Company Overview
Established in 2011 and based in Sohar, Orpic is owned by the Government of the Sultanate of Oman and is currently one of the largest players in the Middle East oil and gas industry. The company offers a wide range of petroleum products, including fuels and plastics, for both domestic and international customers. Orpic identifies accountability, safety, and reliability as three of its core strategic values (Orpic n.d.). The company aims to be a leading performer in Oman and the global oil and gas industry and to ensure the sustainable growth of its business in the future (Orpic n.d.). Based on this, Orpic continues to expand its operations and invest in new units that can add to the enterprise’s strengths and maximise its competitive advantages.
Problem and Purpose Statement
The present-day business environment is changing more rapidly than ever, and the global oil and gas industry faces some major challenges due to a plethora of modern developmental trends. These challenges pose multiple threats as well as opportunities to businesses, and the way companies respond to them today will largely define their competitive position in the future. The main questions that Orpic and its rivals must answer when choosing their strategic orientations and making strategic choices are how to deliver larger volumes of energy to satisfy the increasing demand of the growing population, and how to deliver it more efficiently and make energy itself cleaner, safer, and of higher quality?
In order to find the right solutions to the stated problems, Orpic must primarily focus on deciding which business units to invest in in order to meet the market requirements and which to reduce in order to minimise the exposure to different environmental threats. Therefore, the present report has the purpose of presenting the results of a strategic industry and macro-environment analysis and utilise them for outlining and evaluating different developmental scenarios and strategic solutions. An ultimate goal of this management report is to propose the best investment solution for the enterprise that will help it achieve a better, sustainable competitive advantage in the future.
Overview of Possible Scenarios
Industry Development in Accordance with the Paris Agreement
As the results of the PESTEL analysis presented in Appendix A demonstrate, the trend for environmental sustainability is one of the dominant nowadays and, in the first scenario, it drives the global economic development and cooperation among different states as they strive to comply with the 2015 Paris Agreement. In accordance with this international legal document, more developed countries support the less developed ones in the efforts to build ecologically friendly and resilient infrastructures and foster environmental justice worldwide (United Nations 2019). Since new, value-driven, friendly alliances are established, many of the international tensions, which previously often threatened the economic stability and growth, simmer down, and new opportunities for more efficient use of resources and generation of mutual benefits for different states are captured more easily.
Along with other members of the Paris Agreement, Oman develops more domestic policies and projects to support the transition to green energy options and reduce greenhouse gas emissions. As a governmentally owned enterprise, Orpic plays one of the vital roles in the transition. The number of public-private partnerships aimed at increasing the share of solar and wind energy sources to Oman’s energy mix rises. As the consumer demand for green technologies and renewable sources of energy rises, they become less costly and more competitive compared to traditional non-renewable sources of energy, including coal and oil. Moreover, in the era of sustainable globalisation, people prefer purchasing electric vehicles, and, therefore, the demand for petroleum products steadily decreases. As such, the ability to provide safer, cleaner, and greener services and products in the energy sector become the primary value and the main competition driver.
Depletion of Oil Resources
Depletion of oil reserves is one of the major environmental threats identified in the SWOT analysis presented in Appendix B. Thus, in the second scenario, instead of the vision for sustainable global development, a terminal decline in crude oil supply and a consequent threat to economic stability become the major drivers in the change process. The global oil and gas industry explores alternatives to oil. Some of those alternatives may be cleaner, whereas others may be as dangerous to the environment and climate as oil.
China and Japan show interest in Methane Hydrates extraction and technological advancement that facilitates the extraction process. It becomes more feasible for them and other fuel-poor nations to add this unconventional fossil to their overall energy supply mix (Jones 2017). Nevertheless, methane is a greenhouse gas and considered to play a pivotal role in the warming of the planet’s climate (United Nations 2014). Therefore, although Methane Hydrates extraction becomes more widespread in the given scenario, such alternative as liquefied natural gas (LNG) gets more competitive not merely because it is regarded as a cleaner option compared to oil and coal but also because the promotion of this resource is beneficial for countries with substantial natural gas reserves, including the United States, China and Argentina (Raffaini et al. 2014).
The LNG market booms in this scenario also because, compared to solar power and wind power systems, technologies for the treatment of natural gas are relatively less costly. Natural gas is considered “the perfect partner for renewables”, considering that it is more accessible (Dudley 2018, p. 26). Moreover, since the renewable energy market is growing much slower, its output is not enough to meet the growing demand for electricity and fuels of both the domestic and the global populations. Based on this, although the orientation to environmental sustainability contributes to the creation of competitive advantages in the second scenario, cost-efficiently is similarly and even more important.
