E Mba Og Jan2012

E-MBA (Oil & Gas)-Marketing Management: End Semester Exam- 2012 Page 1
Section A Objective Type Questions 1 x 2= 20 Marks

QUESTION NO:1

a. Marketing is applicable to services and __________ as well as to tangible products.

1. Idea 2. Intangible 3. FMCG Products

b. In most cases, sales correlate negatively with ____________

1. Price 2. Quality 3. Quantity

c. Marketing involves voluntary "exchange" _______________

1. Relationship 2. Partnership 3. Consideration

d. In analyzing a firm's marketing environment it is usual to use the model known as ___________
analysis.

1. PESTE 2. SWOT 3. BCG

e. In the ____________strategy, all consumers are treated as the same, with firms not making any specific
efforts to satisfy particular groups.

1. Undifferentiated 2. Differentiated 3. Concentrated

f. _____________ are subject to the choices and policies that the organization has made.

1. Plans 2. Objectives 3. Strategies

g. The _____________level Planning, is to allow managers to specialize and increase managerial
accountability.

1. Functional 2. Middle 3. Corporate

h. _____________goods are goods in which the consumer is willing to invest a great deal of time and
effort.

1. Shopping 2. Convenience 3. Specialized
i. The punch line Those who love, get insured in an advertisement states ____________ value.
Name of the Program: MBA (OG)
Course Title: Marketing Management.

This question paper has pages.


1. Memorizing 2. Conviction 3. Educational

j. Identify the major determinants of demand

1. Satisfaction 3. Information 3. Need

Section B - Short Answer Questions 4X5 Marks = 20 Marks.
Answer any Four out of Five Questions: Use Real Life Examples where Ever Needed.

Q2. The core principles of Marketing incorporate Marketing Mix, Principles of marketing exchange,
market orientation and relationship marketing? Do you think that Relationship Marketing can hold good
in case of Petro Retail as it do in Case of other B2B and B2C Product Categories?

Q3. The marketing manager is needed to forecast what is likely to happen, in the future in order to adopt
an appropriate marketing strategy. The forecast includes consideration of outside uncontrollable forces as
well as internal proposed changes in the marketing strategy. As a marketing manager for petro Retail
identify, the factors affecting sales forecasting?

Q4. How do the psychological factors Influence Market Segmentation?

Q5. Products come in several forms and categories. Describe how each Category of product is different
from one another?

Q6. The business portfolio is the collection of businesses and products that make up the company. The
best business portfolio is one that fits the company's strengths and helps exploit the most attractive
opportunities. Based on GE-Matrix there are different kinds Strategies that are available for the SBUs
while in each of the grids. Explain Strategies that are available at each stage of GE Matrix with example?

Section C Descriptive Type Question 2X15 = 30 Marks
Answer any Two out of Three Questions: Use Real Life Examples where Ever Needed.

Q7. When you decide to target more than one segment and focus the marketing mix towards the need of
each segment, you are practicing differentiated marketing? Do you agree with the fact that differentiated
marketing is expensive than undifferentiated? Support your answer giving real life example? Can the
concept of differentiated marketing be applicable to Petro Retail?

Q8. Linked to the warehousing decision are the inventory decision-the right response to which may hold
the key to success for many manufacturers especially those where the inventory cost may go as high as
30-40%. Inventory decisions make logistics managers think as to how much to re-order. You are required
to identify the EOQ from the given facts as under:

a. Annual Demand for industrial fuel @ 1000 units / week
b. Order Processing cost of each order is @ Rs 5000 / order process
c. The value of the unit is Rs 500 / unit
d. Inventory Carrying Cost is 18%

Q9. Marketers have developed quite an array of pricing technique to help set initial price levels. Classify
and illustrate such pricing techniques? As a marketer of Lube Oils, which technique among the identified,
would you like to adopt for you product and why?
Section D Analytical / Case Study 30 Marks

QUESTION No: 10
CASE STUDY:

ONGC India: In Search of a
New Growth Strategy

RS. Sharma had been delighted to hear the news of his confirmation as the new chairman and
managing director (CMD) of Oil and Natural Gas Corporation (ONGC). He had witnessed
the sharp decline in the relationship between the top brass of ONGC and the Petroleum
Ministry of the government of India. The friction had focused on the disagreements over the
future strategic direction of the company. It had cost Subir Raha, the chairman and managing
director (CMD), his job. Sharma had taken over the helm of the company upon Rahas
departure as interim CMD.

Raha was credited with a major transformation of the public sector behemoth from
2001-2006. During his tenure, sales at ONGC rose from Rs. 22,841 crores
1
to Rs. 50,900
crores (approximately 5.7 billion to $12.7 billion), and profits rose from Rs. 6,197 crores to
Rs. 14,175 crores (approximately $1.6 billion to $3.5 billion). In 2007, the company was
ranked as the best E&P Company in Asia, third among global E&P companies, and 23rd
among global energy companies by Platts Top 250 Global Energy Companies.

