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Strategic Analysis of Petroleum Development Oman LCC

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Type of Academic Paper – Essay

Academic Subject – Economics and Business

Word Count – 4478 words

Introduction

In a contemporary business environment, it has become highly necessary for organisationss to incorporate strategies that can help them maintain and sustain a competitive advantage in the market. However, it is difficult to compete in a highly heterogeneous market where the external market environment constantly changes (Johanson and Mattsson, 2015). Nevertheless, extensive market research and strategic analysis and assessment provide an opportunity for companies to encapsulate appropriate strategies for sustained future success. In addition to this, the external and internal factors of the business environment in which the company operates are regarded as highly influential for its strategic decisions and implementation (Wheelen et al., 2017).

It also means that both the environments must be aligned and thoroughly assessed for selecting a strategic direction. Therefore, it is significant for every organisation to conduct market research and strategic analysis for strategising the operations and functions and gaining a competitive advantage in the market. The main aim of this report is to produce a management report that will provide a strategic analysis of Petroleum Development Oman (PDO) and conduct a thorough analysis of both the organisation and the industry in which it operates. For this purpose, the report has been divided into various sections and sub-sections. After providing a company’s overview, the first section will represent the microenvironmental analysis with the help of SWOT, and the second section will represent the macro-environmental analysis with the help of PESTLE and Porter’s Five Forces frameworks. The next section will analyse the organisation’s current strategy following by strategic options and the best fit option that can ensure the competitive advantage of the firm.

Company Overview

Petroleum Development Oman, LLC came into being in Muscat in 1925. The company has been known for oil exploration, production and goveorganisationnisatio in the Sultanate of Oman. The company has been engaged in oil exploration and development and the transportation, storage, and development of hydrocarbons in Oman. It has also been offering natural gas and crude oil production all over Oman (Bloomberg, 2018).

Micro-environmental Analysis

SWOT Framework

SWOT framework provides an analysis of a company’s internal business environment in relation to the external opportunities and threats pertaining to the market (Hajikhani and Jafari, 2013). The application of the SWOT framework for PDO is given below:

SWOT Analysis Description
Strengths
  • Oman’s largest producer of oil and gas
  • Employee Orientation
  • Sustainable value creation
  • A central part in the Government’s plans of economic diversification
  • The use of the latest techniques
Weaknesses
  • Too much dependency on Government
  • No refinery or pharmaceutical companies in the group
  • Strongly influenced by Shell.
  • No carbon dioxide flooding
  • Turning to debt markets
Opportunities
  • Stabilized crude oil production
  • Being associated with Shell and Total
  • Cost effective and Innovative Reservoirs.
Threats
  •  Oil reserves are expected to vanish
  • Declining oil prices
  • Deterioration of public finances in Oman

Analysis

Petroleum Development Oman (PDO) is regarded as the largest producer of gas and oil in Oman and has been producing around 570,000 crude oil’s barrels per day (Gemalto, 2015). The company has also been famous for its employee orientation; for instance, in 2006, it has incorporated the policy to secure the access of employees to the corporate resources, and for this, the company has also opted for enhancing security measures within its corporate network (Gemalto, 2015). Being a leading company in Oman, it has been producing and delivering most crude oil and gas in the country; however, the overall focus has been on delivering sustainable value creation within and beyond the industry (PDO, 2018a). Nevertheless, one of the major threats that the company has been facing is the deterioration of public finances in Oman, leading to the change in the relationship between PDO and the Government. The Economist (2016) has identified that PDO has been highly dependent on the government. Since the government recorded a fiscal deficit of under 19% GDP, the company was forced to turn towards debt markets.

Nevertheless, the comprehensive review of 2002 led the company towards a change program. It has laid out an ambitious plan for production recovery based on water-flooding and enhanced oil recovery techniques (PDO, 2018b). However, one of the significant weaknesses of the company identified is that it has no downstream groups such as pharmaceuticals or refining, which has ultimately increased its dependence on only crude oil and natural gas. Gas production and exploration are also managed on the government’s behalf. The company has been strongly influenced by Royal Dutch Shell, which is also reflected in the managing director Raoul Restucci, a veteran of Shell (Faanck, 2018). The implication of such weakness can be associated with the company’s lack of a unique selling proposition and closed and limited services and product portfolio of the company.

