year went
on. Average shareholders equity is always above zero, so the only reason for return on equity
to fall below zero is that the net income in 2010 is below zero. As Return on equity could be
divided into two parts: Return on assets product financial leverage. And the only way for return
on equity to fall below zero is return on assets has fall below zero, financial leverage in this
case, if exaggerated, could made ROE performance even worsen.
However, when we look at the annual report of Royal Dutch Shell plc, we can come to the
conclusion that Royal Dutch Shell plcs management is overall doing a better job as compared
with what they did in 2009. The ROE of BP in 2010 for Royal Dutch Shell plc has rise from 9.2%
in 2009 to 13.7% in 2010.
So from the ROE, we can concluded that BPs management has done a worsen job as compared
to its competitor Royal Dutch Shell plc, if one put one dollar as an investor to BP, he would end
up lose 0.035 dollar when the year ends, but if he put the dollar to its competitor---Royal Dutch
Shell plc, he will gain 0.137 dollar when the year of 2010 is over.
Return on assets
Return on assets is an important ratio for companies deciding whether or not initiates a new
project. The basis of this ratio is that if a company is going to start a project they expect to earn
a return on it, ROA is the return they would receive. Simply put, if ROA is above the rate that
the company borrows at then the project should be accepted, if not then it is rejected.
The return on assets rate in 2010 for BP is -1.2%, while in 2009 it was 7.1%. However, its
competitor Royal Dutch Shell plc has done a much better job. Not only has Royal Dutch shell
plcs return on assets is able to be above zero, but also increased from 4.4% in 2009 to 6.3% in
2010. The situation that BPs return on equity much worsen in 2010 than in 2009, is due a lot to
it return on assets worsen of performance.
Financial leverage
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Accounting leverage is total assets divided by total assets minus total liabilities. The most
obvious risk of leverage is that it multiplies losses. A corporation that borrows too much money
might face bankruptcy during a business downturn, while a less-levered corporation might
survive. An investor who buys a stock on 50% margin will lose 40% of his money if the stock
declines 20%.
There is an important implicit assumption in that account, however, which is that the
underlying levered asset is the same as the unlevered one. If a company borrows money to
modernize, or add to its product line, or expand internationally, the additional diversification
might more than offset the additional risk from leverage. Or if an investor uses a fraction of his
or her portfolio to margin stock index futures and puts the rest in a money market fund, he or
she might have the same volatility and expected return as an investor in an unlevered equity
index fund, with a limited downside. So while adding leverage to a asset always adds risk, it is
not the case that a levered company or investment is always riskier than an unlevered on. In
fact, many highly-levered hedge funds have less return volatility than unlevered bond funds,
and public utilities with lots of debt are usually less risky stocks than unlevered technology
companies. (From Wikipedia, the free encyclopedia)
Both BP and its competitor Royal Dutch Shell plc use a higher financial leverage in2010 than in
2009. In 2010, BPs financial leverage rise from 2.31 in 2009 to 2.84, and Royal Dutch Shell plcs
financial leverage rise from 2.12 in 2009 to 2.15 in 2010. However, as we have discussed before,
that in 2010, the return on asset ratio for BP unfortunately fall below zero, so the rising
financial leverage in 2010 for BP has broaden its financial losses based on equity invested, the
tool of financial leverage in 2010 for BP has been badly used, brought a even worsen effect on
its profit performance. While, its competitor, Royal Dutch Shell plc has a positive return on
asset, the rising financial leverage in 2010 as compared to 2009 has been doing well for return
on equity. Royal Dutch shell plcs operation is much effective, so borrowing money fromdebtors can help them gain more profit.
Net profit margin
Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of
profitability. It is calculated by finding the net profit as a percentage of the revenue. The profit
margin is mostly used for internal comparison. It is difficult to accurately compare the net profit
ratio for different entities. Individual businesses operating and financing arrangements vary so
much that different entities are bound to have different levels of expenditure, so that
comparison of one with another can have little meaning. A low profit margin indicates a low
margin of safely: higher risk that a decline in sales will erase profits and result in a net loss, or a
negative margin. (From Wikipedia, the free encyclopedia)
The net profit margin for BP in 2010 has decreased from 6.8% in 2009 to -1.1%, this means that
in 2010, when a sale is made, the company is actually not profitable, although Royal Dutch shell
plcs net profit margin has also dropped from 647.2% in 2009 to 5.4%, we can see it is still
above zero. So when compared to its competitors, BP seems to lose the ability to generate net
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profit from sales they make. This could be a fault of non-operation income too high, or
operating profit too low, or taxation cost too much, a much higher expenses can also be a way
to explain to the bad performance of net profit margin ratio. So we have to move on to explore
what the real problem lays.
