Who Moved my Oil

If you had to take a guess at the companies that were involved in the chain of operations, from the oil field, to the fuel that you filled into your car, what would it be? Most people tend to associate the petroleum industry with one of the Supermajors: BP plc. (formerly British Petroleum), ExxonMobil, Royal Dutch Shell, Chevron Corporation, Total S.A. and possibly ConocoPhillips.

Big Oil is definitely big. The Supermajors are not only the world’s largest public oil companies; they are also the world’s largest corporations.

Company 2011 Revenue ($ Billions) 2011 Profits ($ Billion)
Royal Dutch Shell












China National Petroleum









Total S.A.



Source: Fortune Global 500

However, the annual revenues and profits of publicly traded companies is only a part of the picture as far as the oil industry is concerned.


Source: Wikipedia

State owned firms dominate the industry. Most of these firms are fully owned and privately held by the respective states and do not need to declare their revenues or earnings.  However, in terms of oil and gas reserves, state owned National Oil Companies (NOCs) clearly dwarf the Supermajors. NOCs control over 80% of the World’s oil and gas reserves. In terms of reserves, Exxon is the 11th largest oil and gas company in the world.

NOCs are also the world’s largest producers of oil. In 2011, PetroChina announced that its oil production had topped that of ExxonMobil. PetroChina produced 2.43 million barrels of oil per day in 2011, whereas Exxon’s production was 2.3 million daily barrels. However, Saudi Aramco, which produced 7.9 million daily barrels of oil in 2011, dwarfed both these giants.


Source: The Economist

The origins of the first state owned firms lies in the 50s and 60s, when the petro-states started nationalizing their oil resources by creating NOCs to take charge of their reserves. The Supermajors were still needed for their technical expertise, capital and skill at managing large projects. Most oil projects took the form of joint ventures between NOCs and the Supermajors. However, over time, the NOCs have become more technically advanced and competent at managing their own projects.

More importantly, state firms from China and South Korea, which do not control their own domestic reserves, have also started competing with the Supermajors via acquisitions to obtain technology, as well as access to oil and gas fields and drilling licenses. On July 23rd China National Offshore Oil Corporation, CNOOC announced a $15 billion deal to buy Nexen, a Canadian energy firm with big holdings in tar sands and expertise in drilling for shale gas. Last year, it had announced a $2.2 billion deal with Chesapeake Energy through which it acquired assets in South Texas shale deposits and agreed to finance most of Chesapeake’s drilling costs. These deals are of strategic importance to China. They provide China with access to foreign oil reserves, as well as the necessary technical expertise to access its own domestic shale gas reserves.

The Supermajors are also facing competition from firms that provide Oil Field Services (OFS). OFS firms provide the equipment and services used in the exploration for and extraction of Oil. The sector can be broadly divided into:

  • Technology solution providers such as FMC that sell products or kits.
  • Drilling contractors such as Transocean that own and lease out rigs to companies.
  • Oilfield services providers that carry out most of the tasks involved in finding and extracting oil. Schlumberger, Halliburton, Baker Hughes and Weatherford international dominate this subsector.

OFS started growing as a sector in the 1980s when the oil companies decided to outsource drilling operations. At that time, the easy availability of oil resulted in relatively low margins on drilling operations. Since the 1990s, the tightening oil market has driven demand for new technologies for exploration and extraction of oil. The big service companies invest heavily in R&D. Schlumberger, which earned profits of $5 billion on revenues of $40 billion in 2011, invests roughly $1 billion annually on R&D. That is roughly the same as the R&D expenditure of Exxon. Technologies and techniques such as 3D seismology and directional drilling, developed by OFS firms, are the mainstay of the modern oil industry.

The dependence on new technologies is also likely to grow. Global production from mature oil fields is falling by between 2% and 6% annually. The dwindling supply and increasing demand for oil means that the oil companies are more and more dependent on OFS firms for the technology and services to extract oil from increasingly inaccessible reserves and remote locations.

The OFS firms have also played a role in reducing the dependence of the NOCs on the Supermajors for technical and managerial expertise. NOCs can now manage projects themselves and hire all the technical help they require directly from OFS firms. This can extend to the extent of risk sharing between the NOCs and the service firms, just as in joint ventures between oil companies. Schlumberger agrees to some amount of payment for performance on big contracts. Others, such as Petrofac, are taking small equity stakes in exploration projects.

So, overall, a number of other players are replacing the Supermajors. As far as owning reserves is concerned NOCs have claimed the best acreage in most of the old oilfields. The large OFS firms are the leaders as far as technical expertise at drilling and extraction is concerned. In spite of the Supermajors’ expertise at exploratory activities, smaller oil majors such as Tullow, Carin and Andarko are proving to be more capable at the task of discovering new reserves.

However, in spite of their diminishing role, Supermajors are obviously still a major part of the industry. Even technically advanced NOCs like Kuwait Oil and Saudi Aramco still depend on the Supermajors for downstream activities such as refining. New petro-states such as Uganda and Ghana do not have the capital, technology or managerial skills required to exploit their oil resources, and would prefer to deal with firms that have a reliable track record of successfully funding and managing big projects. OFS firms such as Schlumberger claim that they do not intend to own reserves. In addition, they do not have the finances to manage the risk associated with large exploration projects. Thus the Supermajors are the only players who can mobilize the technical expertise required to find and extract oil from harsh environments such as the Arctic, and deep oceans and from unconventional sources such as oil sands. Supermajors also have an advantage over smaller firms in the biggest capital-intensive projects such as the large Liquefied Natural Gas (LNG) projects managed by Shell in Australia, and Total in Russia.

In spite of their ever-increasing profits, it is fair to say that life has become a lot more difficult for the Supermajors. The industry has become move diversified and complex. A number of state-owned and private players are playing a large role in moving the oil.

