Indian Oil Essay

Executive Summary

Indian Oil Corporation Limited (IndianOil) is the largest producer of oil and natural gas in India. IndianOil was formed in1964 through the merger of the Indian Oil Company and Indian Refiners Ltd. IndianOil is highest ranked company in the Fortune ‘Global 500’and 21st largest petroleum company in the world . IndianOil is widening the horizons with international investments like Indian Oil (Mauritius) Ltd and subsidiary, Lanka IOC ltd. The economic environment for the company is favourable for the IndianOil. This project is the micro and macro analysis of the company’s economic structure .The company has the oligopoly structure as the products are almost homogeneous and entry of the new competitor is limited. Macro-economic factors are affecting the business including the international market for the crude oil and policies of the Organization of Petroleum Exporting Countries (OPEC).

Introduction

This project is analysing the company’s performance under affects of economic as well as non economics factors .Under micro-economics analysis, how company is creating the value of its products and services in the market. The new substitute of the oil and gas like bio-gas, solar energy and electricity to replace the conventional products (Wikipedia, 2007).The closeness of the products are tightening and forcing the company to deliver better products .the limited entry is also affected with the government policy for foreign direct investment. Macro-economic analysing the different type of the risks in the business .the international trade polices and prices of the crude prices are discussed for the future growth of the company. The developing Indian economy create the market and business for the new products .Research and development department is also contributing for the optimum utilization of the resources for the company as well as consumers .(IndianOil,2007)

Preliminary business analysis

Indian Oil Company was formed in the 1952, has merger with Indian Refiners limited which formed the giant oil company in India, known as Indian Oil Corporation Limited. According to the company data, IOCL and its subsidiaries account for 47% petroleum products market share, 44%national refining capacity and 75% petroleum products pipeline capacity. IOCL has wide range products and services for different kind of the customers .the main product of the company is petroleum and gas as the company is having network of 30,000 sales points nation wide for petroleum and diesel, 183 bulk storage terminals and 97 aviation fuel station and 88 indane LPG bottling plant (Iocl, 2007).company has manufacturing plants for the customised hydrocarbons Naphtha, which is used to manufacture fertilisers. Liquefied Petroleum Gas is also marketed by the company; recently company has signed the joint venture with Reliance Group for the providing gas to the homes through the gas pipeline. Other product includes high speed diesels and aviation turbine fuels and kerosene for Jet plains. (IndianOil 2007)

Indian oil industry is most important sector in economy as it cater a wide range of industries including petrochemicals, fertilizers, automobiles etc. the government is closely monitoring the oil and gas sectorin1997, the government has deregulate the industry .where the companies were having good profit on the other hand companies are exposed to the problems of the international prices of crude oil. The prices of the petroleum, diesel and LPG are regulated by the central governmental.

There is still a huge gap between the demand and supply in the oil sector. Being the largest and leader in the Indian oil sector ,the company has to take different measure to keep the products and services competitive .value creation is not limited to only to the market, but the share market of the company is the another areas where company’s consistency in financial manner is very important aspects .

Indian is the sixth largest consumer of the oil in the world .India is importing 70%of the crude oil from international market the domestic production of crude oil has been in the range of 35-45 Million Metric Tones. Oil comprises the 37% of India’s primary energy consumption. Indian’s refining capacity nearly doubled from last ten years .Gas is the fastest growing fuel in the Indian kitchens replacing traditional fuels such as kerosene etc. (www.teriin.org). The company is expanding its business to the Middle East .IOCL is secured a joint venture with Iran for a development plan for exploration.

Micro-Economic analysis

Creation of value

The company can create the value by improving the products and supplying the best product in the market. IndianOil has in oligopoly market structure which means the products are almost homogenous which tighten the competition for the company .the company is creating value by producing more efficient products at competitive prices R; D centre has developed more scientific ways to improved products .Indian oil industry has very competitive nature as the products are homogeneous, marketing advertising .the new state-of-the-art retail outlet and providing more than oil and other services are some of the new tools to capture more market .being a public company , IndianOil has not much control over the prices of government provide subsidy while pricing the oil and diesel .

