Case Studies on

Oil Industry

Edited by
R. Muthukumar
Icfai Business School Case Development Centre

Icfai Books
# 71, Nagarjuna Hills, Punjagutta, Hyderabad – 500082
Icfai Books
# 71, Nagarjuna Hills,
Punjagutta, Hyderabad – 500082
Andhra Pradesh, INDIA
Phone: 91 - 40 - 23435387/91, Fax: 91 - 40 - 23435386
e-mail: icfaibooks@icfai.org, ibscdc@icfai.org
Website: www.icfaipress.org/books, www.ibscdc.org

© 2008 The Institute of Chartered Financial Analysts of India. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, used in a

While every care has been taken to avoid errors and omissions, this book is being sold
on the condition and understanding that the information given in the book is merely for
reference and must not be taken as having authority of or being binding in any way on
the authors, editors, publisher or sellers.

Product or corporate names may be registered trademarks. These are used in the book
only for the purpose of identification and explanation, without intent to infringe.

Case studies are intended to be used as a basis for class discussion rather than to
illustrate either effective or ineffective handling of a management situation.

Copies of individual case studies are available for purchase from www.ibscdc.org

ISBN: 978-81-314-2039-3

Editorial Team: KBVSS Raghava and Deepa Varma

BP: Evolution of a New Corporate Culture 1

Indian Oil Companies’ Race for Self-Reliance: Risks and Rewards 15

Total: The French Oil Giant’s Growth Strategies 29

ChevronTexaco’s Growth Strategies 45

North America’s Largest Independent Oil & Gas Company, EnCana:

Global Oil Prices: Demand Side vs Supply Side Factors 81

PEMEX: The Mexican Oil Giant’s Restructuring Strategies 107

Royal Dutch Shell Plc.: The Competitive Strategies 119

BP – John Browne Bets on Asia: The Strategic Logic 133

Gazprom’s Takeover of Sibneft: From a Local Monopoly to a

Sunoco Inc., the Philadelphia Refiner: The Refining and

Exxon Mobil’s New CEO, Rex Tillerson’s Agenda – Diplomacy:

Bharat Petroleum: Way Forward 197

Ente Nazionale Idrocarburi (ENI): Succession Battle at the

Mergers and Acquisitions in Russian Oil Sector – The FDI Factor 247

CNOOC: Growth Strategies of the Chinese Oil Giant 261

Constellation Energy: The Growth Strategies 281

Unocal’s Embattled Strategy: A Soft Takeover Target? 295

Oil1 is a precious energy source. It, fulfills 40% of the global energy needs2, is one
of the oldest in the world as well as one that affects the world economy. Oil provides
the raw materials for many essential chemical and industrial products3. The
industry, in recent years, has been characterised by rising oil consumption,
declining crude production and low reserve accretion.
There are two major sectors in the oil industry – upstream and downstream. In
between, there is one more sector called midstream. The midstream sector
processes, stores, markets and transports commodities such as crude oil, natural
gas and natural gas liquids (NGLs) such as ethane, propane and butane. However,
midstream operations are usually included in the downstream category.
The upstream sector involves the processes of oil exploration4 and drilling.
Exploration of oil is conducted both on land and on the continental shelves across
the world. Over the decades, drilling technology has advanced greatly, allowing oil
producers to access more deposits, thus resulting in an increase in reserves.
The downstream sector involves refining, transporting and marketing of oil and
oil products. After the crude oil is extracted from oil wells, it is transported to
the production units through pipelines, train cars, large oil trucks, etc. At the
production unit, it is processed and refined into different products that include
liquefied petroleum gas (LPG), gasoline, jet fuel, kerosene, middle distillates
including heating oil and diesel fuel, residual fuel oil and asphalts. These products
are then transported to their actual points of sale – from where they are supplied
to the eventual consumers. Oil products are also used in the chemical industry
to produce petrochemicals.
Both the upstream and downstream sectors are subject to stringent operating
criteria such as environmental and safety regulations, and product specifications.
Most oil companies specialise in any one of the specific functions either in the