Continued Use of Fossil Fuels
The third scenario refers to the situation in which countries across the globe do not undertake joint efforts to shift towards more sustainable energy consumption, and the major oil and gas companies existing nowadays continue to dominate the market and compete with each other by offering oil-based products. In contrast with the first scenario, the third one is not associated with a decline in international tensions. Since countries are primarily driven by competition in their decisions and actions, they strive to generate benefits primarily for themselves and fail to design policies and alliances that could foster economic growth and prevent environmental injustices on the global scale.
In this scenario, industry development is substantially driven by aspirations for cost efficiency and profitability. Since the use of alternative energy sources is not widespread, green technologies do not become economically viable. However, innovation remains an important driver of competitive advantage in the oil and gas industry as new technologies allow reducing waste and operational deficiencies, increase output and improve the quality of final products.
Strategic Solutions
Integration of Renewable Energy Technologies
The integration of renewable energy technology is the most favourable for Orpic in the first scenario and, moreover, is the most suitable as the discussed global environment makes those technologies economically competitive and commercially viable. The largest international competitors in the oil and gas industry will steadily become greener and invest more and more in the biofuel market, as well as solar and wind power generation, since it is considered to play a major role in meeting the Paris Agreement goal of limiting global warming (Bradford et al. 2017). Therefore, in order to compete in the global market and add value to customers and other stakeholders, Orpic will need to follow the trend and, preferably, lead it.
The greening of internal systems and a shift towards the generation of cleaner sources of power produces multiple social benefits. For instance, as air pollution becomes lower, detrimental impacts of fossil energy use on health will become fewer, and, as a result, healthcare costs can substantially drop (Bradford et al., 2017). Considering this, environmental leadership in the oil and gas industry can be regarded as a form of corporate social responsibility (CSR) that, according to Smith (2007), serves as a source of sustainable competitive advantage.
Commitment to CSR allows building unique and positive relationships with stakeholders, resembling a partnership, and gaining their trust because it implies the establishment of a dialogue with consumers and other interested parties or the utilisation of other tools for gathering information about their vital interests and needs (Smith 2007). As noted by Smith (2007), the major benefit of SCR is the development of a positive corporate image, which consequently can translate in increased profit and firm value, greater customer and employee satisfaction, and other advantages. Therefore, the design and implementation of a strategy that will align product and service innovation with environmental and social consideration can be beneficial for Orpic.
At the same time, it is clear that renewables integration into the firm’s systems and product range is associated with multiple challenges, and the first one is related to finance. On the global scale, in order to meet the objective set by the Paris Agreement, international parties will need to invest $40 trillion in clean energy research, development, demonstration and deployment by 2050, which equates to nearly $1 trillion a year (Bradford et al. 2017). It is worth noticing that compared to upstream and midstream sectors in the oil and gas industry, the downstream sector and oil refining usually have the lowest volumes of investment capital at their disposal – roughly $50 billion a year compared to $600-900 billion and $150 billion in the abovementioned segments respectively (Bradford et al. 2017). However, Bradford et al. (2017) indicate that these numbers show that the capital markets are still capable of integrating renewable energy into all sectors of the oil and gas industry. It is also valid to say that, as a governmentally owned enterprise, Orpic may have much more financial support needed for a feasible transition than private companies.
Other challenges to the integration of renewable sources of power into petroleum production are the variability of power generation by using windmills and solar panels and other operational considerations. Ericson, Engel-Cox, and Arent (2019) note that petroleum refineries operate 24 hours every day of the week, under different weather conditions and, therefore, cannot depend on sun and wind alone. To reduce the risk of power generation variability in renewable energy systems, a reliable backup system is needed that would incorporate diesel generators, gas turbines, or battery storage (Ericson, Engel-Cox & Arent 2019). This can significantly increase the complexity of the power supply system along with operational, maintenance, and investment costs. Secondly, operational complexity requires the development of new skills and knowledge in personnel (Ericson, Engel-Cox & Arent 2019). Thus, the high costs of staff training must be taken into account as well.
Nevertheless, it is valid to say that the benefits of integrating renewable energy systems in Orpic outweigh possible costs in the first scenario. However, it may be less feasible to realise this investment project in the second and third scenarios in which fossil fuels remain highly competitive. For this reason, Orpic must consider other options as well, and one of them is the expansion of operations in the LNG market.
Investment in LNG
The demand for LNG across different markets has been increasing in recent years and, therefore, by investing in natural gas liquefaction, Orpic will become able to capture a major revenue stream. Natural gas, also known as shale gas, has some major advantages compared to other energy sources. As stated by Mulcahy (2015), “gas plants are generally less capital-investment intensive than those fuelled by coal or nuclear power” and “even on a full cost basis, they are competing against other power generation alternatives such as renewables” (p. 273). Moreover, compared to solar and wind energy technologies, power generation through natural gas is more reliable since it does not depend on climatic conditions. Nevertheless, it does not mean that the integration of the LNG systems for gas transportation and distribution can be less cost-intensive than the integration of renewables.