Total asset turnover
Total asset turnover is the amount of sales generated for every dollars worth of assets. It is
calculated by dividing sales in dollars by assets in dollars.
Asset turnover measures a firms efficiency at using its assets in generating sales or revenue-the
higher the number the better. It also indicates pricing strategy: companies with low profit
margins tend to have high asset turnover, while those with high profit margins have low asset
turnover.
( http://www.investopedia.com/terms/a/assetturnover.asp)
In 2010, BPs total asset turnover rise from 1.04 in 2009 to 1.13. This means BPs efficiency at
using its assets in generating sales or revenue has been better. And its competitor Royal Dutch
Shell plc in 2009, is not doing a good job in managing its assets, however, we can see from the
ratio of total asset turnover for Royal Dutch Shell plc has rise from 0.01 in 2009 to 1.17 in 2010.
This means the management of Royal Dutch Shell plc has improved a lot, to further explore
which assets has contributed the most to improve total assets turnover, we will have to
calculate the fixed asset turnover, inventory turnover, current asset turnover and noncurrent
asset turnover individually.
Operating profit margin
In business, operating margin, operating income margin, operating profit margin or return on
sales (ROS) is the ratio of operating income (operating profit in the UK) divided by net sales,
usually presented in percent.
Operating margin=operating income/revenue
BPs operating margin dropped slightly from 97.2% in 2009 to 96.2% in 2010, means that the
part that operating income taken as per share in revenue has decreased slightly. Overall, BPs
operating section is not doing a bad job. But when the operating profit margin check comes to
its competitor---Royal Dutch Shell plc, it is doing a much worsen job. In 2009, it did gorgeous to
have achieved 14157.2% in operating profit margin, but in 2010, only 97.3%. From this, we can
come to at least two conclusions: first, Royal Dutch shell is doing better each year compared to
BP in operating profit margin, even its operating profit margin dropped dramatically in 2010 to
97.3%, it is still 1.1% higher than that of BPs; Second, there must be some reason for Royal
Dutch Shell plcs operating profit margin to dropped so dramatically, operating income to a
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company is much more stable than non-operating income, if a company relies its profit much
on non-operating income, in the long run, it has some potential management risk.
Effect of non-operating items
The effect of non-operating items reflects everything in the companys income statementbetween its operating income and its earnings before taxes. If the company has net non-
operating expense, the ratio of income before tax to operating income is less than 1.0; on the
other hand, if the company has net non-operating income, this ratio is greater than 1.0. The
effect of non-operating income is often referred to as the interest effect or interest burden
because for many companies the interest expense is the primary non-operating expense.
Companies with higher interest expense have lower ratios of income before taxes to operating
income, whereas companies with larger non-operating income have higher ratios of income
before taxes to operating income. (Certified financial analyst program, corporate finance and
portfolio management)
Effect of non-operating items for BP in 2010 is much stronger than 2009, from 10.5% in 2009 to
-1.6% in 2010. The ratio effect of non-operating items in 2010, 2009 for BP and Royal Dutch
Shell plc are all below 1.0, means that the two above companies all has net non-operating
expense. In 2010, BPs effect of non-operating items is below zero, means that non-operating
expense has taken up more than operating income. In 2010, Royal Dutch Shell plcs effect of
non-operating items rise from 7.6% in 2009 to 9.6%, means that more share of income before
taxes has taken part in the total operating income.
Product comparison:
Comparison point
Farm /
Outdoor Oils.
comparison
point
CHAIN & BAR
TWO STROKE
HITIDE 2iOUTBOARD
NAUTILUS
POWER CUT
TC OIL
LAWN 2 MOWER
CHAIN-N-BAR
OIL OIL
CHAINSAW BAR
GL-4 PREMIUM GL-4
TRACTRAN TDH
DONAX TD
AGRITRANS
STOU 15W40 15W40
SUPER TOU
BP
MULTIFARMAGROMA MP
SHELL
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Hydraulic
Oils.