1
Oil (crude oil or petroleum) is a flammable liquid containing a mix of different hydrocarbons that occurs naturally
in deposits, found mostly beneath the surface of the earth. It is formed from organic material, buried deep within
layers of rocks, which decomposes in the absence of oxygen, to form petroleum. The organic material is formed
from the remains of plants and animals, which over millions of years have fallen to the floor of shallow seas, and
have been covered by sediment layers (salt, sand, clay and others).
2
http://www.mbendi.co.za/indy/oilg/p0005.htm
3
Intermediate products such as ethanol, ethyl chloride, methanol, styrene and butadiene, which evolve during the
production of petrochemicals, are used in the manufacture of other products such as plastics, synthetic fibers and
synthetic rubbers. Oil derivatives are used in the preparation of products such as candles, paints, carpets, soaps,
perfumes, balloons, margarines, cassettes, insecticides, telephones, crayons, nylon ropes, toothbrushes,
deodorants, nail polish, lipstick, polyester, and many more.
4
The process finds the oil existence and is a very expensive exercise as it involves seismic surveys and the use of
advanced technology (such as laser and satellite) to detect oil deposits.

i
upstream or downstream activities such as exploration, oil drilling, oil field services
(help in setting up oil wells), pipelines (construction), equipment markets and gas
stations (petrol pumps). However, a significant number of companies are also
integrated into other upstream or downstream businesses. But, most of all global
oil majors have vertically integrated operations ranging from oil exploration
(upstream) to end-marketing (downstream). The level of vertical integration of
larger companies gives them a huge advantage over medium and small oil industry
players. This enables oil majors to exert monopoly power; thus the oil market cannot
be considered a competitive one.
Since the world’s oil reserves are limited and their distribution is uneven (with
countries consuming most oil having less oil reserves), the business of oil has
had high political significance. By the turn of the 20th century, the oil industry
pegged around a handful of vertically integrated oil companies with access to
huge crude oil reserves.
Evolution of the Business of Oil
The oil industry’s history dates back to over five thousand years, when oil seeping
out from the earth was used in waterproofing boats and baskets, lighting and
paints in the Middle East. It was also used for building mortar, roads, but was
primarily used for medication.5 The evolution of modern oil industry began only
in the mid-19th century.
Then, whale oil was used as a major source of fuel for lamps and for making candles
in many parts of the world. During this period, petroleum was obtained by
skimming it from ponds and by distilling coal. As the demand for whale oil
increased, the global whale population decreased rapidly. As the supply of whale
oil fell, its price increased phenomenally.
In these circumstances, the quest for a long-lasting, affordable and readily
available alternative to whale oil, resulted in the discovery of land oil reserves.
The modern oil industry was thus born in 1859, when Edwin L Drake, a former
railroad conductor, dug the first oil well near Titusville in the US. Soon, the oil
exploration business spread across the world. The first oil refinery was set up in
1861, in the US. Since the late 19th century, many oil companies have been
established; these include Standard Oil (which later split into 34 oil companies
including Exxon, Mobil, Chevron, ARCO and Amoco), Texaco, Shell and British
Petroleum. A majority of oil discoveries in the 19th century were in North America,
mostly in the US.
5
“History of oil industry”, http://www.rigjobs.co.uk/oil/history.shtml