Urbanization is encouraging oil industry to set up pipeline network to provide the LPG to home vie under ground pipeline. Nowadays the LPG is provided through iron cylinder each weighing 15 kg approximately .there are two problems with this delivery system as the availability of the gas regulators in domestic market. Earlier gas regulators are imported from Italy which is one of the reasons for the slow distribution .nowadays the regulators are domestically manufactured which lead to decrease in the connection fees from Rupee 975 to 675.

The demand and supply gap is still considerable in petroleum and diesel sector especially in the regional areas .as for the relation to the LPG, the gap is reducing due to the intervention of the Relance Industries. In the agriculture oriented regional areas, IndianOil is providing special services for the agriculturists .apart from retailing the petroleum and diesel, the IndianOil has expended its market size by providing the resources for the renewable energy sources, efficiency increasing additives .this kind of market is having very tight competition due to international competitors .crude oil, iron, pipeline network and human resource are resources. Cost of capital is very crucial aspects as the governmental intervention which is subject to ruling parties

Labour market in oil industry requires the skilled labour skilled labour as the company is focusing on the value of the human resources to improve the outputs which is underlying the corporate value. IT re-engineering projects has conducted unified transaction on the leading software over 450 locations. In the industry the labour market is very tight even the educated population .industry is fully absorbing the qualified professional.

Dimension of the market

Indian Oil Corporation Limited industry is the part of thew Indian oil industry. the main function are retailing including the refining and the oil exploration and importing the oil from international supplier .there are numbers of the competitors for company’s market but the ONGC is capturing the highest market share. Oil and gas has become the necessity of the consumers which makes demand for the oil and gas is relatively inelastic to price changes. The key inputs are oil explorations, refiners, labour and capital.

Human resources of the company includes all workers, researchers and sub contractors .10 refineries, research and development centre, educational institute and retail outlets are main plants, building, machinery and equipment. IndianOil falls in the oligopolistic structure with few sellers’ cause of high setup cost, differentiated products and significant barriers to entry. The key barrier to entry is heavy and complex licensing system because the industry is closely regulated by the government. According to Reynoldsons, new technologies enable the manufacture to make production more cost efficient production which will increase supply .this more appropriate for the Indian oil industry because the supply is important due to huge gap between demand and supply .the low cost production and cost efficiency is the key to remain the leader in the industry.

Cost Analysis

The company has the 10 refineries and 30000 retail sales points .they are backed by the 183 bulk storing which are also locates at Sri Lanka ,Mauritius and Middle East. IndianOil has largest sale company with the turnover of Rs183, 204 crore (US $41 billion) and the profit of 4915 crore (US $1.10 billion) for the fiscal 2005.company has a employee strength of 30,048 as March 31, 2006 which is one of the India biggest employer .another type of the inputs includes the cost of marketing, advertising and sales promotion initiatives as the company spend huge amounts on the sale promotion. The company has the customized product which needs additional costs. IndianOil focus on research and training in the field of innovation of the new technology as the new technology and the improved products can increase in the company’s value.

Market structure analysis

Market structure of the any company is donated by the products and environmental factors. IndianOil has products which are almost homogenous but in the market difference is created by just advertising and promotional measures. The entry to barriers is limited as the Indian oil industry is monitored by the government and also need the large set up cost and restricted licensing process .Indian oil industry is driven by the prices of the crude oil in the international market.

Competitive

IndianOil numbers of competitors market in India as well as other countries .There are Bharat Petroleum, Hindustan Petroleum, Oil and Natural gas Corporation and new player Reliance Petroleum Retailing and refining companies in oil market tighten market. There are more than 12 companies in organised sector on the national levels with IndianOil has competition. The competition in the industry is based on the innovation and technological advancements and the best key is to reduce the operating cost.

Indian oil emphasises on the promotion of the products, but recently the company has started opening the new state of art retail centre. IndianOil is expecting intense competition from private player mainly in the small unorganized consumer petroleum products market which is approximately 35%of the total consumer market and small scale industry and medium industrial sector where company can loose market share. the consumer market is almost three times of the size of the retail petroleum products business company is claiming itself safe in organized sector as company has dominant position in the organized sector . IndianOil is providing the 80% of the refined oil to largest consumers (www.petroleumbazaar.com).

