A SWOT Analysis of Oil and Gas Industry in India 9
ASWOT ANALYSIS OF OIL AND GAS INDUSTRY IN INDIA
Oiland gas are important pillars of modern industrialized world. This isbecause, as nations and economies record growth, the same is true oftheir gas and oil industries. This has led to revolutionized people’slives and improvement of their living standards. This implies that astable and well-planned oil and gas production sustains developmentof the nation’s economy. However, due to capitalization of the oiland gas sector and different political and economic background fordifferent states as well as international regulations, the oil andgas industries are influenced by various factors.
SWOTis an abbreviation for strengths, weaknesses, opportunities andthreats. Hence, SWOT analysis is an economic evaluation tool thatseeks to provide business strategic planners with a platform toevaluate an organization’s strategic fit. This is done in relationto an organization’s capabilities within the framework of thecompetitive market (Prentice Hall, 2003: 92-103). The rationalebehind SWOT is to evaluate and establish the most appropriate way foran organization to apply its strengths in exploiting opportunities.SWOT also seeks to identify the prevailing weaknesses of anorganization in line with perceived and anticipated threats.
Theuse of SWOT, if appropriately implemented, is expected to lead topragmatic option set in preparation for action. In the first place,SWOT will seek to identify those factors that lead to a morecompetitive organization in comparison to other peer firms. These arethe strengths possessed by the organization and are to be used in therealization of the organization’s set objectives. They may includethe organization’s assets like capital, patents, as well asequipments.
Secondly,SWOT looks at the aspects of the organization which are perceived aslimiting factors. Such factors lead to poor or weak performance ofthe organization. These weaknesses include poor technology, low levelof expertise and lack of enough resources. Thirdly, SWOT seeks toestablish perceived favorable impact of the organization’s futureoutcomes in terms of the demand of its products. When an organizationtakes advantage of perceived opportunities in the future market, theresultant is enhanced competitiveness.
Fourthly,SWOT evaluates perceived threatening factors from without theorganization. Threats may lead to a disastrous impact on theorganization’s prospects. This would impact on the competitiveposition of the organization. Some threats may be external and beyondthe control of the organization. They include new severe governmentand international regulations, unreasonable rise in the prices ofsuppliers, among other factors. If threats are identified andappropriately assigned their probability of occurrence, then thestrategy leads to a generation of contingency plans. This in turnoffsets the risks of the organization’s market rating.
Hence,this paper seeks to use the SWOT analysis tool, as outlined above, toevaluate and to critically examine the factors that influence oil andgas exploration in India. The Indian Oil and Gas is a key pillar inthe economy of India. In India, gas and oil exploration is controlledby the state-owned Oil and Natural Gas Corporation to anapproximation of 60 percent of the output of the crude oilproduction. However, there are also domestic and privateorganizations that venture in the oil and gas production industry inIndia.
Accordingto India’s Energy Agency report by Sun-Joo Ahn and Dagmar Gracyzyk,the government of India has an indispensable role to that it plays inthe energy sector. It does this via enterprises owned by the state,regulating the market and public policy, as well as involving inpersonal guidance. As such, the India’s energy policy framework hasintertwined dynamics. It requires comprehension of the role ofindividual government ministries and other government agencies andtheir relation with other energy players (Ahn and Gracyzk, 2012: 16).
Indiahas an energy policy framework that seeks to achieve three mainpolicy objectives. These include energy access, climate changemitigation, and energy security. In terms of access, for instance, itis estimated that a quarter of India’s population does not haveaccess to electricity. This deficiency hinders economic growth.Hence, policies aim at providing a framework that ensures adequateenergy access to the whole population.
Moreover,India’s policy framework takes note of low energy security in thecountry. Owing to increased dependence on imported energy,particularly oil and natural gas, the Indian government advancespolicies that seek to remedy energy insecurity. Hence, in line withthe first objective above, the government seeks to supply energy toall citizens regardless of their capability to pay for it. This ininfluenced by the concept of self-sufficiency which entails thatIndia places reliance on state-owned and domestic energy sources-such as hydrocarbon. The notion of self-sufficiency is expected tolead to energy independence (Madan, 2006).
Inaddition, Indian policy framework seeks to address the immediate andanticipated climatic change impact. Being a signatory to the UNFCC(United Nations Framework Convention on Climate Change), India has aresponsibility to keep a check on the levels of carbon emissions.However, this tends to hinder the rapid industrial development. Thisis because India is a growing nation with a relatively short historyof industrialization compared to the long industrialized westerncountries. In this regard, India claims that the high levels ofcarbon releases in the ambiance are as a result of the longindustrialized countries. Requiring developing countries, like India,to cut carbon emissions at the same level as the industrializedcountries, thus hinders a fair industrialization (Ahn and Gracyzk,2012: 18).
Withthe foregoing background of SWOT analysis and India’s policyframework, it is possible to apply the SWOT tool in evaluating gasand oil exploration in India. Firstly, in terms of strengths, Indiais ranked fifth worldwide in terms of energy consumption. This is adirect concern of the fact that India is one of the economies thatare recording the fastest growth in recent times. The implication isthat the demand for gas and oil must be geared towards matching therate of economic and population growth. As a result, India’s oiland gas market is significantly huge.