ii
During World War II, oil played a major role in international politics since it was
vital to conduct mechanised warfare. This, coupled with the threat of Soviet Union
that emerged as one of the global powers during World War II, made the US and
its allies (Britain, France and Germany) move to the use of oil over coal to fuel
their industrial growth in the post-war period. Till that time, the US had been
self-sufficient and could also meet 90% of Europe’s oil needs. However, after the
late 1940s, rapid growth in oil consumption forced the US to import oil, as its
resources could not meet the growing demand. During this period, the focus shifted
to the Middle East, which possessed about two-fifths of the world’s known oil
reserves. The cost of oil extraction was much lower in the Middle East, compared
to other parts of the world. As a result, countries including Saudi Arabia and Kuwait
began flooding the world with their oil supply in the late 1950s. This oil was priced
lower than that of other countries, resulting in a sharp growth in oil consumption
across the world. The economic growth of the industrialised world became vitally
dependent on access to oil.
As demand continued to grow, oil companies began to look for oil below the
seabed. The first oil wells to be built in open waters were in the Gulf of Mexico.
In 1959, the massive Groningen land gas-field was discovered in the Netherlands.
Geologists estimated that the same rock formations might be found beneath the
southern North Sea basin in UK waters. Gas was discovered off the English East
Coast in the 1960s. New fields were explored in ever deeper and wilder waters,
like the Atlantic Ocean west of Scotland. In 1969, oil exploration really began in
the North Sea. The subsequent development of the North Sea is one of the greatest
investment projects in the world.
The period between 1948 and 1972 was termed the ‘golden age of oil’ as world oil
consumption during this period increased fivefold. While oil consumption in North
America tripled during this period, it grew 11 times in other places. This clearly
indicated the growing importance of oil in people’s lives across the world. Oil
changed the way of life and work in developed countries, by spurring mass use of
motorised vehicles, use of synthetic materials and access to electricity. As a result
of its commercial importance, the oil business boosted the economies of many
countries during this period.
In 1961, the Organization of Economic Cooperation and Development (OECD) was
instituted by countries which were committed to a market economy. Many countries
from North America, South America, Europe and Asia became members of OECD,
which helped expand free trade and cooperated in matters of international
economic importance, such as dealing with the OPEC oil cartel. OECD developed

iii
strategies to curb OPEC’s power in determining the oil prices and to cope with the
looming energy crisis6.
Though the Middle East had huge oil reserves, it could not reap very high profits
because oil prices were determined by the refineries and OECD. This system
benefited only the refineries, and not the oil-producing countries. This led to the
formation of the Organization of Petroleum Exporting Countries (OPEC)7 in 1960,
to unify and coordinate the petroleum policies of the 12 major oil producing and
exporting countries. OPEC set production quotas for each of its member states. By
setting production quotas, it was able to regulate the supply of oil and thereby
manipulate the global oil price. Thus, OPEC began to control the oil business to
ensure benefits to its own members. This was noticeable in 1974 when their
embargo8 on oil caused the price of crude oil to soar.9
As part of the embargo, the Arab nations cut their production levels drastically,
resulting in a much reduced oil supply during the period. However, though the
embargo was targeted at only the countries supporting Israel, it ended up affecting
the global oil industry; it created a fear of oil shortage in the world, prompting
countries to increase their oil storage levels. The reduced production and increased
demand for oil resulted in a drastic increase in oil prices during this period; global
oil prices increased fourfold (from $2.90 per barrel to $11.65). Oil-dependent
economies across the world were severely and adversely affected.
As a result of this crisis, the Western countries started focusing on oil security and
conservation, and promotion of alternative energy sources – to reduce uncertainty
arising out of volatile oil prices in the future. They undertook initiatives to conserve
oil resources. These mainly included reforming oil security laws, insulating homes
better, improving energy efficiency in industrial processes, making automobiles
with higher mileage and searching for alternative fuels for automobiles. These
initiatives, coupled with many other factors, reduced the OPEC’s power to a certain
extent in the next few years. The embargo was lifted in 1974 and OPEC increased
production quotas in 1975 to bring down the oil prices.
By the early 1980s, OPEC was no longer able to regulate the supply of oil effectively
and the oil industry moved closer to a market-driven, competitive era. Oil was even
floated on the New York Mercantile Exchange (NYMEX) in 1983. As oil prices
6
In 2004, OECD had 30 member countries, with a shared commitment towards market economies and democratic
government.
7
OPEC was formed by five founding members, namely Iran, Kuwait, Iraq, Saudi Arabia and Venezuela. Later on,
Qatar, Indonesia, United Arab Emirates, Libya, Nigeria and Algeria also joined it.
8
In 1972, Syria and Egypt started a war on Israel and many countries including the US supported Israel in the war. As
a result, in 1973, many oil exporting Arab countries imposed an oil embargo on the countries supporting Israel.
9
http://www.mbendi.co.za/indy/oilg/p0005.htm