Raha had articulated a bold vision to recreate ONGC as an integrated player with a global
portfolio of assets in both the exploration and refining ends of the business. The company had
quickly capital- ized on Indias newfound market credentials to buy properties in far-flung
countries, and had managed to cobble together an integrated structure that spread well into the
retail stream as well. However, crude production had stagnated at around 30 million tons a year,
and, despite significant investment in exploration, ONGC had been unable to make sizable
finds. The Petroleum Ministry had become concerned that ONGC was not living up to its
founding objectives that clearly emphasized its central role in exploring and exploiting Indias
energy reserves, and was instead launching new initiatives that took it farther away from its
core purpose. This proved to be the genesis of major differences between management and
ministry.

Upon assuming charge as the interim CMD in May 2006, Sharma had assured
stakeholders that The rich legacy of Mr. Subir Raha will continue, and all efforts will be made to
take the organization to the great heights which Mr. Raha has envisioned. The transition will be
smooth, maintaining the culture of performance, in cooperation with all stakeholders.
2
Now that
he had been confirmed as the new CMD of ONGC, it remained to be seen whether he would
vote to stay the course or make corrections. The pressure to see better E&P (Exploration
and Production) performance was building, and there were visible signs that the forays into
refining, retailing, and global markets that Raha had engineered were coming under fire. It
would be Sharmas role to write the next chapter of the companys strategy.

The Exploration and Production Landscape in India

The U.S. Geological Survey World Petroleum Assessment of 2006 reported that India had
about 5.4 billion barrels of proven reserves and about 10.6 billion barrels of undiscovered
deposits. Applying
2006 consumption rates, it was determined that these reserves would last a mere 20 years.
3
Given the economys projected growth rate of around 7-8%, demand was expected to outstrip
supply much sooner. Industry watchers expected India to become the worlds fourth largest
energy consumer by 2010.
4
(See Appendix I for a pictorial representation of the structure of the
oil and gas business in India.) It was the sixth largest consumer in 2006, and was already
importing 70% of its oil needs mostly from Nigeria, Saudi Arabia, Kuwait, and Iran. The
competition for new reserves was intensifying worldwide, exacer- bated by Chinas equally dire
need for more oil to fuel its own economy.

The search for oil in India commenced in 1866 in the Upper Assam region located in the
northeast of the country. The first find was made in 1889 in Digboi, a region that continues to
produce today, albeit at very marginal levels. It is arguably the worlds oldest continuously
producing field. Over time, this strike had been followed by other finds in Bombay (now called
Mumbai) High offshore, the Krishna- Godavari (KG) basin, Rajasthan, and the Cauvery basin.
(Appendix II shows the geographic locations of Indias major reserves and prospect sites.) In
1997, the government realized that advanced technology and deep pockets were needed to
explore in the remaining geologically challenging areas, and therefore decided to open the E&P
sector to foreign and domestic private firms. The New Exploration Licensing Policy (NELP)
was enacted in 1997 to invite capital and technology. Appendix III identifies the salient features
of the NELP program.

ONGC dominated the exploration and production business in India, with 57% of
exploration licenses covering more than 588 thousand Km
2
. It accounted for close to 80% of
both Indias domestic petroleum and natural gas reserves. The Mumbai High field situated
offshore in the Gulf of Cambay was a joint discovery by India and Russia. Considered to be
the pride of Indian E&P efforts, Mumbai High produced around 400,000 b/d at its peak in
1989, and had then started a steep decline. ONGC had invested very large sums of money in
new technology to increase the recovery rate from these fields, but, despite its best efforts, the
recovery hovered around 26-28% compared to average rates of 40% worldwide.

Raha had invested substantial sums to launch and sustain a deep-water program, among
the largest in the world. The Sagar Samriddhi program (roughly translated as self-sufficiency
from the ocean) cost more than $2.5 million a day and was expected to find about 11 billion
tons of oil in the waters off Indias east and west coasts. However, the program had proven to be
lackluster at best in terms of finds with 11 dry wells within a short time period.
5
Raha had
famously observed, Digging dry wells is a learning experience. The finds in the Krishna-
Godavari basin, the Cauvery basin, and the finds at Panna and Mukta, both in the Arabian
Sea, fell far short of the expectations for the ambitious program.

Exhibit I shows the major discoveries reported under the NELP program.

Although some junior independents had found success in India, the international majors
chose to sit on the sidelines. For example, when the bidding for NELP Round VI opened in
2006, the Direc- tor General of Hydrocarbons had received bids from 135 firms, including some
large players such as BP, Total, and Eni. However, when awards were announced, none of the
big players were on the list. Some of the larger foreign players complained that it was
impossible to match the terms and conditions that the winning bidders had offered.