Closelyinterrelated to the above is the fact that there have been majordiscoveries of oil and gas. It is estimated that India has reservesaveraging 1,200 million metric tonnes of crude oil and approximately1,477 billion cubic meters of natural gas: a significantly largefigure. These figures were provided by India’s Ministry ofPetroleum and Natural Gas in April of 2009 (Mathur, A.S., 2009:1-44).
Moreover,there has been increased demand for petroleum products as well as ofoil and gas. In April of 2009, for instance, the government of Indiagave assent to the New Exploration Licensing Policy (NELP) in orderto handle the increasing demand. The approval of this policy has ledto the attraction of both domestic and foreign energy players inIndia. Consequently, a high exploration of oil and gas has beenrealized. The implication of these strengths is that the productionof oil and gas finds a ready market within India. With the risingnumber of new oil and gas discoveries, the demand supply gap in Indiais remedied without over-dependence on energy import.
However,the India gas and oil exploration is faced with several weaknesses.Foremost, there is poor development in infrastructure. This resultsfrom the apparent underinvestment in infrastructure in the past. Theimplication is that there arose stagnancy in the oil and gasproduction which has led to imbalanced demand supply chain. Eventhough the government sought to implement the NELP in several rounds,there has been low participation of the private and foreign playersin the NELP rounds. Statistics show that a total of twenty oneforeign firms took part in NELP-7 (2008). Only ten foreign firmsparticipated in NELP-8 (2009) and just eight companies in NELP-9(2011) (The Economic Times, 29thMarch 2011). This has raised difficulties in India’scommercialization of its gas and oil discoveries. Even with therising discoveries since the inception of NELP in 1999 averaging to51 gas discoveries, only two discoveries had reached the productionphase by 2011.
Moreover,there is a shortage of qualified human resources and expertise. Thisis because of attrition, failure to attract young expertise andretirement of workforce. In 2010, it was estimated that close toeleven percent of the expertise would retire in a few years’ time(Government of India, 2010). The failure to attract young expertiseis attributed to the apparent lack of sensitization regardingavailable career vacancies in the industry as well as poor workingconditions in the industry. Moreover, the national oil companies arecontinually losing their workforce to the private sector as a resultof differences in salary and remuneration.
Amore perturbing issue regards tax and regulatory strategies of thegovernment of India. Tough taxes and regulatory requirements pushaway potential investors in the oil and gas industry. For example,the Income tax Act of 1961 demands that deductions for unsuccessfulexploration expenses shall not be allowed unless it concerns an areaof exploration surrendered before the start of commercial production.Hence, any aborted exploration will not have its expenses deductedunless the respective company surrenders the area of exploration tothe government. This act is an example of a strong policy frameworkthat leads to confusion and uncertainty among the key and potentialinvestors (FICCI, 2011: 7).
Overand above the domestic regulations, there are international or globalissues that face India’s oil and gas industry. For instance, thereare environmental policies that require states to curb their levelsof Green House Emissions. The Kyoto protocol of 1997 is a typicalexample of an international treaty. This treaty is linked to UNFCC.It commits its signatories to reduce their levels of carbon emissionsto the 1992 levels. As it is apparent, oil and gas are among the mainsources of carbon emissions.
By2009, India ranked third among world largest carbon emitters.Statistics show that between 1990 and 2009, India’s carbonemissions increased from 1.7 percent to 5.2 percent (Ahn and Graczyk2012: 28). Part of this upsurge was attributed to the risingexploration of oil and gas. This raises the concern regarding India’simpact on global change in climate. As a result, gas and oilproduction has to be restricted at a global level so as to mitigateglobal climatic change. These regulations have an impact on India asa rising oil and gas producer and consumer. However, as observedearlier, India as well as other developing nations have reiterated byclaiming that the result of climatic change is to be attributed tothe developed nations.
Interms of opportunities, it is expected that the domestic consumptionof oil and gas will continue to grow swiftly in India. This impliesthat more production of these products is essential in meeting therising domestic demand. As such, this is an opportunity for oil andgas industry players to expand their investments. Moreover, there isa high level of untapped domestic gas and oil potential in India.This opens an opportunity for further exploration by existing and newoil and gas exploration firms. Combined with the increasing demandfor oil and gas in India, industry players have an opportunity toincrease their competitive levels by investing and taking advantageof the apparent opportunities.
However,the continued government interference is perceived as a major threatto the oil and gas industry in India. Currently, the governmentdetermines the retail prices of petroleum products. It also offersuntargeted subsidies to some products. However, such subsidiesusually fail to result to the anticipated benefits for the low-incomeclass. Instead, they lead to a financial burden to the oil companies.This hinders private investment in the industry’s retail sector. Inaddition, the allocation of natural gas and prices are determined bythe state de facto. As a result, private and foreign firms arereluctant to participate in the industry. It would call forderegulation of pricing and provision of targeted subsidies to fullyattract a reasonable investment in to the oil and gas industry.
Inconclusion, we can argue that SWOT analysis leads to establishing thestrategic fix of an organization. In the case of the gas and oilindustry in India, we have identified the main strengths andweaknesses that characterize it. While the strengths include a readymarket and a growing demand for gas and oil in India, the weaknessesinclude poor infrastructure and lack of skilled manpower. Byincorporating the strengths and considering the weaknesses, astrategic plan should seek to explore the available opportunities inthe future market- such as the anticipated rise in demand for gas andpetroleum products. However, measures should be put so as to dealwith perceived threats such as government over-control of theindustry.
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