Strategic Paper Reliance Industries Ltd – Jamnagar Complex Essay Example

today at around 60 million barrels per day.

where there has been high numbers of closures and no new refinery has been built since the very early 1980’s.

Key problems/opportunities currently facing the Oil Refinery Industry. A limited supply of the natural resource crude oil Problem No one exactly knows how much crude oil the world has left. This is for two reasons, one, varying interests find it nearly impossible to agree on who should calculate and what a fair method is, and two, there still may be more undiscovered deposits out there. Estimates vary from a decade to 100 years with most agreeing on around 50 years based on current and future forecasted consumption.

Opportunity

Due to the well advertised fact that the globe is running out of oil many companies have been reluctant to invest in upgrading or new refineries fearing that they will be left with a refining plant with nothing to process.

This hysteria has lead to an opportunity for Reliance Industries to fill the current and future growing needs of a world hungry for oil. The fact is that there is still 50 plus years left of oil and a return on investment can be very profitable well before oil reserves dry up. Other factors to consider include:Only 30 to 35% of oil found in a well is extracted and if technology improved this process then the current estimates could double. Also oil can be extracted from Oil rich Canadian sands and Oil Shale although these are seen as a last resort.

Decline in Oil refinery numbers & a significant decrease in new refineries being built Problem No new refineries have been built in the USA & Europe for around 15 years and

numerous refineries have been closed since the early 80’s, the reason for this falls into two main categories:

1.There has been a lack of profit for oil companies for quite some time as the supply in the market has been significantly greater than the demand. Hence this has led to poor margins and the decision lead by the Organisation of the Petroleum Exporting Countries (OPEC) to narrow this gap by not building any new facilities and closing sites in an effort to close the gap and reduce the amount of excess capacity.

2. To build a new refinery in a developed nation is now extremely difficult, as obtaining a license to build is nearly impossible, there are strict laws around the environment, infrastructure and land which make it ostly to build, locations are hard to find as no one wants an oil refinery in their backyard.

Opportunity Reliance now has the opportunity to time the opening of its new operation inline with the shortening of the supply/demand gap. Whilst building the complex in a window of opportunity in India that does not come under the tough scrutiny of developed nations as pointed out in point two above. Also as the demand for petro-products increases and out performs current capacity in developed nations, Reliance Industries has the opportunity to export and fill the gap.Demand is forecasted to drastically increase globally Problem As the economies of China, India & the rest of Asia grow so does the demand for oil.

As the living standards improve for these nations so does spending on luxury items such as cars. This demand is not only fuelled by wealth but also the continuing population growth

requires oil for lighting & heating. The problem is that there is no plan in the Oil refinery market to expand and meet this demand which will lead to a loss of opportunity slowing growth and driving excessively high prices for petro-products.

Opportunity

Reliance has an excellent opportunity to fill this new demand, growth will be very rapid and if this window of opportunity is not taken it may be missed. Another opportunity that must be raised is that currently India is a net importer of refined oil products and the building of a new facility could not only fill this gap but capitalise on projected future growth throughout Asia.

Threats of new replacement energies constantly emerging Problems. The Oil Refinery market has for a long time had the concern of a newer, cleaner, cheaper, and more abundant energy source replacing it’s mantel as King. This has been proven to be difficult as to replace the oil share of energy its replacement would need to produce 40% of the total energy produced today. Current contenders are, and not limited to, such sources as Ethanol, Solar, Electricity, Gas to Liquid and Biomass to name a few. Other forms of natural resources exist as well but thus far show a greater threat to the environment than oil.

Opportunities

The constant media headlines stating a new fuel is here ready to revolutionise the industry has thus far been fruitless, if anything leaving open the opportunity for Reliance to build a new refinery as other nations investors are wary of this threat. The fact is that all contenders thus far have been either too expensive or inferior in comparison. Also if a new energy

source was to be introduced to replace oil it probably would need a major shift in the way it is utilised therefore new engines and other technologies would have to be designed, a costly exercise, and would take significant time to be introduced.Concern over decreasing Profit Margins within the industry Problem As mentioned previously there has been a decline in the profit margin due to the abundant capacity available in the market. This has now been addressed and the gap between supply and demand is shrinking.

However, other factors play a part in profit margins apart from capacity utilisation, for example the quality/price bracket the refined oil produced sits in, insurance costs, running/labour costs and Government Taxes and permits.