Exhibit I. Discoveries Made in India (99-00 to 06-07)
6

No. of Discoveries

Name of Company

Oil

Gas

Relinquished

Total
Commercial
Approved
Development
Approved
Under
Evaluation
Cairn Energy 19 4 1 22 9 8 13
Reliance Industries Ltd. 3 20 0 23 9 2 14
ONGC 0 5 0 5 0 0 3
Gujarat State Petroleum 4 2 0 6 0 0 6
Essar Oil Ltd. 1 0 0 1 1 0 0
Focus Energy 0 1 0 1 0 0 1
BG Exploration 1 0 0 1 0 0 1
Niko Resources 0 2 0 2 2 2 0
Hardy 0 1 0 1 0 0 0
Total 28 35 1 62 21 12 41

A losing bidder from an international oil company complained, Government-owned
companies bid aggressively and are expected to win most blocks. We believe that some of their bids
are not economically viable. In some cases, the investment recovery was as low as 20%....Some
bidders had even agreed to share
90% of their profit with the government even before recovering their investments.
7
The results of
the NELP Round VI indicated that ONGC had once again won the lions share of the acreages
that were up for bid.

Cairn Energy was perhaps the most successful foreign entrant in India. Its million-barrel
oil discovery in Rajasthan in 2004 was second only to Mumbai High offshore that came in
the early 1970s. Growing from its Scottish roots, Cairn had established a firm footing in India
since the country opened its doors to foreign investment. It operated Indias largest privately
held oil field and had interests in 15 blocks in the country. Seeing its fortunes rise after the
Rajasthan find, the company had floated an initial public offering (IPO) that was a
resounding success, attracting the interest of other oil firms in the region such as Petronas of
Malaysia. It had a fairly high success ratio in its prospecting activities and reported more than $1
billion in revenues for 2006. Its strength originated from its technology resource base and the
fortuitous strikes it had made in Rajasthan. It estimated that it had access to about 3.6 bn boe
(barrel of oil equivalent) in Rajasthan. In addition to this property, it had been operating in the
KG basin, Gulf of Cambay, and the under explored northern regions of the country. Many of
these projects were pursued as joint ventures with ONGC under production-sharing contracts.

Oil India (OIL), a government-of-India company, was another E&P company pressed
into service to help India meet its energy needs. The company originated as part of the
Burmah Oil Company that operated in Assam in northeast India for many years. While its
strikes had mostly been limited to the Assam region, it had obtained interests in a few other
blocks in Rajasthan, Western offshore, as well as the KG basin. It had also launched an overseas
exploration program by acquiring interests in Libya, Gabon, Nigeria, and Yemen. Some of
these properties had been acquired in conjunction with other Indian public sector enterprises
such as IOCL and ONGC.

Indian Oil Corporation (IOCL), the countrys largest refiner, had been recently permitted
by the government to engage in E&P activities, both in domestic fields as well as foreign
properties. IOCL had not been active in domestic exploration, however, having limited itself to
a few assets in Indias northeast. It had bid jointly with OIL for blocks in Libya, Iran, and
Gabon.

Reliance was the largest domestic private sector entrant in the E&P segment. The Reliance
Group was among the largest in India with extensive interests in petrochemicals,

telecommunication, retail, and a host of other economic segments. It had posted outstanding
results in every sphere of activity it had entered. Although a relatively late entrant to the E&P
segment, Reliance controlled exploration rights in 34 domestic blocks and two foreign
properties in Yemen and Oman. It was also active in five coal-bed methane projects in India.
The pride of place in its E&P stable belonged to its properties in the KG basin off the eastern
coast, where it had found gas estimated to be around 7 trillion cubic feet, the biggest find in
2002 worldwide. It reported a success rate of 74% for all wells drilled, a feat that remained
unmatched in the country. Its foray into the E&P sector was matched by an equally audacious
position in the refining segment. Its refinery in Jamnagar in the state of Gujarat processed
660,000 bpd (barrels per day), was the third largest such facility in the world. In August
2007, the company had announced a plan to invest $14 billion over the next few years to
intensify its exploration activities. It had entered into several partnerships with ONGC, Niko
Resources, BG Exploration, and other E&P companies to bolster its exploration program in
the country. It planned to dig more than 100 wells in three to four years, and had initiated
actions to procure seven rigs, mostly for deepwater use.

Although the Director General of Hydrocarbons (DGH) had intended to launch the
seventh round of NELP in August 2007, the process appeared to be delayed. Given the
worldwide rig shortage, the DGH felt that successful bidders might not be able to complete
test wells in the time frame stipulated on winning bids. There was another complication
regarding the sanctity of PSAs. The concern arose from pricing gas that was to be produced
by Reliance at its find in the KG basin. The original terms that were offered at the time of
bids stipulated that gas and oil when found and produced from the leased properties could be
sold at prevailing market prices. However, when Reliance was ready to produce gas from its
KG basin asset, it encountered stiff opposition from the fertilizer companies and power
generation units, two of the largest buyers for its gas. Ironically, one of the leading voices of
protest was that of the Anil Ambani Group, a company that had cleaved from the original
Reliance Group when the Ambani brothers had a public feud over the ownership of the
company upon their fathers death. The Anil Ambani Group had banked on lower gas prices to
fuel a mega power plant that it was commissioning.

