Case Analysis Reliance Industries an Indian Family Business Comes of Age in Global Energy and Petrochemicals

CASE ANALYSIS RELIANCE INDUSTRIES: AN INDIAN FAMILY BUSINESS COMES OF AGE IN GLOBAL ENERGY AND PETROCHEMICALS

Submitted by: ABHISEK SINHA Sap ID: 500020708 MBA(Oil & Gas) R020212004

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KEY STRATEGIC ISSUE / PROBLEM IDENTIFICATION Reliance which started off as a trading company by Dhirubhai Ambani has a come a long way ever since. The case discusses RIL: Reliance Industries Limited headed by Mukesh Ambani which has forayed into various sectors of key importance to the development of a country i.e. textiles, oil and gas, telecommunications with vertical integration being the most important strategy of reliance. It has diversified its business by following conglomerate diversification strategy and has entered into sectors like telecommunications, power generation and hotels .The company’s policy has been of controlling the supply chain to ensure quality in whatever it offers to its consumer in order to build trust thus increasing customer loyalty. RIL by developing standard operating procedures, establishing large scale facilities that can cater to global demand has become a globally known company. The journey of Reliance from a small trading company and then step by step its entrance into textiles: Patalganga project, then petrochemicals, oil refining: Jamnagar complex, oil and gas exploration and production: KG-D6 was not without hurdles. Now the company is gearing up to make a global mark. Acquiring of US shale oil and gas, to plan aggressive bid for Iraq’s Al Nasiriya refinery project demonstrates RIL’s eagerness to globalize. For the Iraq’s project RIL would compete with CNPC (China National Petroleum Corporation) and given China’s access to low-cost base it would not be an easy game. The key problems to be addressed by RIL would be to sustain its competitive ability in light of new capacities emerging in Middle East, to compete against Chinese players who have access to a low-cost base, to be able to parlay its E&P position and become a niche player in emerging shale gas plays and to gain from diversification. These issues if not addressed will result in Reliance’s failure to make a global presence and will confine its market and business to Asia Pacific region. In order to take advantage of the global synergies Reliance needs to choose the best operating model and value-chain integration. ALTERNATIVES TO ADDRESS THE KEY ISSUES There are various factors in the external environment that will affect Reliance Industries efforts towards making a global footprint. Given the development of 2

new capacities by Middle East, the development of complex refineries in Middle East will decrease the margin of Reliance industries. Reliance has to choose different operating model and different value chain integration models in different global markets to take advantage of synergies that would develop by acquiring different global markets. For eg upstream integration model is being used by Middle East countries due to their self-sufficiency in domestic reserves and the trend in Middle East is towards petrochemical integration. Middle East refiners i.e Qatar Petroleum and Chinese downstream integrated players are planning to establish a win-win relationship which help Middle East refiners secure a market for their products and will ultimately China to secure supplies and lessen the demand-supply gap. The second most important factor that will limit Reliance Industries Limited capture of foreign markets as compared to Middle East refiners is that most of the capacity of reliance petrochemicals is naphtha based the cost of which is higher and natural gas is available at low cost in Middle East which has self-sufficiency in gas reserves. Due to this the cost of production of ethylene by Reliance petrochemicals is twice as compared to Middle East refiners. Reliance in order to sustain its competitive position relative to Middle East would have to increase its access to low-cost gas and increase its gas based capacity in manufacture of petrochemicals. Closure of North American refineries due to their declining domestic demand would though increase Reliance Industries Margin in the long run. Reliance Industries though has developed competencies nowhere to be seen in terms of infrastructure, competitive workforce, and large scale facilities but as it tries to cross borders and add more markets to its ever increasing customer base many external and internal factors will come into play. The on-going problems of reliance in its E&P sector and its deteriorating relationship at all levels in government is a problem that needs to be solved if Reliance wants to gain competitive advantage over other players in the sector. Declining gas production from KG-D6 has also hampered Reliance’s share value as well as its earnings. The types of relations that Dhirubhai Ambani had when he embarked on a journey to make India’s leading company are not seen now. The solution to this is to negotiate and create a win-win situation for both parties. 3