The production of crude oil had peaked in the year 2000, but in the year 2004, it had seen a steep decline; it was when Shell had overstated its reserves in various places, including Oman. However, since 2011, crude oil production has been stabilised in Oman, allowing the economy to boost and providing more opportunities to oil-producing companies. On the contrary, Faanck (2018) has identified that in the wake of Oman’s strategy of diversifying its economy to reduce oil dependency, the oil prices are expected to show a severe decline which can ultimately affect the overall revenue margin of oil-producing companies. One of the major reasons for this is the expected turndown in the oil extraction due to Oman’s deserted weather. However, it can become challenging for PDO as the company has not incorporated the technology of carbon dioxide flooding preferably used in Saudi Arabia and Abu Dhabi (Mills, 2018). In addition, Mills (2018) has also identified that Total and Shell have a big influence in the country and outside the framework of PDO. These companies have agreed to develop tight gas in the area of Barik. It might also imply that PDO needs to conduct robust planning which can allow the organisation to regain its position in the economy and have a competitive advantage despite being dependent on government and its other shareholder

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Macro-environmental Analysis

PESTLE Analysis

PESTLE AnalysisL Description
Political analysis
  •  Geopolitical conflicts
  •  Political instability
  •  The major influence of the government policies
Economic analysis
  •  Increasing prices of oil and gas
  •  Decreasing oil production
  •  Manipulation in the oil market
  •  Global economic crisis
  •  Over debt in public and private sectors
Social analysis
  • Increasing awareness of the fuel and the decreasing use of fossil fuels such as oil sand and coal
  •  Increasing global oil consumption
  •  The dilemma of oil and gas extraction
Technological analysis
  •  Lack of skilled employees
  •  The higher cost of development.
Legal analysis
  •  Very stringent regulations
Environmental analysis
  • Regulations of pollution in the extraction of oil and gas

Analysis

Based on the external environment analysis of Oman’s oil and gas sector, it has been assessed that the industry has a significant influence on the country’s political conditions. According to the analysis of Goldsmith and Goldsmith (2018), the geopolitical conflicts in Yemen affects the business sector of the country. Additionally, according to the analyses of Worldview (2018), Oman is located at the southeastern corner of the Arabian Peninsula that also has a huge impact on the oil reserves and the intervention of the government policies. Moreover, according to the analysis conducted by Thomsonreuters (2018), there is a higher implementation of the oil and gas regulations that has also affected Oman’s oil and gas industry.

Oman is the largest provider of oil and gas and has been accounted for 72% of the overall revenue generated by the government. It has been assessed that Oman has made several agreements with the Petroleum Exporting Countries (OPEC) that has urged the country to cut down the production by 45 000 barrels, according to Oman Section (2018). Petroleum Development Oman (PDO), being a major player of oil and gas in the industry, has been associated with the stabilised production of crude oil, one of the major benefits that the country can gain for increasing its economic growth. However, Oman has been under the influence of debt in the public and private sector that leaves a major threat on Petroleum Development Oman (PDO) to continue its growth. However, as identified earlier, the increasing deterioration of public finances in Oman may also highly affect the company in terms of its sustainability and growth.

Petroleum Development Oman (PDO) is a state-owned company and has been facing a huge impact of the government regulations and authorities in terms of the dilemma of oil resources. According to the Omani environmental protection authorities, the availability of oil resources has been decreasing, which has created a significant effect on the company’s profitability. Moreover, according to Oman Observer (2018), the country has also been exporting natural gas, and the LPG also may have a positive effect on the company’s overall profitability. Additionally, it has been assessed that there are stringent regulations for the country in terms of implementing policies for safe oil and gas extraction (Times of Oman, 2018). The country’s environmental policies have a huge impact on Petroleum Development Oman (PDO) that shall be minimised by implementing the strategies for the reduction of environmental pollution within the extraction of oil and gas.

Porter’s Five Forces Analysis

Porter’s five forces analysis is a strategic framework used to evaluate and assess the competition in the market (Dobbs, 2014). For PDO, it is essential to analyse the competitive environment of the firm. Therefore, the analysis of the framework for PDO is given below:

Bargaining Power of Buyers

The bargaining power of buyers in Oman’s oil and gas industry depends on government measures in the economy. The customers of PDO are the manufacturing and refining companies (Bloomberg, 2018), other industries and since the company is a government-based organisation, the bargaining power of customers is low to moderate. However, the initiatives taken by the government for diversifying the economy has impacted the bargaining power of buyers, due to which they can avail of crude oil and gas at lower prices.

Bargaining Power of Suppliers

The bargaining power of suppliers in the oil and gas industry of Oman is low because many suppliers are present in the economy supplying oil and gas to different companies and industries. One of the significant issues is the dependency of organisations on the government for funding and fiscal measures. The raw material prices are also based on how much government supports the industry (Mills, 2018). Nevertheless, the suppliers have been given various options, including cost-effective and innovative reservoirs allowing them to bargain for the price of extracted crude oil and natural gas. Therefore, even with the development and measures taken by the government, the supplier’s power remains low in the industry.