Close substitute

Oil and gas products are the backbone of the Indian economy .As mentioned many time, PEAK Theory 1 is really contributing as international crude oil prices is very important factor in determining the oil prices .high prices forces the large consumer to switch on other alternative sources of the energy. United state and other large oil consuming nations are moving aggressively to nuclear, coal-to-gasoline and ethanol because these nations do not want to depend upon the oil. The general environmental concern is the increases in the atmospheric temperature which due to burning of the fossil fuels which is really great contributor of the green house warming.

Research and development centre has found bio-diesel extracted from certain tree spices which are common in many areas of the India, such as Jatropha, Karanja and Mahua. Another alternate is the mixture of sugarcane ethanol with diesel. (Peak theory is the shift to alternatives due increased of prices leads to shortage in supply).India and other large consumers are looking petroleum alternate as ethanol, hydrogen inter-combustion, natural gas, auto gas synthetic fuels and hybrid electric vehicles .natural gas has alternate such as kerosene ,solar energy ,wind energy and bio-gas which is limited to regional and agricultural areas .

IndianOil has developed bio-fuels from rice bran, sunflower, palm and Jatropha and distributed the technology to benefit the community. Company is the first to experiment the Hydrogen-CNG. IndianOil is collaborating with KOSAS, Korea and NEDO, Japan to use CNG to reduce transport emission as the company is preparing itself to come with supply chain of alternate fuel by 2008.Rearsch and development centre is experimenting on gas-to-liquid/residue/biomass gasification (IndianOil, 2007). The company understand the proposed danger of loosing market due to substitute as IndianOil has proactive approach towards developing alternatives of the petroleum and gas. (www.fueleconomy.gov, 2007)

Potential New Entrants

The new company will tighten the market which will provide better services for the customers. The new entrant has numbers of barriers to enter such as huge investment, technological expertise, market share captured by the existing player, licence and tariff and very significant is the consumer perception about new product .apart from large initial investment, and new entrant must have patience and continuous improvement and compiling with quality standard .According to Shri Ram Naik (2) ,new entrant must have 11% of their outlet in the remote and rural areas which will be not be lucrative area for the companies to target.

Government is encouraging the new entrant like promoting government owned Pronet in which British Gas, Siemens, Shell and Reliance (ficci.com, 2007). Several multinational companies have already entered into the lubricants as the deregulation in which one third of the market is captured by the Shell, Exxon and Caltex. Government has frozen the further approvals for the LNG import as the combined capacity exceeds the projected demand. Indian government is offering favourable polices such as tax holidays and trade from special economics zones to encourage the new entrant. New entrant can force IOCL to come up with more improved products and services which will definitely reduce the profit margin. The tariff and the excise duty are also discouraged the international consumer.

(2) Shri. Ram Naik: Minister for Petroleum and Natural Gas

(http://ficci.com/media-room/speeches-presentations/2003/Jan/jan10-petro-naik.html)

Buyer

Indian oil has different products for the different customers from common man to biggest industry .as we came to know that IOCL is retailing the petroleum, petroleum products ,diesel and auto gas to the public as vehicle fuel .IndianOil has sullying the oil products like lubricants, engine oil , boats oil and greases etc .IndianOil has the agriculturalists as very new customers as the company is unveiled the growth areas in which company is supplying petroleum products SERVO lubricants and fertilizers under the name of ‘Kisan Kendras. IndianOil is providing the fuel for 40 million kitchens

(Source: financial reports, performance at glance, www.iocl.com)

(http://www.petroleumbazaar.com/articles/article3.htm)

IndianOil has country’s largest consumer of the refined oil products, Indian railways .80% of the requirement is satisfied by the company .Indian defence forces is one of the customers beside from the private aircraft operators as the company provide ISO 9002 fuels and services. IndianOil claims the 65% market share of the aviation fuel market. Indian population is second highest in the world and growth rate is also increasing purchasing power/disposable income of individuals is increased which led to sale of more and different products. (IOCL Website 2006-07)