As the regional and global environment is changing Reliance has to determine what will really create values and make the most of their asset portfolios. In order to compete with Middle East which has self-sufficiency in oil and gas reserves and has access to low cost feedstock for its refinery and petrochemical industry the task of Reliance would to get access to low cost feedstock. The move of RIL of acquiring three US shale gas assets which includes 40% stake in Atlas Energy Inc.’s core shale acreage in Marcellus, 45% stake in Pioneer Natural Resources Co in Eagle Ford Shale acreage and stake in Carrizo’s shale acreage is smart and will give RIL access to gas reserves as well as access to technology which can be used for domestic reserves. To compete with Chinese players like Sinopec and CNPC who have access to lowcost base Reliance would have to focus on the refinery value drivers in order to draw out maximum from their asset portfolios. The refinery value drivers include factors on input side, factors on output side and factors related to management of assets used in conversion of inputs to outputs. The input factors include flexibility of switching crudes, flexibility to process local or regional crudes and balancing between local crudes and foreign crude thus increasing refining margin, other factors include choosing between pipeline imports or import by ships and optimization of assets that are being used for refining. Trading of feedstock, products is another factor that needs to be looked upon. Profiting from economies of scale is factor related to the assets that are being used for the conversion of inputs into outputs, technology is another asset related factor: technical know how in order to gain access to reserves even in difficult terrain will help Reliance Industries increase its production and give a boost to its E&P sector. For gaining access to the requisite technical know-how Reliance needs to establish partnerships with global players in the industry which is possible if reliance puts forwards proposals which create a win-win situation. The fiscal and regulatory regime of the target market is of utmost importance while deciding which customer base to target in which RIL should concentrate on the tax structure, the regulations and the external environment of foreign country. The regulations should be such that they create a smooth working environment for RIL. Another important factor is management of the supply chain and integrating the different Strategic Business Units so as to achieve technical and marketing synergies reducing cost and increasing margin of RIL making it competitive with companies like Chinese 4

players who have access to low cost base. Appropriate operating model and value chain integration strategies should be adopted in different markets in order to gain most out of the resulting synergies. Locations of refineries, logistics infrastructure are also some factors that need to be considered while managing the supply chain. There should be flexibility in terms of usage of technology, to change crude basket and operational flexibility. The output factors that include decision on markets to target for proposal of market offering, the optimization of value chain are some of factors that need to considered in order to derive maximum out of the assets put in place to cater to the demands and specifications of the customers. Yes, RIL would be able to extract profits from the large shale gas acreages acquired by it. It would help RIL to gain technical know-how of extraction of shale gas which can be utilized by the company in domestic shale gas extraction. Acquiring shale gas acreages abroad would lead to access to gas reserves which will further increase earnings of RIL. In the wake of declining domestic gas production shale gas reserves in US have come to the rescue of RIL increasing its EBIDTA. Operator experience, technical synergies can be obtained by this move which RIL can use for domestic gas production and reap benefits. RIL would gain from diversification .The company has followed conglomerate diversification and is in the following segments :textiles, oil refining, E&P, telecommunications and hotels .RIL has recently acquired a stake in East India hotels which is a widely different segment from the core areas in which has established its presence. RIL will reap profits if it uses an appropriate integration strategy which will help it gain from the synergies: technological and marketing. Synergies will reduce RIL’s expenses like promotional expenses and will increase its margin. The company can integrate its E&P business with the refining business which will give it feedstock reliability, lower cost of feedstock for its refineries and the company can gain from synergies that would come as a result of this integration. Diversification will help RIL increase its revenues as for e.g. RIL’s E&P business is suffering losses due to its reduced production from KG-D6 basin but acquiring of shale gas acreages in US, thereby entering into this niche market will benefit RIL.

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