iv
continued to tumble, OPEC decided to lower its production quotas to stabilise prices
between 1982 and 1985. After many OPEC nations reneged on their production
quotas during this period, Saudi Arabia (as the largest producer) tried to compensate
and prevent further falls in the oil prices by reducing its own production. However
the situation did not improve. Saudi Arabia was not able to bear the brunt of reduced
oil production for long and it more than doubled its production in 1985. As a result
of this, oil prices plummeted to below $10 in mid-1985.
By 1986, OPEC countries rose above their internal differences and tried to stabilise
the prices by setting new production quotas. However, by then, oil production in
non-OPEC countries increased, because of which the impact of OPEC’s actions on
world oil prices reduced. Since 1986, oil prices did not fluctuate very widely. The
OPEC was now more of a price-taker in the market, and sought to ensure oil price
stability by responding quickly to the market’s requirements. World oil
consumption increased during the 1990s (to 6.2 million barrels per day between
1990 and 1997). But the oil industry faced many ups and downs on account of
factors such as the Iraq-Kuwait war, collapse of the Soviet Union, the Asian
Financial crisis, and increased oil exports from Russia in the late 1990s.
Unable to withstand the increasing competition and bear the high R&D costs, many
independent, small and medium companies in the industry went bankrupt. Many
countries in Europe and Asia privatised their oil industries, to attract foreign
investment and step up economic growth. Apart from this, during the late 1990s,
the industry experienced a phase of consolidation, with many major oil companies
merging. Some major oil mergers during this period were those of Exxon with
Mobil (ExxonMobil), British Petroleum with Amoco and Arco (BP), and Chevron
with Texaco (ChevronTexaco).
At the turn of the 20th century, oil prices had soared to more than $30 per barrel.
This was mainly due to economic recovery in many countries across the world,
and production cuts by OPEC as well as non-OPEC countries.
Oil Industry in the 21st Century
In the early 21st century, it was estimated that the world’s 300 largest oil fields
contained three-quarters of the world’s oil reserves. The remaining 25% of the oil
reserves were distributed across thousands of smaller oil fields. Oil companies
typically concentrate on extracting oil from the largest potential deposits first.
Major oil reserves were located in the Persian Gulf, North Sea, North and West
Africa and the Gulf of Mexico. Among the 90 oil-producing countries, five countries
in the Middle East had two-thirds of the proven world oil reserves. According to

v
reports, the original recoverable oil from the earth is estimated at 2,330 billion
barrels of which about 90% has already been discovered and 50% has been
produced. Reports also state that in 2000, the world was consuming four barrels
of its known reserves for every new barrel discovered. In other words, while 22
billion barrels of oil are extracted annually, only 6 billion barrels of new oil reserves
that can be used in the future are discovered to compensate for the oil extracted.
In 2000, the oil depletion rate was estimated at 2.2% per year. The gap between
the consumption and discovery of oil is increasing, taking the world towards a
deficit in oil, which is why oil is referred to as a non-renewable energy resource.
In early 2000s, North America, Oceania, Western Europe and the Far East
consumed 77.5% of the oil industry’s output, while they produced 44.4% of it.
However, these places contain only about 12.5% of the world’s total oil reserves. In
contrast, the Middle East, which has about 65% of the world’s oil reserves, produced
about 30%, while consuming only 6% of the world’s supply.
Between 1992 and 2001, the global production of petroleum increased by 9.5 million
barrels per day, at an average annual growth rate of 1.5%. Saudi Arabia, the US
and Russia were the largest producers of petroleum in 2001, jointly accounting for
about 31.7% of the total global petroleum production.
These countries were followed by Iran and Mexico, which jointly accounted for
9.9% of the world’s production. Saudi Arabia and Russia are the largest exporters
of oil today. In 2001, the US retained its position as the world’s largest consumer
of oil (19.6 million barrels per day), accounting for 25% of the world’s total
consumption. It was followed by Japan, China, Germany and Russia. In 2003, oil
prices were expected to skyrocket on account of the US-Iraq war. However, both
the OPEC and non-OPEC countries produced more oil and made it available in
the market, resulting in stability of world oil prices. In early 2004, the price was
hovering about $32 per barrel.
In early 2004, the major global oil companies were BP Plc. (UK), ExxonMobil
(US), Royal Dutch/Shell Group (UK/Netherlands), ChevronTexaco Corp. (US),
and Total SA (formerly TotalFinaElf). BP is the world’s largest integrated group
with proven reserves of 18.3 billion barrels of oil equivalent. ExxonMobil is the
second largest, with proven reserves of 21.2 billion barrels of oil equivalent. Royal
Dutch/Shell Group is the third largest oil and gas group with proven reserves of
about 15.2 billion barrels of oil equivalent.
Royal Dutch/Shell Group is a joint venture between Royal Dutch Petroleum (60%)
and Shell Transport and Trading (40%). ChevronTexaco is one of the largest