(Source: overview of Indian economy, (www.economywatch.com)

Suppliers

Most of the Indian Oil’s supply of oil and gas is from international market. India is very close to five top nations of the top gas reserves which are Iran, Qatar, Saudi Arabia and Abu Dhabi. The major importers of Liquefied natural gas are Japan, South Korea, Taiwan and Western Europe. Indian has to import 70%of the oil from international market to full fill the domestic and industrial requirements. Crude oil is purchased from international sellers which are Kuwait; Iran and Middle East. Company has its own oil exploration units in South India (Bombay). The domestic oil is expected to grow from 119 Million Metric Tons Oil Equipment (MTOE) to 250MTOE in next 10years. These are the prime suppliers of the petroleum and gas but there some secondary suppliers such as the iron made gas (LPG) cylinders, transportation of the raw materials. Secondary suppliers are mainly contract based suppliers.

(Sources: www.commercecan.ic.gc.ca)

(http://commercecan.ic.gc.ca/scdt/bizmap/interface2.nsf/vDownload/CABS_0039/$file/india.pdf)

(Sources: www.commercecan.ic.gc.ca)

Macro Environment Analysis

Structural Risk

The economic environment always affects the business. The economic development of the country contributes a lot in the structural aspects of the improvement or vice- versa .the business cycles are alternating periods of economic growth and contractions, which caused the output, income, sales, employment and industry changes. The phases of the business cycle are boom, recession, trough and expansion .inn the oligopoly structure of the company forces the company for the structural improvements and technological advancements .IndianOil is growing and expending the business where overall industry is booming but monetary policies are also affect the structural risk for the oil industry because the government is managing the whole oil industry. The increased per-capita income enables the individuals for disposal of their resources to use different and efficient fuel. Liberalization and open market for Indian markets attracts foreign and private investor .government also encouraging the companies by high ceiling for FDI (Foreign direct investment),tax holidays zones and subsidy on import .structural risk also effect the employment risks .

Policy Risk

The governmental polices effects the business of the IndianOil as the company is operated by the government and the subsidies from the government .policy risk is not only limited to Indian government but also extended to the polices of the other countries where IndianOil operates. The governmental polices also effect the operation of the company which increase or decrease the risk. the policies of the ruling party is very important .Bharatia Janta Party has conservative approach for the FDI in public owned companies .the favourable governmental policies makes the companies more profitable and company enjoys the favourable business environment. The government can also create the policies that limit the company’s expansion like investment board has put limitation for the company to increase the business in rural areas which may not as profitable as urban areas. Policy risk involves two policies fiscal policy and monetary policy.

Fiscal policy is the where government makes the policy about the spending on the welfare such as national defences and road buildings where government collects the taxes for these spending. An increase in government purchases or cut in taxes will increase in real GDP in short term and decrease in the government purchases as a share of GDP will lower interest rate (Taylor, Moasa, 2000,pg 373) .the fiscal policy for the 2007-2008 aims to continue the trend of revenue receipts will be higher than the projected as the implemented the policy in the domain of tax policies, expenditure management. (www.indianbudget.nic.in).

(Sources: Reserve bank of India)

(www.rbi.org.in/scripts/BS_ViewBulletin.)

Monetary policy refers to the entirety of the actions taken by the central bank that affects the money supply, interest rates exchange rate, inflation and unemployment and real GDP. The increase in tax and excise duty will increase the burden on IndianOil which will effects the investment and expansion. The present deficit will introduce more taxes.

Exchange risk

The exchange rate is very important for the IndianOil as both the buyer and suppliers comes under the effects of exchange rate .IndianOil has the import of the most of its oil from other countries and company ahs the customers other countries .according to IOC chairman, the company is losing Rs 6.13 litre on petrol, Rs 3.76 per litre on diesel, Rs 14.67 a litre on kerosene and Rs 167.14 per LPG cylinders as the company is selling below the imported prices. The rupee appreciation and good refining margins helped to soften the under-realisation on fuel sale of IndianOil, without which the total under-realisation in 2007 is Rs 750billion as against the total under -recovery of over Rs 700 billion only. The recent appreciation in rupee against dollar has helped Indian Oil PSU companies to reduce the under recovery (www.indiaearnings.com)

(http://www.indiaearnings.com/sub_india/compnews.php?autono=283993)

(Sources: IRIS NEWS DIGEST, 29 May 2007).