The government had appointed a ministerial-level commission to examine the pricing
structure for Reliances gas. Seeing the writing on the wall, other NELP block holders
protested loudly. The managing director of BG Exploration, William Adamson, wrote to the
cabinet secretary, saying that this prelude to a renegotiation of gas prices would dampen
the pace of exploration and erode the confidence of the international companies in
forthcoming bidding rounds.
8
Hardy exploration vice president Ashu Sagar said, Any action
to renege on commitments will weaken investor confidence, not only in NELP but also in
Indian contracts.
9
BP country head Ashok Jhawar said, Subsidies in energy pricing should
come at the consumer end; otherwise, countries which set an unrealistic wellhead price for gas
will suffer from lack of exploration and development since exploration investment tends to flow
to higher priced locations.
10

The Refining and Marketing Landscape

India was gearing up for a boom time in refining. The government had announced
plans to increase its refining capacity from 2.6 million bpd to 4.84 million bpd (240.96 million
tons per year) by
2012. It had a small excess of capacity in 2007 since it consumed 2.2 million bpd against an
installed base of 2.6 million bpd.
11
Indias state-owned companies had entered into joint venture
agreements with overseas competitors from the Middle East and elsewhere to commission
much of this capacity expan- sion. Kuwait Petroleum Company, Saudi Aramco, Shell, and
Oman Oil Company were a few of the foreign partners who had signed construction deals
with Indian refinery operators to build new plants. This explosion in capacity clearly

underscored Indias potential as an exporter of refined products.

Exhibit II. Installed Capacity and Throughput for the Refining Sector

Refinery Crude Throughput ('000 tonnes) Installed Capacity
Refiner 1991 2001 2002 2003 2004 2005 2006 2006 Cap. Utln%
IOCL 23742 33226 33761 35288 37659 36628 38522 41350 93.2
HPCL 9230 11980 12347 12929 13699 14329 14229 13000 109.5
BPCL 6957 8683 8744 8711 8757 9138 10298 12000 85.8
CPCL 5698 6625 6689 6819 7040 8923 10362 10500 98.7
MRPL

6438 5487 7253 10069 11809 12014 9690 124.0
RPL - 26033 29654 30544 32345 34309 33163 33000 100.5

Source: Government of India, Petroleum Statistics 2006.

Indian Oil Corporation (IOCL) was Indias largest refining and marketing company
(R&M). With annual turnover of approximately $51 billion (2006), it was ranked 135th in
the Fortune 500 index of global corporations and as the 20th among petroleum companies
worldwide. Its assets were spread across 10 refineries, a pipeline network spanning 9300
kilometers, and 11,739 retail gasoline outlets. In recent years, IOCL had set out to explore
new horizons in both downstream and upstream operations. It had already enhanced its
capabilities in the area of petrochemicals, and was exporting significant volumes to
neighboring countries in Asia and the Middle East. It had expanded its retail network to
reach Sri Lanka and its bunkering business into Mauritius, the Middle East, and East Africa.

Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat Petroleum Corporation Ltd.
(BPCL), two other major state-controlled
12
companies, were active in refining and marketing.
HPCL had two refineries that controlled roughly 10% of overall refining capacity. A third
refinery was in the planning stage. It had also invested in a minority share of another state-
owned refiner, Mangalore Refinery and Petrochemicals Ltd. (MRPL). Given the liberalization
of constraints governing state-controlled companies in the country, HPCL had evinced keen
interest in pursuing a strategy of vertical integration. It was not only expanding its refining
potential, but was also entering the exploration arena through alliance relationships with other
firms.

Exhibit III. Retail Outlets for State-Controlled
Downstream Companies

Source: Petroleum Statistics, 2006-2007. Ministry of Petroleum and
Gas, Government of India.

BPCL was the third state-owned refinery that managed two refineries, and it also managed
2,123 gasoline retail outlets. It had evolved from the old Burmah Shell that was nationalized
COMPANY %
BPCL 25
HPCL 25
IOCL 38
IBP 12


by the government in the 1970s. It, too, was building a third refinery with six million tons
per annum capacity in Madhya Pradesh.

Collectively, the state-controlled refiners had a lock on domestic refining capacity. They
had en- joyed a protected status for a fairly long time and had built mini-empires in both the
refining and retail ends of the industry. However, private competition was already on the
horizon. Since many of the existing state-owned refineries were old, they did not have the
ability to handle complex crude, further exposing them to downside risks.
13
This was an area
in which private players were seeking to gain an advantage.

Reliance Petroleum Ltd. (RPL) had emerged as one of the formidable players in the
downstream business. Reliance Industries, one of Indias largest companies that had made its
fortune in textiles, polyester filament yarn, and associated petrochemicals, had floated RPL to
establish a foothold in the refining business. It complemented Reliances efforts upstream. It
had an installed capacity of 30 million tons per year (0.6 million barrels per day), making it
the worlds third largest refinery. It was in the midst of doubling that capacity and was set to
commission a second refinery that had a Nelson com- plexity rating of 14, thus enhancing its
ability to process heavier, sour crudes that traded at a discount compared to the light, sweet
variety. Chevron-Texaco, the U.S. major, had invested 5% in Reliances refining venture, and it
was expected that RPL would export up to 40% of its refined output to developed markets,
mostly in the U.S.