vi
integrated oil companies and the second largest in the US, with proven reserves of
12 billion barrels of oil equivalent. Total SA (South Africa) is also one of the largest
integrated oil companies with proven reserves of 11.4 billion barrels of oil equivalent.
There is fast growing oil consumption in the non-OECD Asian countries. The
non-OECD Asia (including both India and China) accounts for around 40% of the
total increase in world oil use. The gap between demand and supply is set to widen
unless major gas discoveries are made. The growth of the gas/LNG imports are
very closely intertwined with the power sector, and the competition, and, perhaps,
to an extent of replacement of coal as the preferred fuel. The setting up of Natural
Gas import infrastructure would depend to a large extent on the ability of the power
sector to pay for gas as against the cheaper coal, or an alternative fuel.
The world oil consumption has increased by 1.2 million barrels per day in 2005,
even after the increase of 2.6 million barrels per day in 2004. 10 In 2004, China’s
oil use increased by 0.9 million barrels per day and, at the same time, its demand
increased by only 0.4 million barrels per day in 2005. Oil & Gas Journal, in its
report, has shown that the world oil reserves are estimated at 1,293 billion barrels
as of January 1st 2006.11
Because the world’s population is growing and living standards are rising
worldwide, energy consumption globally is expected to rise by more than 50%
over the next 25 years. But finding supplies to match that growth is going to be
increasingly tough, and will require vast new investments in the coming decades.12
There are accumulating risks to energy production, including rising geopolitical
barriers, inflation in costs, dwindling petroleum engineers, and growing constraints
on carbon dioxide emissions.13
According to the International Energy Agency, which collates data from all
oil-producing countries, peak oil will arrive between 2013 and 2037, with
production thereafter expected to decline by about 3% a year. While oil from
conventional sources is expected to decline, more and more is expected to come
from unconventional supplies found in oil-rich rocks, especially in the US and in
deposits of tar found in Venezuela.14

10
http://www.economywatch.com/world-industries/oil-industry.html
11
Ibid.
12
Jad Mouawad, “Oil Industry Offers Sobering Outlook on Supply”, http://www.nytimes.com/2007/07/18/business/
18cnd-oil.html?ex=1342411200&en=5892c76468cf72ca&ei=5090&partner=rssuserland&emc=rss, July 18th 2007
13
Ibid.
14
John Vidal, “Analyst fears global oil crisis in three years”, http://www.guardian.co.uk/oil/story/
0,11319,1470330,00.html, April 26th 2005

vii
These trends in the industry will lead to a series of important implications and
questions for managerial executives. This case study volume discusses the evolution
of the global oil industry since its inception and details how industry forces and
political business environment affected oil companies and the industry trends. It
also details how each player revived their strategies, to survive in the industry or
to retain their market share.
This book contains case studies of different companies that were chosen to illustrate
a range of important issues in competitive situations in the oil industry. Companies
examined in these cases allow the reader to systematically analyse the important
types of strategic decisions. Based on the analysis, various decisions are taken up.
Each type of decision raises its own economic and administrative issues. The
strategic decisions highlighted in the case studies are:
• Major Capacity Expansions: The decision to commit resources as a
substantial addition to the firm’s capacity, whose success depends on future
industry conditions and what competitors choose to do
• Vertical Integration: The extension of the firm’s scope of operations
through either forward or backward integration
• Entry: The decision to enter a new industry through acquisition or internal
development
• Divestment: The often painful decision to withdraw from the industry
• Mergers and Acquisitions: Agreements among firms in the same
industry including supply agreements, joint ventures and cross-licensing.

viii