Cyclic risk

The growth in the Indian economy is the benefiting the employment rate in the country .Indian government is emphasis the oil companies to expand their business in the rural areas ,as the business cycle is in the boom period which is increasing the disposable income ,labour participations ,reduction in the cyclical employment and consumption of the product will be increased .the oil and gas products are also effects by the growing economy as people will buy ore vehicles which will increase the use of the products

(Sources: Reserve bank of India)

(http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=8397)

Driving Forces analysis

IndianOil is leader in Indian oil industry .driving force analysis refers to the forces which will effects the operations of the business .IndianOil has impact of the international crude oil prices and the supply is main driving force .the prices are now at average around $25 per barrel and .the movement is very significant in determining the oil prices -the possibility and time period for business environment in the Iraq and the winter season in the northern hemisphere. Another driving force in the Indian oil sector is the recent foreign bidding .china and India is upcoming companies in Asian sector .PetroChina is snatching international bidding from UPA government proposed the merger of all oil PSU to make IndianOil stronger in the international market. The merger of the oil companies will end up the job losses and creates the frictional unemployment will cost the company to pay the termination compensations (www.tribuneindia.com).

The car manufacturing companies are considering the environmental factors while making car such as highbred cars, forcing companies to change the fuel quality and the more environmental friendly fuels. The deregulation in the petroleum products intensifies the competition in the particular market which is the driving force for the company to cat on unorganised sector. The Indian economy is increasing very rapidly and GDP growth rate of 9.2% has increased the average purchasing power of the common man which enables them to enjoy new mode of transport .the increased number of the vehicles means more consumption of the oil. The next threat fro the Indian oil corporation is the reduction of the oil consumption in the railways due to the electricity as a replacement.

Exchange rate is also affecting the import and export of the company .appreciation in the Indian rupee will result in the less attractiveness of the oil export which led to shift the customer to other countries. The demand the supply gap is the greatest driving forces fro the IndianOil. Domestic exploration technology is very important to substitute the import of the oil .the driving force in any industry is the competition which forces companies to improve their products and services and market their products. Governmental interference in the regulation of the industry plays very significant role as the policies and tax system o f the company affect the IndianOil. Product substitute is also forcing company to expand its horizons in both technological way and promotion methods.

(http://www.tribuneindia.com/2005/20050118/edit.htm

Competitive strategy

IndianOil is very large retailing, E&P (exploration and production) industry leader. The cost efficiency is the best competitive strategy as the in the large production is done on the lower cost. In the oligopoly structure of the market for the IndianOil, the company has homogenous products in the market .the companies can capture the market by the creating the difference in the product by promotions and providing the value added services .value added services include extra care for the customers, providing services in the less explore areas Indian oil has drawn up comprehensive plan to tackle emerging competition in oil and gas retailing sector, by unveiling the new brand of ‘Swagat’ petrol pumps on high ways .

The exploration of the rural market where company can expand .the company has adopted the two methods of the promotion to optimised the marketing strategy which are Thematic and Schematic .the promotion of the brands through print and television advertisements whereas ,Schematic approach involves dealer incentives and other sales promotion such as customer incentives and local communication. the problem in this the unorganized process in this strategy but if the company has targeted market .IndianOil has expensed Rs 89.98 crore in 2006-2007 as compared to 139.18 crore 2005-2006 as the PMO (Prime Minister Office) directed to cut unnecessary the advertising .the down stream companies has to follow the governmental polices while fixing the prices .the downstream companies has started to extend the refining capacities of the company .the company is extending the business to international market .overall, IndianOil is performing role of the public sector unit ,which is moving the whole industry upwards (Hiroyuki Ishida ,2007)

(http://eneken.ieej.or.jp/en/data/pdf/388.pdf)

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