Managing Oil and Gas Value Chain

(MOGVC) Assignment
MODULE- 5

ASSIGNMENT:
Explain the value chain of your business. You need to include your buyers and suppliers
in your value chain explanation. Identify key business processes of your each element of
business chain. What are the issues related to optimization of business processes? How
can we optimize these processes?

SUBMITTED TO: PROF. SUDHIR YADAV, IPMG

Date of Submission: 23rd September 2010

Submitted by:

DEBABRATA PANDA
Roll No. 2009 3003,
MODULE-5, BATCH: 2009
-11

dpanda@gspc.in
deba.panda@gmail.com

Phone: (91) 79 66701103

Mobile: (91) 9879506075
ASSIGNMENT:
Explain the value chain of your business. You need to include your buyers and suppliers
in your value chain explanation. Identify key business processes of your each element of
business chain. What are the issues related to optimization of business processes? How
can we optimize these processes?

I am working in Gujarat State Petroleum Corporation Limited (GSPC), which is mainly

engaged in the Exploration & Production activities both in India and abroad. GSPC is
relatively new player in the E&P sector which started its E&P operation in 1995 with
Hazira field. Within a span of 15 years, it has grown its portfolio of both exploration &
Production assets which currently are 62 Blocks, out of which 11 are overseas Blocks
located in Egypt (5), Yemen (3) , Australia (2) and Indonesia (1).

The below slide depicts the diversified business sectors that GSPC and its group
companies are pursuing the business, with the sole objective of value creation to its assets
and stake holders.

Managing KG – An Focusing on the right

GSEG sourcing
increasing stretch Expanding segments
– An
The need for a focused outside Gujarat Improving internal
integrated
international expansion processes
view
Managing finances

Upstream Downstream

GIPL
GSPC GSPL GSPC Gas GSEG
Bandwid
Transportatio Marketing Distribution th
E&P Trading Power
n
Consulti
ng

Managing Human Resources – An increasing challenge

Other corporate issues – The need for delegation

The profits of integrated oil and gas companies are derived from their participation in the
entire value chain – from source to final consumer. In generating huge surpluses from
their core activity, oil and gas companies create myriad business opportunities for other
firms in ancillary services which are often overlooked. While profitability of the
individual segments of the industry varies substantially and periodically, there exists the
vast potential for attractive returns commensurate with risks and resource availability
throughout the energy value chain and that is one of the drivers for GSPC to diversify
across the hydrocarbon value chain.
The value chain is depicted pictorially to give an overall understanding.

The upstream value chain that includes Exploration and production is the most
important activity which provides the momentum and growth in the other segments
of the value chain. The Upstream chain is provided below;

KEY BUSINESS PROCESS (shown in red circle below):

A value chain can be defined as a sequence of consecutive production activities. In the
case of the hydrocarbon sector, this value chain is the constellation of activities that
surrounds the production of hydrocarbons, including t he Upstream (extraction and
production of oil and gas), downstream processing (oil refining, gas processing and the
production of downstream petrochemicals), auxiliary industries (financial, process
chemicals, etc.), transportation (pipelines) and associated service industries as depicted
above, illustrates a simple value chain, applicable to the hydrocarbon sector.

Opportunities for profitable business exist along the entire value chain, including those
activities that are ancillary to the core production processes. Significant Marco–economic
benefits i n t he form of additional income, employment, technological development/
Technology transfer and infrastructure development also flow from an energy value
chain. The more developed the value chain, the greater the benefits that accrue to both
individual firms and the economy. The most visible activity in the oil and gas value chain
is exploration and production (E&P) or upstream phase. The E&P business is reputed
to be the most risk prone economically and physically, but it generates the highest returns
when successful. Petroleum producing wells may yield a variety of commercial streams
including oil, natural gas, condensate and natural gas liquids, which provide the company
with multiple revenue streams. The business is dominated by large vertically integrated
companies or firms with substantial risk capital. E&P investments also create a market
for petroleum services estimated at US$ 160 billion annually. These include geophysical
activities, drilling and associated services, engineering and design, sub sea engineering
construction of platform, supply and maintenance of machinery and equipment. Both
local and foreign firms are actively involved in the provision of services which absorbs
up to 80% of total E&P expenditure.