Historically, refining investments had been the Achilles heel of petroleum companies.
Integrated super majors in the U.S. and elsewhere had been quite reluctant to invest in
downstream refining after having suffered serious losses in the 1980s-1990s when worldwide
capacity overhangs combined with declining demand to wipe out profits. Environmental
regulations and mandates had made it extremely difficult to establish greenfield refineries in
the U.S. The refiners had become particularly adept at de- bottlenecking and technology
improvements to increase yields from their historical refining investments. However, there
was periodic overcapacity in the Middle East and Singapore, two locations within easy reach
of India.

Some industry watchers had predicted an average refining surplus of 17.5% by the end
of the decade, even assuming that the massive capacity that Reliance was bringing online
would be mostly exported.
14
The optimists, however, were touting Indias growing demand for
refined products, widely expected to accelerate at an average annual rate of 4.5%.
15
Competing
projections at that rate of growth showed that a substantial capacity increase would be needed
even for the domestic market.

The Indian government had historically maintained an Administered Price Mechanism
(APM) that included a complex system of subsidies and shadow prices in order to insulate local
prices from the vagaries of international market fluctuations. This usually resulted in the
upstream exploration and production companies having to foot a significant portion of the
oil bill by pricing their production lower than world market prices. Pure refiners were also
called upon to support the system of artificial prices and hence shared in the subsidies. In
2002, the country announced that it was dismantling the APM approach, although within two
years of doing so, the government was intervening once again to keep prices low when crude
prices started to move upwards quickly. This new round of intervention was less transparent and
more ad hoc. For example, customs duty on imported crude was pegged at 5%, while
refined product imports were charged 10% duty. This assured that the refiners would be well
protected from foreign competition. It was widely believed that the refiners would be less
profitable if market prices were introduced along with a level playing field that was not punitive
to imports. It was reported in 2006 that ONGC alone was subsidizing consumers to the tune

of $1 billion annually, and the marketing companies were losing $51 million a day.
16

The Oil and Natural Gas Corporation of India

ONGC evolved from the Oil and Natural Gas Directorate set up by the government of India
in 1955 to oversee the exploitation of the countrys oil and gas deposits. The company had
originally been chartered to plan, promote, organize, and implement programmes for
development of Petroleum Re- sources and the production and sale of petroleum and
petroleum products produced by it, and to perform such other functions as the Central
Government may, from time to time, assign to it.
17
The company had been quite successful in
its initial forays into exploration and production. It had discov- ered deposits in Assam and at
Mumbai High offshore. Armed with the lions share of Indias oil and gas reserves, ONGC was
among the largest companies in the country and quite profitable. It had reported sales of
$19.237 billion and net profits of $3.929 billion in 2006, making it the largest Indian Fortune
Global 500 company. Subir Raha, who took over the reins of the company in 2001, was largely
respon- sible for this meteoric growth. Appendix IV provides historical performance data for
ONGC.

Rahas climb to the top of ONGC was indeed an illustrious one. He had joined Indian
Oil Cor- poration (IOCL), the refining company, as a management trainee in 1970. With a
background in electronics and telecommunication engineering and subsequently an MBA from
Leeds, Raha rose through the ranks of IOCL, holding several portfolios ranging from Human
Resources to Marketing and Busi- ness Development. During his tenure at IOCL, he had
revolutionized fuels marketing, creating fully computerized terminals for product sales, and
developing Indias first convenience store concept. Along the way, he oversaw the
implementation of the largest SAP project in South Asia, and was nominated to the board of
directors of the company.
18
After 31 years at IOCL, including a short stint in the Petroleum
Ministry on secondment as the head of the Oil and Gas Coordination Council, he was chosen
to run ONGC, widely considered the backwaters of the petroleum business in India.

Winds of Change at ONGC

When Raha arrived, he saw an organization that seemed to be plodding along solely on the
basis of its past performance. In 1999, McKinsey, the U.S. consulting company, had predicted
that ONGC would soon become a sick company, insolvent and beyond repair should it
continue on the same trajectory. It had crippling systems of government control over its strategy,
a competent group of technical personnel with flagging motivation, and a fairly serious
problem with overstaffing. Its portfolio of producing assets was quite weak with Mumbai High
alone accounting for roughly 40% of production and another
14 fields contributing 35%. The rest of its production came from over 100 fields. Although
it was profitable, there were hardly any signs that it would live up to its full potential.

Raha provided the company with a new vision to galvanize the troops into action. He
declared that ONGC would fulfill its key role in ensuring Indias energy security by locating
reserves worldwide. He announced plans for a coal-bed methane (CBM) project in the state
of West Bengal, deepwater exploration projects in the KG basin, and a redoubling of efforts by
ONGC subsidiary ONGC Videsh Ltd. (OVL) to bid for acreage outside India. He sought to
breathe new life into a staid and stodgy organization.