Currently, Orpic has a well-developed internal capacity for crude oil treatment and production of liquefied petroleum gas (LPG) that is primarily distributed in the domestic market (Orpic 2013). However, LPG differs from LNG in many of its properties and, therefore, requires an absolutely different approach. For instance, since natural gas is lighter than air, it should be stored in the form of a super-cooled (cryogenic) liquid and, for this reason, specialised equipment and adapted infrastructure are needed to store and distribute LNG (Alternative Fuel Systems Inc. n.d.). It means that in order to work with LNG, Orpic will have to renovate its facilities and pipeline networks or even build new ones.
The social costs of natural gas should also be taken into account when making an investment decision. First of all, it has a greater environmental value than coal and is regarded as a clean substitute for the latter (Ishwaran et al., 2017). However, it should be emphasised that the use of LNG can produce greater environmental benefits merely if the practice of coal-burning becomes steadily eliminated while the rate of LNG utilisation is growing (Ishwaran et al., 2017). Thus, in order to maximise the benefits of shifting towards LNG on the global scale, it is important to address current policy deficiencies and work jointly with other states to make sure that they undertake efforts to abandon coal mining and burning. In this way, it is valid to conclude that natural gas is incomparable to renewables in its environmental values. Thus, LNG is also less efficient in reducing social costs linked to air pollution and global warming, including individuals’ psychological and physical suffering due to disease, excessive healthcare expenses, and so forth.
Regardless of the relatively high social, environmental, and general investment costs of LNG, it is associated with a significant demand potential and is promising in terms of generating greater profits in the future. As reported by Cooper, Stamford, and Azapagic (2016), natural gas consumption will triple by 2035, and the natural gas reserves could add about 7299 trillion cubic feet to the total global gas reserves. This volume will be larger than that of the conventional gas reserves, which currently equates to 6614 trillion cubic feet (Cooper, Stamford & Azapagic 2016). As for Oman, the proven volume of its natural gas reserve is 23 trillion cubic feet (EIA 2019). Compared to Russia and Iran, whose reserves stand for 1688 and 1191 trillion cubic feet, respectively, the size of Omani natural gas supply seems rather small (EIA 2019). However, considering that both Russia and Iran are involved in diplomatic and geopolitical conflicts at the present moment, their opportunities to develop long-term relationships with potential LNG importers are limited. Conversely, with access to the domestic natural gas resources and by increasing its capacity for gas liquefaction, Orpic will be able to turn into one of the important players in the global LNG market.
Investment in Innovation and Technology for Greater Production Efficiency and Risk Reduction
The third of the possible strategic solutions is the investment in the modernisation of internal systems and technological advancement in order to maximise Orpic’s current oil refining potential. It is valid to say that the implementation of the organisation-wide innovation strategy is one of the best ways to stimulate business growth in the last of all the outlined scenarios – Continued Use of Fossil Fuels – which excludes the shift towards unconventional sources of energy, including renewables and LNG. At the same time, innovation can be realised in the other two scenarios as well since it is inherently connected with the integration of renewables and other new practices. The difference is merely in the overall focus and, in the third scenario, it is made on the generation of such a competitive advantage as technological know-how that can help produce such values as increased cost- and operational efficiency and improved quality of final products.
As stated by Andronova and Osinovskaya (2017), as well as Ibrahimov (2018), the orientation towards innovation should be deeply integrated into the organisation’s strategy and should be supported by targeted research and development (R&D) projects and partnerships. There is a wide range of opportunities that Orpic can explore in order to increase innovation. Some of them are the establishment of partnerships with universities and private enterprises with technological expertise and the development of organisational, entrepreneurial units. For instance, partnerships with private enterprises lead to the development of scientific and technological potential, promote knowledge advancement and more rapid materialisation of scientific ideas (Akhmetshina & Mustafin 2015). Private companies with narrow specialisation in the high-tech industry often have much more expertise than governmental organisations and, thus, with their assistance, the implementation of various innovation projects becomes less risky and costly and usually results in greater commercial success (Akhmetshina & Mustafin 2015).
As technological trends outlined in Appendix A demonstrate, the integration of automation and robotics becomes widespread across different industries. The benefits of such an initiative include more efficient use of resources, increased safety, and better quality of work and the final product (Hashim, Tariq & Sinha 2014). It means that with the help of automation, it is possible to reduce costs and increase output. Moreover, it allows adding extra values to stakeholders by minimising their exposure to various production hazards. Such outcomes are in line with both current and expected future market requirements for cheaper and higher-quality products and Orpic’s strategic orientations to become the leader in the global oil and gas industry.