The building of the Jamnagar Refinery will have several advantages over other refineries as pointed out earlier. India is currently a net importer of oil refined products, this alone should ensure initial capacity concerns are negated if quality and price are met (not to mention the future possibility of export). Other areas of Reliance advantage will be its workforce will be cheaper, ready and willing, the possibility of tax breaks from the Government, cheaper insurance premiums and generally cheaper running costs.Lastly, building a state of the art refinery geared to today and future demands for certain quality products will fill a gap that older refineries are finding hard to compete in.

Environmental Issues are playing a stronger part in shaping the Industry Problem In 1989 an environmental oil disaster occurred when the Exxon Valdez struck a reef in Alaska, this single disaster more than any thus far in the past, has pushed the focus of environmental management upon not

only the oil industry but the entire energy industry. The outcome of this new focus has meant the introduction of new strict laws and policies for most nations.These laws are designed around ensuring better air quality, a reduction in factors affecting climate change (refinery greenhouse gas emissions), waste water management and the reduction of risk of fire and explosions. The focus of environmental management for oil refineries has been hardest felt by those refineries in the US and Europe where new laws and targets have limited industry growth. Even to the extent that developed nations are driven by voters who do not want the oil refineries in their backyard, therefore driving policy change accordingly (this is even if the refineries are meeting set environment targets).

In saying this, here is the opportunity for Reliance Industries, as the fact remains that the demand for refined oil within these nations is still there. Reliance has the opportunity currently to take advantage of both the Government and the public’s “current” more relaxed environmental stance to build a refinery without any excessive constraints (whilst ensuring the refinery is equipped to handle changing environmental policy in the future).It should also be noted that Reliance has also an opportunity to equip its facility with technology that will produce fuels that meet higher emission standards hence taking advantage of new markets in place driven by Government policy change.

A shift in product demand and new quality standards being set for new and existing products Problem Current Oil Refineries are struggling to meet both newly introduced quality standards driven by environmental legislation/customer requirements and a shift in global customer demand for more distillates (diesel fuel,

jet fuel and heating oil).This is partly due to their inability to process crude oils with high sulphur and the need for expensive upgrades to improve the facilities refining techniques. Opportunity Reliance Industries has an excellent opportunity to have a competitive advantage over older refineries and the way other newer refineries are set up.

This opportunity can be realised by ensuring the setup of the Jamnagar complex achieves the following:

1. Superior refining techniques that will allow the capture of new/existing markets that require petrol at the highest specifications in quality and environmental attributes.These may include reduction of air toxics, including benzene, and the elimination of lead. Ensuring it meets these targets means Reliance will be able to capture lost market share as older refineries struggle to compete.

2. The ability to process crude oil, heavy oil and oil full of impurities, such as sulphur, that other refineries cannot. This will allow Reliance Industries to align itself to underutilised markets and any newly developed market.Also by reviewing configuration needs (installing hydro cracking processes) to take into consideration the production of distillates it can capture the market by catering for the growing demand for these types of product.

Recommended course of action and a timeline for the implementation of the solutions proposed Based on the documented review of the oil refinery industries problem/opportunities above, I recommend that Reliance Industries build the Jamnagar Refinery as per the project proposal as soon as possible to ensure this window of opportunity is not missed.As per highlighted I believe it beneficial to build the refinery around the ability to process distillates and ensuring state of the art refining techniques are used. The plant should

be built in two stages with the second stage mainly concerned with an increase in capacity. The timing of the second stage capacity upgrade should come on-line, in time to meet expected future forecasted export demand. It should also be noted that this second stage will not only increase profitability by volume but drive savings across the vertical supply chain in areas such as distribution.

Lastly it is recommended that Reliance Industries work very closely with the Government in partnership from day one to ensure a (legal) win – win situation is fostered for both sides and the nation as a whole. Conclusion These changes and forces within the industry are creating a very negative arena that has lead to minimal investment in new capital especially green-field sites, but does the doom & gloom hold a golden opportunity for a well considered risk? Two facts are still in place, demand is increasing at a rapid rate and the current industry is not investing to ensure the supply meets this demand into the near future.The direction found in this document enforces the original proposal for Reliance Industries to build the Jamnagar Complex. Although this decision may be seen as a gamble in some eyes, it can also be viewed as a calculated risk that has a lot in its favour and if successful, as planned, will drive Reliance Industries into a new dimension within India and on a global scale.

References

1. Technological Challenges of Sustainable Growth, Academy Symposium, November 1997, http://www. atse.org. au/index. php? sectionid=126
2. Energy Information Administration (Official Energy Statistics for the US Government), Oil Consumption - http://www. eia. doe. gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/dem_image_consumption.htm
3. Energy Information Administration (Official Energy Statistics
   

for the US Government), Regional Crude Oil Production - http://www. ia. doe. gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/sup_image_worldprod. htm