ONGC, like most of its state-owned counterparts, had a workforce that had a sense of
entitlement rather than performance-oriented progress. This had led to a bloated middle

that was protected by archaic labor laws that prevented management from enforcing
performance discipline. A voluntary retirement program was announced fairly early in Rahas
tenure, and the offer had the positive effect of reducing the ranks by 10%, an uphill
accomplishment. Internal systems were revamped to make the organization function smoothly.
The company had been bogged down by bureaucratic delays in critical project approvals because
of the sheer number of executives who had to sign off on almost anything of consequence.
This had crippled the organization, and many technology vendors had balked at the
prospect of bidding for ONGC contracts. All contracts were subject to tendering, and
technology firms were reluctant to submit their technologies to the tendering process given
the inherent competitive secrecy involved and the long gestation period for such tenders.
They preferred negotiated contracts instead. When ONGC had resorted to such contracts, it
was constantly second-guessed by the Ministry of Petroleum. As a result of these systemic
problems, some believed that ONGC was behind in technology by 5 to 10 years.
19

One of Rahas very early moves as the new CMD was to revamp the entire decision-
making structure of the company by eliminating bureaucratic layers of staff approvals. He
sought to create a more flat structure that could make decisions quickly. In achieving this
end, he sought to push au- tonomy down the chain. These changes resulted in significant
improvement with respect to the tendering process. New tenders were being decided on in a
matter of weeks as opposed to months under the old system.

It seemed evident that ONGC would have to improve the quality of its talent pool if it
were to realize the vision that Raha had created. In boosting high-performance behaviors, the
company instituted incentive plans targeting innovation and productivity. These incentives
were targeted at both individual and group performance. The organizational structure was
reworked to allow for autono- mous decision-making within the constraints of state
ownership. A comprehensive redesign of the entire performance appraisal process was also
initiated. The resulting process won ISO 9001 certifica- tion and spanned all key elements of
the HR discipline from learning benchmarks and work culture analysis to succession planning
and leadership development. Four new performance reward schemes were also
simultaneously launched to infuse the company with a performance orientation. ONGC
created a management development institute, christened as the ONGC Academy, to focus on
providing leadership and technical training to its employees.

The company also moved swiftly to put its financial house in order. It had a very heavy
interest and tax burden, especially because of the significant foreign loans it had to service.
R.S. Sharma, then CFO of ONGC, recommended that the company use its plentiful but idle
cash reserves to pay off its foreign debt. The remaining cash was plowed back into the business.
These actions resulted in significant savings in terms of both taxes and interest. In 2004, the
government decided to sell off a portion of its holdings as a move to attract private capital to
ONGC. The initial public offering for the 10% stake was oversubscribed three times in a span
of 20 minutes, a record for the Indian stock market. As of 2007, the government of India
owned 74% of ONGC; IOCL and Gas Authority of India Limited held 7.69% and 2.4%,
respectively, as a result of cross-holding agreements; while institutional investors, employees,
and the public held the remaining shares. In 2007, ONGC represented 10% of the market
capitalization represented by the Mumbai Stock Exchange, the largest stock market in the
country.

International Forays and the Path of OVL

When Raha came on board, ONGC subsidiary OVL had one property in Vietnam. It had
originally been created in 1996 to prospect for oil and gas in foreign markets. After all, India
had 15% of the worlds population but only 0.5% of energy reserves, making foreign

exploration crucial to energy security. OVL was given the powers to draw talent from
ONGC and elsewhere solely on the basis of merit. The government designated OVL as Indias
nodal agency in all bilateral energy discussions initiated by the government, thus giving it a
ringside seat to shape Indias energy security. As of 2006, OVL had invested $4 billion out of its
investment budget of $5.1 billion and controlled 25 properties in 18 countries. (Appendix V
provides a listing of key OVL properties around the world.) Its growth had been meteoric, and it
had demonstrated the ability to align itself with industry leaders such as Exxon Mobil in the
Sakhalin I project, Petronas of Malaysia in Sudan, and BP in Vietnam. It was also the
designated operator in many of the projects. It reported reserves of 206,109 MMTOE
(million metric tons of oil equivalent) and production of 6.34 MMTOE in 2006. The goal was
to produce 20 MMTOE by 2010 and 60 MMTOE by 2025.

OVL had formed a joint venture with the highly successful Mittal group, the steel
company that had an enviable record in oil-rich emerging markets. Named ONGC Mittal
Energy, this partnership was born from a promise to open doors in challenging markets using
the relationships that the Mittals had established in building their steel empire. Despite the
potential of this alliance, OVL faced stiff competition for acreage.

