I believe effective risk management lies at the heart of the difference between good businesses and great businesses. Fifteen percent of the Global Fortune 500 are mega-energy companies. The size and scale of some of these companies dwarfs that of entire industries and yet their supply situation at best is unnerving. PWC in its O&G report card notes that by 2050 the current demand of 200+ million barrels per day is expected to double. To sustain this outcry of demand from consumers, the industry needs to establish energy sources and ensure supplies that are sustainable, affordable and most importantly; can mitigate risk effectively with better access to technology and asset bases.
Given this continuing scenario of uncertainties with regard to supplies, the acquisition of energy assets overseas and diversification of the oil and gas supply base assume greater urgency. Establishing a strong foothold in the industry requires moving into other geographies. Operating companies are now finding that it is easier to acquire/merge with regional and smaller players, as compared to discovering new assets, as a means to enhance their revenues. Additionally, it is expected that Sovereign Wealth Funds (SWFs) will increasingly invest with aggression in assets in other geographies as part of risk mitigation measures. This is expected to result in the development of SCOCs and International Owning companies, leading to a redefinition of the value chain as it is known today.
With the pressing need to address demand-supply disparity, as well as establish a global foothold, the Indian oil & gas sector has been witnessing numerous M&A activities lately. There have been both inbound and outbound covenants, namely BP's $7.2bn acquisition of a 30% stake in Reliance Industries' upstream assets and the consummation of the Cairn Vedanta deal for $8.67bn.
In conversations with industry stakeholders I've seen that the need of the hour for Indian oil and gas companies is to bridge the ever increasing demand supply gap. The national oil companies will continue to play a significant role in M&A activity as they seek to acquire specific capabilities to shore up asset bases. The government will also set up its version of SWF's to help local companies beef up overseas acquisitions and endure the demand gap.
I would say that the emergence of such super-consolidated entities will have a competitive advantage that will come from technology specialization and leadership, leveraging scale, better management of financial risk, and increasing access to the global talent pool and other resources. This will lead to overall operational excellence and a sustainable growth model. I'd be interested in knowing your thoughts on this. Do leave a comment.
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