The threat of New Entrants

The threat of new entrants is based on entry barriers imposed by the government. This threat is low in the industry because the Omani Government has put strict restrictions and lengthy processes to enter into the market. Moreover, Oman’s oil and gas industry is highly unsaturated, and most of the firms operating in the industry are government-based (Dandekar, 2013). Due to this, no new company is inclined to enter the market, and the threat of new entrants remains low.

Threat of Substitutes

The oil and gas industry has no substitute; the companies can use different technologies and methods to extract and produce crude oil and natural gas, but there are no substitutes for such products and their use amongst customers. Considering this information, the threat of substitutes in the region is low.

Competitive Rivalry

Competitive rivalry in the oil and gas industry is based on the presence of both domestic and international firms. According to Gemalto (2015), Oman’s oil and gas industry is the most competitive across the globe, and the organisations operating in the industry owns many reservoirs and production units in the region. The presence of Total and Shell in the region has also posited significant competition in the market; however, the presence has been upstream by the joint bidding agreements of the government. The total has signed the MoU (Memorandum of Understanding) with the Omani Government to create a joint venture with the company. However, there has been a lack of developed and new explorations, and resources bargained under a said joint venture (Wafoman, 2018). The competition for PDO in the oil and natural gas industry is low, but the dependency on the government is high that is shaping an existing competitive advantage of the firm in the market, and requires appropriate measures to sustain competitive edge by dealing with price wars and other international firms and government’s influence on the company

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Current Strategy of the Organisation

STP Strategy

STP is a strategic framework that identifies the three main dimensions of the current strategy of the firm: segmentation, targeting and positioning (West, Ford and Ibrahim, 2015). The current strategy of PDO has been analysed by considering STP below:

Segmentation

Segmentation is the division of people into similar groups based on demographics, psychographics and behavioural. PDO’s segmentation strategy depends on demographic segments as the company has been focused on manufacturers, refineries, and other industries located within and outside Oman. This demographic segmentation also includes the various areas such as Mina al Fahal, where the company is based, Qalhat and Sur, where the company supplies fuel to Oman LNG (PDO, 2016). The customers also include the Government Gas System, which is responsible for providing fuel to most of the power stations in Oman. However, the company has also gone beyond its territorial limits in terms of demographic segmentation; for instance, the following figure shows crude oil export destinations of PDO:

Figure 1: Crude oil export destinations of PDO

Source: PDO (2016)

Target Strategy

The target market strategy of PDO is associated with B2B customers situated in different parts of the world. Concerning this, the company targets its customers through its high tech drilling producing high-quality crude oil and natural gas (PDO, 2016). However, the primary concern of the company should be its higher dependency on the government. With the economic diversification, the target market strategy shifted from premium prices of crude oil to lower costs causing lower revenue generation of the firm (Mills, 2018). Nevertheless, the company has also targeted its customers through the EOR technique while considering the challenging and complex nature of Oman’s geology (The Economist, 2016). The main purpose of this target market strategy is to minimise financial costs and maximise the production of the company. However, the issue of the limited target market and global competition cannot be denied; for instance, the company has only been targeting the market with its production and exploration activities (Fanack, 2018). On the other hand, the level of economic stability and lower crude oil prices have also shown a significant decrease in the company’s exports to other regions, hence limiting the target market within Oman’s oil and gas industry.

Positioning Strategy

PDO has positioned itself in the market by being a government-based organisation and having its shares owned by Shell and Total. However, the agreement between the Total and Omani governments has been outside the PDO’s framework (Mills, 2018). Nevertheless, the company has continued to have a dire focus on renewable energy and water management. For the customers operating within Oman, such as Government organisations, the company has maximised the local goods’ procurement and improved its capacity to become a sustainable organisation (PDO, 2016). For this purpose, the In-Country Value has been regarded as a way of retaining total expenditure and stimulating productivity within the economy.  The company has gained a competitive advantage by positioning through Nimr Water Treatment Plant and its 35 new projects of social investments (Europetrol, 2018). One of the most resourceful positioning strategies of the company has been its investments in its hydrocarbon logistics and liquid bulk storage in Oman, which has become a great attraction for the firms in the USA (Export.gov, 2017). However, the future concerns are associated with the company’s unique selling propositions, which are much influenced by Shell and the dependency of the company on the government. The abrupt changes have been occurring in the company’s pricing strategy, operational strategy and international presence.

Marketing Mix

The marketing mix is defined as a marketing tool used to analyse the firm’s current strategy in the market (Johanson and Mattsson, 2015). According to the application of the 4 Ps of marketing for PDO, it has been identified that the product/service strategy of the organisation is associated with the use of the latest technologies for the exploration and production of natural gas and crude oil. However, its international competitive edge has been affected due to the fact that the company has not been used carbon dioxide flooding for better exploration of crude oil as the same technique is being used by the firm in Saudi Arabia and Abu Dhabi (Mills, 2018). In addition to this, the pricing strategy of the firm is highly impacted by pertinent economic conditions. There are two main dimensions of pricing strategy; one is the dependency of the company on the government, and the other is the diversification of the economy. Due to both the dimensions, crude oil and natural gas prices have been kept low in the market.