China and its national oil companies had shown a voracious appetite for prospecting
acreage, and hence had gone head-to-head against India and OVL in several auctions. While
China had the financial strength in foreign exchange reserves to pay high prices, OVL was
forced to rely on Indias diplomatic standing and goodwill. China had increasingly shown an
ability to package development assistance innovatively to resource-rich countries in Africa and
elsewhere as a means of obtaining favorable terms. The battle for reserves between China and
India came to a head when both OVL and China National Petroleum Company (CNPC) bid
for PetroKazakhstan, a Canadian-owned company with assets in the Central Asian Republic of
Kazakhstan. CNPC was allowed to re-bid after all bids were unsealed and, having offered
$4.18 billion, was declared the winner. Although OVL was also given an opportunity to re-bid,
the offer was summarily withdrawn and CNCP was awarded the rights. The petroleum minister,
Mani Shanker Iyer, complained, The goalposts are being changed after the match has
begun.
20
OVL had lost to CNPC in Myanmar and to Sinopec in Angola. Reflecting on these
losses, India and China forged a bilateral partnership agreement where both countries had
decided to cooperate in future bids. Following this agreement, OVL and CNPC won a bid
for 38% of Al Furat Production Company, Syrias largest oil producer, and later with Sinopec
for 50% of Omimex de Colombia.

A New Dawn for ONGC

Raha had been the architect of an integration strategy that called for a move into the
downstream segment. He wanted to transform ONGC into Indias first integrated major in the
petroleum business and set about accomplishing that task. In 2003, an opportunity to
implement this strategy presented itself in the form of MRPL (Mangalore Refinery and
Petrochemicals Ltd.), a privately held refining complex that had fallen on bad times due to
the vagaries of Indias price control system. ONGC acquired a 71.6% stake in MRPL for a
price that was widely believed to be about a tenth of what it would have cost to build a refinery
with equivalent capacity from the ground up. This was followed by a move into the retail end
when the government opened fuel marketing activities to new entrants. ONGC had obtained
licenses for a retail network and had opened a few fuelling stations by 2005. Ownership of
MRPL meant that ONGC could sell its crude to the company at arms-length prices and
then sell refined products through its own petrol pumps. That way, the oil subsidies that
ONGC was financing would stay within the fold.

Vertical integration was an approach that promised to give ONGC control of its own
destiny. Further, it offered the company wider flexibility in monetizing its assets, a crucial

P
o
or

determinant of success. For example, Cairn India had been struggling to monetize its huge
find in Rajasthan because it did not have control over the pipeline that would carry its oil to the
market. ONGC was a key partner in the pipeline venture and possibly had a good appreciation
of what could go wrong if the company did not have control over the entire hydrocarbon
chain. Raha had observed, Integration along the hydrocarbon value chain is not a matter of
choice for a company with a global footprint; it is an imperativewe have to squeeze every
available paise
21
out of every molecule of crude. We have to become a part of the crude cycle,
the refining cycle, and the product cycle to tide over any downturn in any one of them.
22

Exhibit IV. Crude Prices and Refining Margins for Indian Producers

Source: ICICI Securities. Aug. 10, 2007.

The vertical integration strategy was not without its detractors. There were loud
complaints that ONGC was entering into areas where it had no expertisecoal-bed methane,
underground gasification of coal, power generation, LNG, and petrochemicals were all
uncharted territory for the company. The major concern was that ONGC had lost its focus on
exploration, the primary reason for its constitu- tion. While many others had made sizable
discoveries following liberalization, ONGC had lagged behind. Ironically, the major finds
made by competitors originated in areas where ONGC had been active for several years.

Some industry experts blamed the internal organization of ONGC and the quality of its
geoscientists for the poor record. Unlike the oil majors who typically employed a multilayered
system of evaluation, appraisal, and decision-making, at ONGC the team with the most
clout, often comprising the most senior staff or the local manager, made the call about where to
drill. Absent a system of checks and balances, it appeared that the company was relying on the
power of a few to make good decisions. The industry used an exploration ratio of 1:2 as a
benchmark to evaluate drilling performance (drill two wells to find one with potential).
ONGC averaged 1:4 or 1:5 for on-shore and 1:10 or worse for deepwater.
23
Eleven of its
deep-water wells in the Sagar Samriddhi program came up empty, and overall production
had hardly budged from 30MMT per year. If one applies global averages, ONGC should be
producing 80 MMT per year, said V.K. Sibal, the director general of Hydrocarbons.
24


Some analysts believed that ONGCs poor track record was due to its inefficient data
analysis structure. It lacked a central repository where all the data from its prospective
fields were analyzed. Instead, this was done in a piecemeal manner, reducing the flexibility
and speed at which decisions could be made. The expense of hiring drilling rigs was another
key consideration. Since the rigs cost a huge amount of money to deploy, ONGC did not
take much time to evaluate data methodically. Instead, it was focused on maximizing rig
utilization, thus compromising its ability to strike oil. It had also justified this approach based
on the fact that there was a global drilling rig shortage, thus eliminating the possibility of
thorough analysis. In contrast, companies like Reliance usually signed drilling contracts on a
job charter basis only after they had completed exhaustive seismic data gathering and
interpretation. By 2006, ONGC had spent Rs. 3000 crores (roughly $616 million) in three
years and had drilled an embarrassing 20 dry wells.
25
To complicate matters further, the
company had lost more than 200 engineers, geologists, and geoscientists to Reliance, a trend that
promised to accelerate further.