When business drivers alter the way upstream petroleum companies compete, decision
makers focus on key activities in the Value Chain. Optimization of these activities is
essential. Our technology can add value at any point in the chain, as well as across the
entire chain. Technologies of particular value in the center include operational modeling
and simulation, optimization, and asset performance prediction. Representative
technologies that span the entire E&P upstream value chain are complex data mining and
portfolio management. However, the greatest opportunities occur in the middle, at the
center of upstream production operations where competitive advantage can be
gained. Here, technology can be applied strategically, in support of core business
objectives.

Value creation in the E&P industry of the future will focus on the knowledge-intensive
activities of finding and managing oil and gas reserves and their associated risks. A new
E&P business model must include ways of shedding assets and gaining more value from
knowledge and intellectual capital. By emphasizing short-term cash flow from existing
assets, the current industry model masks longer-term advantages that are being created by
more innovative companies. To date, Web-based initiatives in E&P have focused
primarily on reducing transaction costs through e-procurement systems. While these
certainly have a role to play in our industry, like so many other industry initiatives, they
will have far more impact on short-term P&Ls than on long-term competitive advantages.

It is also to be noted on the aspects of Marketing Myopia by Theodore Levitt, product

can also be delivered as a service. “All products have benefits, to be sure, but it is the
benefits, not the product, that you want to buy. I don’t want to own a one-inch drill, I
want to buy a bunch of one-inch holes.” To an industry that drills a lot of holes, this
analogy rings particularly true. Major oil companies used to purchase drilling “products”
– ships, rigs and bits. Now they contract drilling services, which have created a
competitive advantage.

How does virtual integration apply to the oil and gas business? The E&P industry has a
history of partnering and outsourcing. In fact, outsourcing certain operations is how the
oilfield service industry was born. But the idea of sharing the value chain by virtually
integrating with best-of-breed third parties has never been widely embraced. If anything,
the chasm between the service sector and oil companies had widened under endless price
pressures and cost-cutting initiatives. Virtual integration goes way beyond traditional
outsourcing. Virtual partners and remote service providers must become an integral part
of an E&P organization’s value proposition. They must be economically aligned and
effectively integrated with the company’s internal systems, including its information
technology. The “virtual IT” system of the future, therefore, must extend far beyond the
corporation’s firewall. The Porter’s 5 principles of strategy are partially applicable as
the supply- demand relationships of oilfield services are based on crude price volatility,
i.e. higher the crude price, higher is the requirement of services by E&P companies.

The optimization of the various business process as shown in the above schematic (red
circle) in the value chain can be carried out under the following major activities in the
upstream value chain, which is the pivotal activity:

• Capital Program Optimization

• Asset Earnings & Risk Modeling
• Lifecycle Management of Assets
• Field Development Optimization
• Enhanced Recovery Optimization
• Workover Resource Management
• Real-Time Data Surveillance
• Drilling Program Optimization
• Supply Chain Efficiency
• Fleet Management & Logistics
• Organizational Design & Effectiveness

Value creation throughout a virtually integrated system is such that, even though all the
participants share the profits, the “total pie” is much larger than if only one or two
vendors dominated the market. Virtual value chains scale much faster and are more cost-
competitive than vertically integrated ones. But virtual trumps vertical only in the
presence of effective and responsive communications. That’s why the Internet will be the
the backbone of the open architecture value chain. It is to be appreciated that some of the
major discoveries in the US have been made by virtually integrated systems wherein the
university students were part of it and they had contributed to these discoveries. Hence,
future of the highly risky Upstream business will rely on value creation through a
virtually integrated system.

LNG is a highly integrated business, with most companies in the LNG business holding
equity in all stages of the value chain, which gives them the flexibility to harvest benefits
optimally. Global trade in LNG is projected to increase six fold between 2003 and 2030,
calling for massive investments in liquefaction, re-gasification and tanker capacity. The
highly interlinked nature of the energy value chain and the continuing importance of
energy in economic life create abundant opportunity for firms to participate directly and
indirectly in the industry. Opportunity beckons across the energy value chain: where are
the entrepreneurs?
Submitted by:

Debabrata Panda
Roll No. 2009 3003