Recommended Solution
It can be suggested for Orpic to pursue the integration of renewables and the greening of internal operations at the present moment due to several reasons. First of all, renewables are reported to be the fastest-growing fuel in history, with an annual rise in demand of 7% (Dudley 2018). Even though the second scenario – the Depletion of Oil Resources – seems to be more realistic and it is appropriate to expect that international oil and gas corporations will be mainly oriented towards a higher diversification in the energy mix rather than the transition to exclusive use of solar and wind power, the demand for clean energy sources will still more likely be on the rise due to increasing environmental concerns.
Secondly, Oman currently shows a greater commitment to environmental protection and initiation of various renewable energy projects, such as joint solar-panel ventures between the Oman Investment Fund and Ningxia Zhongke Jiaye New Energy and Technology Management Co. and between Petroleum Development Oman and Marubeni Consortium, than to the development of LNG projects (Oxford Business Group 2018; Climate Action 2017). It means that during the integration of renewables, the company will be provided with institutional support. Moreover, governmental and organisational orientation towards sustainable development is correlated with greater public awareness of ongoing problems related to environmental deterioration and climate change. As stated by Hermawati and Rosaira (2017), stakeholder awareness is one of the critical factors defining the effectiveness of renewable energy technology projects. It is valid to say that this factor will help Orpic communicate the values associated with the suggested green leadership strategy to domestic and international customers and will allow maximising competitive advantages from this initiative.
It is also worth noticing that, just like oil, natural gas is a fossil fuel and a non-replenishable source. Therefore, an increase in its utilisation will inevitably contribute to the depletion of reserves and global warming in the long run. Therefore, an investment in LNG would become merely a short-term solution and would eventually be counterproductive to the Paris Agreement targets and Oman’s environmental protection efforts. At the same time, early investment in renewables will allow Orpic to gain greater experience curve benefits over time. As noted by Lilien and Yoon (1990), the “experience curve effect increases the first entrant’s cost advantage and profit potential” (p. 569). As one of the leaders in the oil and gas industry that will happen to work with clean energy sources, Orpic will also be able to build greater trustworthiness, reputation, and positive image, which can be regarded as crucial, intangible strategic assets.
Reputation and corporate image play a critical role in defining customers’ motivation to purchase from companies. Better reputation is associated with lower perceived interaction risks or, in other words, it is correlated with the level of trust one shows to another person or any other entity (Adeosun & Ganiyu 2013). In the case of an early entrance into the renewable energy market, Orpic will gain a reputation not only through obtaining greater expertise than its rivals in the global oil and gas industry but also by demonstrating social and environmental accountability. The proposed solution will result in a significant decrease in onsite greenhouse emissions and increased energy use efficiency at Orpic, which will add more value to consumers and will increase the attractiveness of the company’s products in the global market (Ericson, Engel-Cox & Arent 2019). It is also valid to say that the initiative will help the firm attract more socially responsible international strategic partners. In its turn, this outcome will result in many other competitive advantages across different operational segments.
Besides that, by following the pioneering market entry mode, Orpic will gain significant competitive advantages by renovating its operations and integrating renewable power across its facilities. Pioneering is closely linked with innovativeness increase that, in its turn, leads to greater competitiveness potential. Nevertheless, the advantages that first-movers obtain usually do not last for too long and diminish when rivalry and the number of competitors following the same ways of development and entering the same market becomes higher (Lilien & Yoon 1990). It means that for better and more sustainable innovation outcomes in terms of its competitiveness, Orpic will need to pursue innovation and excellence on a continual basis in the future.
Strategic Management through Joint Venturing
Overall, the demand potential and the identified Orpic’s critical success factors make it clear that the strategic window for utilising renewable energy sources and undertaking the green leadership approach is now optimal. However, it is possible to say that the company does not have all the necessary competencies and knowledge to manage the integration of renewables well at the present moment. Therefore, it may bear substantial financial losses during the transition. In order to reduce these risks, it may be recommended for the enterprise to apply the joint venturing strategy similarly to Petroleum Development Oman that commenced building a solar photovoltaic power plant together with the Japanese Marubeni Corporation (Oxford Business Group 2018). This joint venture will allow Petroleum Development Oman to generate clean power for its own use at a lower cost than when purchasing it from another company.
The term “joint venture” can be defined as “an agreement between two or more legally independent companies, which pool their capabilities and resources together to a shared business” (Ahmed & Ahmed 2013, p. 232). The major advantages of this strategy are greater access to necessary specialised resources, opportunities to employ the partner’s expertise, and shared liability (Ahmed & Ahmed 2013). Nevertheless, the establishment of a joint venture also implies that Orpic will not have absolute control over operations, and there is also always a risk of cultural and vision clash among partners. Thus, in order to choose an enterprise to work with during the integration of renewable energy sources, Orpic will need to carry out extensive research of the solar and wind power market and choose a partner with matching leadership and management styles, shared goals and visions.
Appendix A: PESTEL Analysis
Appendix B: SWOT Analysis
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