Raha was widely seen as being very dismissive of Indias potential for oil and gas, and
even the official company Web site characterized Indias prospects as limited. In contrast, Bill
Gammell, CEO of Cairn India, after striking oil in Rajasthan, observed, Ive always said for
years that India is hugely unexplored.
26
Expressing a similar point of view, Petroleum
Minister Mani Shankar Iyer observed, We have 26 sedimentary basins, which in absolute
terms is huge. But ONGC, far from being a failed company, is a company with lots of
potential. I want ONGC to focus on its core competence. Instead of trying to make up its
perceived losses in exploration by opening up petrol pumpsand worse, fertilizer plants and
power plantsI want ONGC to prove to me that its spending on exploration has reached
optimal level and the next rupee spent would be a waste.
27

The combative Raha pointed out, We are not making soap, textiles, or aluminum ingots.
In any given process, you know what the inputs are and, if you do so, you will get steel, glass,
soap, or 20 cars rolling out or so many meters of cloth. Exploration is not that kind of
business. Exploration is a risky business. It is unique. When you therefore talk of exploration,
we accept that certain wells will go dry. It took almost 200 dry wells before North Sea oil was
established.
28

Clouds over the Horizon

Raha ko jute ki nok pe rakhna hai (You must keep Raha under your shoe), S.C. Tripathy, the
petroleum secretary, was reported to have concluded in early 2006.
29
Raha seemed to have
overstayed his welcome when he publicly crossed swords with the petroleum minister. The
ministry had sought to appoint two directors to the board of ONGC, but Raha went public
with his displeasure and commissioned full- page newspaper advertisements suggesting that
the minister was trying to run ONGC like his own fiefdom. After much public haranguing,
the government withdrew its nominees and Raha had won the battle, or so it appeared. Iyer was
reassigned to take charge of the Ministry for Youth Affairs and Sports. However, when Rahas
contract came up for renewal in 2006, the ministry mandarins decided to let it lapse without
further renewal, as was the customary practice. They believed that Raha did not have the right
background for managing an E&P company, given his downstream predisposition and
skills. Some of his directors believed he was autocratic and made unilateral decisions without
consultation, a streak attributed to his success in the financial markets. In the end, the lackluster
exploration record of ONGC seemed to have weighed heavily in the decision to let Raha leave
after his contract expired.

The future of ONGC seemed to hang in balance. There was enough evidence to
suggest that ONGC was on a trajectory of growth that would lead to a prominent position

among the global players. However, there was equally strong evidence to argue that ONGC
was faltering. In its first annual report after Rahas departure, the company had focused on an
impressive array of projects under way. It had signed technology deals with global giants like
Schlumberger and Baker Hughes to obtain critical insights into redeveloping its mature fields.
It claimed that 44 of its 165 marginal fields were ready to commence regular production and
that 96% of these assets would be brought back into production over the next five years.
30
Its
alternative energy projects in coal-bed methane and coal gasification had moved from the
drawing board to an exploratory phase. Significant investments had already been budgeted for
these initiatives. It was also setting up a wind-power farm with a capacity of 50MW, and
thermo-chemical reactors for hydrogen and geo-bio reactors and fuel cells. Given the recency
of these investments, it was difficult to know whether they were indeed driven by strategy
considerations or political considerations.

The vertical integration strategy was steaming ahead alongside alternative energy projects.
Two global scale petrochemical complexes were being set up in Dahej (Gujarat State) and
Mangalore (Karnataka State). The Dahej facility was expected to cost approximately $2.8
billion and was scheduled to go online by 2010. It was slated to use naptha feedstock from
ONGC facilities close by in Hazira and Uran. Due diligence studies were under way to explore
feasibility for an additional refinery in Kakinada, close to KG basin finds. The next major find,
however, remained elusive.

R.S. Sharma had a lot of things on his plate and needed to make quick course corrections
if that was indeed his conclusion. These were the best of times or the worst of times
depending on ones perspective. Investors were eagerly awaiting Sharmas strategic vision for
ONGC. Whether it would be one cast within the shadow of Raha or one that would
diverge from his grandiose integration and diversification plans remained to be seen.

Questions:

Q10-A. Give an analytical view about the case following the Competitive strengths of ONGC in
India?

Q10-B. In its report McKinsey in the year 1999 stated that ONGC would soon become a sick
company, insolvent and beyond repair. Looking at the prevailing scenario and the statement
given by McKinsey was the big challenge for Mr Raha to initiate wind of change and formulate
strategies to survive? State the factors and steps taken by Mr. Raha for the take off of ONGC
from the point of no-return?


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E-MBA (Oil & Gas)-Marketing Management: End Semester Exam- 2012 Page 1

Section A Objective Type Questions 1 x 2= 20 Marks

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