COMPARISON POINT
SHELL
BP
SUPERDRAULIC
SUPERDRAULIC
SUPERDRAULIC
SUPERDRAULIC
SUPERDRAULIC
SUPERDRAULIC
SUPERDRAULICBARTRAN
HV
HYDRATRANS
10W
TELLUS T
SERIES
HVI ISO 32-150 ISO 32-150
BARTRAN
100
ISO 100
TELLUS 150 BARTRAN150
ISO 150
BARTRAN
68
ISO 68
TELLUS 100
BARTRAN
46
ISO 46
TELLUS 68
BARTRAN
32
ISO 32
TELLUS 46
ISO 22
TELLUS 32
TELLUS 22BARTRAN
22
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Petrol Engine Oils.
COMPARISON
POINTSHELL BP
SEMI-SYN
EURO TECH
HELIX
HELIX
HELIX HIGH
25W60 SJ/CF-4CORSE PLUS
MILEAGE
25W60 SH/CF
25W60
15W40 SL/CF-4HELIX SUPER VISCO DIESEL
15W40 SL/CF 15W40
15W40 SM/CF-4HELIX SUPER
15W40
15W50 SM/CF-415W50 SJ/CF
10W30 SM/CF-4HELIX
10W30
10W40 SM/CF-4
20W50 SL/CF-4STANDARD
20W50 SL/CF
20W50 SM/CF-4HELIX
20W50
VISCO 2000
20W50 SG/CD 20W50 SH/CD
20W50 SJ/CF-4VISCO 3000
20W50 SJ/CF
HELIX ULTRA
5W30 C3
EXTRA 5W30
LOW SAPS
20W50 SG/CDHELIX RED
HELIX PLUS
10W40 SM/CF
SEMI SYNTHETIC
SEMI
10W40 SL/CF
SYNTHETIC
SYN 5W40
HELIX ULTRA
SM/CF FULLVISCO 7000
5W40
SYNTHETIC
5W40 SM/CF
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Supply chain management:
Royal Dutch Shell
in the supply chain management they are using building block system for betterimplementation their innovation in supply chain management concepts that is enterprise first
British petroleum:
From oil exploration to exploring new forms of alternative energy and finding the best ways to
market our products, BPs business interests are wide. Professionals in Procurement and Supply
Chain Management work across every part of it and in places as diverse as Angola, Egypt, the
USA, and Indonesia. Wherever they are, innovative improvements are valued and our teams
take on strategic as well as operational goals in their work with suppliers, contractors and
government bodies. We encourage our people to progress as specialists in key markets areas or
sometimes by becoming involved with more than one large global project at a time.
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Environmental issues
Royal Dutch Shell environmental issues
Royal Dutch Shell is engaged in a variety of business activities across the world which of
necessity involves the extraction, production, handling, processing, storage and transportation
of hazardous products, including hydrocarbons and chemicals. On 13 May 2008, Shell released
a report setting out ambitious plans to meet the global energy challenge that can be summed
up as more energy, less CO2. The report describes Shells plans to invest in second generation
biofuels and carbon capture and storage. It also discusses utilization of natural gas and wind
power combined with the necessity to reduce greenhouse gas emissions and operational oil
spills. The vast scale of operation means that even with the highest safety and maintenance
standards in current and future activity, accidents and events arising from human error ormisjudgment and or plant or equipment failure, are likely to occur. The record of past
environmental incidents and events detailed in this article should be considered in that context.
Environmental issue of British petroleum:
As the oil spill coming from BPs Deep water Horizon exploratory drilling rig accidents
(blowouts) of April 20 and 22, 2010 continues unabated, many questions are raised and many
gaps uncovered in our knowledge. Most importantly, the long-term effects of such catastrophic
spill on humans, marine life and environment are hard to predict, while various clean-up
methods seem to raise a series of additional issues (such as the controversy related to the
dispersants used). So far, few environmental issues became evident including:
the formation of underwater oil plumes the danger from the dissolved contamination the impact of oil plume on the sensitive gulf coastal wetlands
While the oil continues to be spilled and scientists struggle to investigate and better understand
and address, the long-term impact of the spill on environment, ecosystems and humansremains hard to predict.