After applying the first two elements of the marketing mix, product and price, the third element is placed, and it is identified that since PDO is a government-based organisation, most of its products and services are being offered within Oman (PDO, 2016). The company has also been engaged in exporting crude oil to other countries. However, most of the revenue is generated through Oman. However, it must be noted that the company has faced various issues regarding government policies, such as the deterioration of public finances in Oman that forced the company to turn towards debt markets. The company has also been engaged in promoting its products and services various strategies. Zawya (2018) has identified that PDO has been organising exhibitions and fairs through its subsidiaries in order to showcase its products and services, including energy and power resources, amongst the customers.

Strategic Options for the Organisation

With respect to the above-mentioned analysis of PDO’s external and internal market environment as well as its current strategy assessment, the following options have been recommended for the company:

Creating its Own Unique Selling Proposition

The analysis has identified that the company lacks its unique selling proposition due to being highly influenced by one of its owners Shell. Another major reason for a need for USP identified in the analysis is the issue of no downstream group. It means that at this point, the company needs to incorporate measures and strategies which can ensure that the company’s USP is reflected in the market. It has also been supported by Baker (2014), who stated that USP provides the company with a measure to differentiate from other competitors operating in the market. This can be done by including the refinery and downstream pharmaceutical markets, and the company should offer refinery services by equipping itself with a new and innovative refinery plant. With this, the company will offer integrated services starting from production, exploration, and delivering refined crude oil to customers.

Partnership with International Firms

The analysis has identified the higher dependency of PDO on the government. The company had to face various challenges in the wake of diversification of the economy and deterioration of public finances. Therefore, it is recommended that to avoid such a dependency. The company should undertake partnerships with international firms as similarly done with Total and Shell. According to Johanson and Mattsson (2015), the international partnership is essential for entering into markets and gaining a competitive edge on the international and national levels. Therefore, a partnership with international firms will allow the company to think beyond the territorial boundaries, and the strong influence of Shell could also be reduced. This will also allow the company to support the economy, and even in the diversified economy, the company will be able to gain profit from the customers operating outside Oman.

Innovative ways of Production and Exploration

The analysis has identified that the company has not been used carbon flooding and other techniques for the production and exploration of crude oil and natural gas. Hence, it is recommended that there should be new technologies, methods and ways through which these processes could be smoothly performed. The new and innovative technologies can also allow the timely delivery and high quality of crude oil. According to Tang, Pee and Iijima (2013), innovative and high-tech processes can allow the firms to ensure that quality-based products are delivered to the customers. Hence, it is recommended that the company should opt for innovation in its processes to gain a competitive advantage by offering high-quality products.

 

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Recommended Best Fit Option and Justification

Partnership with International Firms

The best strategy for PDO to gain a competitive advantage at both the domestic and global level is to undertake partnerships with the firms. For this purpose, the company can start with the USA because the analysis has identified that the company has invested in its hydrocarbon logistics and liquid bulk storage in Oman, which has become a great attraction for the firms in the USA (Export.gov, 2017). This can also become a unique selling proposition for the firm and lower its dependency on government and the influence of its shareholder Shell. With strategic partnerships with international firms, the company will save itself from turning to debt markets. Instead of loans, it could provide services to the companies it will be partnering with. Another major benefit of incorporating an international partnership strategy is that PDO will be able to gain a competitive advantage by having an opportunity of selling and exporting its crude oil directly to the foreign country, allowing it to escape from the economic downturn and, in retrospect helping to regain financial and industrial stability.

Conclusion

The main aim of this report has been to produce a management report that will provide a strategic analysis of Petroleum Development Oman (PDO) and conduct a thorough analysis of both the organisation and the industry in which it operates. The company is an oil exploration, production and government organisation in the Sultanate of Oman. One of the major threats that the company has been facing is the deterioration of public finances in Oman, forcing the company to turn towards debt markets. The gas production and exploration are also managed on the government’s behalf, and Royal Dutch Shell has strongly influenced the company. The oil prices are expected to show a serious decline which can ultimately affect the overall revenue margin of oil-producing companies, including PDO. It has been identified that the segmentation strategy of PDO depends on demographic segments as the company has been focused on manufacturers, refineries and other industries located within and outside Oman. The report has offered three recommendations: creating its unique selling proposition, a partnership with international firms, and innovative ways of production and exploration. In conclusion and with reference to the analysis, the best strategy for PDO to gain a competitive advantage on a domestic and global level is to undertake partnerships with the firms.

References

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