-by Anubhav Bhattacharjee

Anubhav is a PGP-1 student at IIM, Ahmedabad and currently a member of the Consult Club here. He graduated from the Indian Institute of Technology, Madras in 2012

Note – A typographical error in the post was corrected on 28th August 2012. The profits quoted from Fortune 500 are in $ Billion and not $ Million. 


Microfinance – State of the Sector

Professor C.K.Prahlad, of the University of Michigan and an IIMA alumnus introduced the idea of tapping into the fortune at the “bottom of the pyramid” by providing value, in terms of product and services, to the poor. However, business models based on financial services for the poor are a recent development, and have faced significant challenges.

The global microfinance industry is based on the principle of financial inclusion- to let people who have very limited access to lending avail of the benefits of timely capital. Commercial banks often face transaction costs that far outweigh the commissions earned by servicing the accounts of poor and needy people. This has given rise to the establishment of a separate set of lending institutions dedicated solely to the poor. The unsteady income of many of the borrowers, coupled with the lack of collateral, is the primary reason why microfinance institutions often charge high interest rates, which has been quoted as a cause of concern in the news. Microfinance institutions do reduce the risks they face through the practice of solidarity lending in which groups of borrowers in the community are made collectively responsible for repayment of loans of each member of the group. However this reduced cost of lending is still around 20% to 40%, which is usually charged by these institutions in India, and is much lower than the rates charged by local moneylenders, which are, on average, around 100%, and can go up to 500%.

Regulatory and Political Risks and Moral Considerations
Recently India-based SKS microfinance has been widely reported in the news for being a colossal failure in the MFI industry. SKS was funded by Bajaj Allianz and later raised Rs. 75b (the largest ever, for an MFI) through equity investment. While SKS charged rates of 26-34%, it nevertheless incurred a loss of Rs. 1360 crore in 2011, and an equally large amount of private debt. However, it should be noted that this loss can be attributed to politically motivated intervention and interference in the industry following suicides amongst borrowers. Although India does have a problem of farmer suicides, and the borrowers in question did have larger outstanding loans at higher interest rates from moneylenders, the suicides wer attributed to the MFIs. Calls from politicians encouraging borrowers to default on Microfinance loans lead to recovery rates plummeting from close to 100% to around 20%. SKS Microfinance also had to ground staffers following arrests of its field workers.

Another take on the issue of profitability and high interest rates is provided by Mohammed Yunus, the founder of Grameen Bank, the world’s most renowned microfinance institution, who claims that agencies should not be charging more than 15% of their long term operating costs as the interest rate. Dr. Yunus had also expressed his dissatisfaction towards SKS for raising an IPO. According to him this was a signal to investors indicating prospective profits at the bottom of the pyramid, which he believes is undesirable. However, SKS’ case remains moot- in Bangladesh, Grameen Bank could obtain deposits to fund its operations but that same activity is not possible in India due to a restriction on banking licenses. Thus, most of SKS’ deposits originate from commercial capital markets. However, with the new Microfinance Institution (Development & Regulatory) Act on the anvil, MFIs would not have to register themselves as lending institutions, taking them directly under the purview of the RBI and outside the jurisdiction of local anti-usury laws.

Online Lending
Shifting the perspective to online lending, global MFI portals such as Kiva Microfunds have demonstrated stable profitability over the years. Closer home, founded in 2010, peer-to-peer foundation Milaap is the first online lending platform designed for NRIs and non-Indians make loans to the poor. Based in Singapore & Bangalore, Milaap allows lenders to browse through a list of borrower profiles and their specific needs and then select their preferred borrower. Disbursement and repayments are done via field partners and Milaap also claims a repayment rate of 100%. The interest rate charged in 12-18% which is half the available microlending rate in the market. So far, Milaap has raised $200,000 from Atlanta based First Light Ventures and $40,000 from Spring Singapore, besides getting various Singapore based VCs to pitch in $1-1.2m in July 2012. As illustrated by these reports, the business model of online lending is one of the most promising solutions for the MFI sector and probably we shall see ever more development in that direction worldwide.

Shift back to Individual Financing
According to a report published by the Microfinance Information Exchange for the Latin American & Caribbean region, while debtors grew at an annual rate of 17% between 2006 & 2011, creditors grew at 24%. Meanwhile the gross loan portfolio rose at 23% per year to $15.8b. This shows a clear profitability trend emerging in South American nations, where microfinance penetration is the deepest and businesses have successfully implemented models based on solidarity lending, joint liability and local lending networks. However joint liability models have the potential to promote moral hazard and a hesitance towards taking responsibility among the debtors. Moving away from joint liability, several lenders have started using individual credit contracts, repayment schedules, subject monitoring and non-refinancing threats, which have made individual financing a more viable option. Brazil’s Banco do Nordeste, which has one of the most sophisticated microlending platforms, the CrediAmigo, has targeted individual urban microentrepreneurs and had achieved both stable profitability as well as low risk portfolio risk. The urban segment usually involves better business sense on the debtor’s part and a greater probability that the business launched with the help of the microfunding would actually be both liquid as well as sustainable in the long run.

Microfinance across the world
Recently, Forbes launched the rankings of the 50 best microfinance providers in the world by comparing them on categories like gross loan portfolio, %loans overdue by more than 30 days, operating expenses per active borrower and return on assets and these parameters were graded on scale, efficiency, risk & returns. Although Indian and Bangladeshi firms were prominent in the list (9 & 8 entries respectively), among the best managed were also 3 Moroccan & 3 Colombian microfinance funds. The Moroccan govt. has secured $46m in funds for better internal control over MFIs. Political instability in the region has greatly compromised MFI’s ability to operate and more and more number of loans had to be extended in 2011-12. However again, whatever profitability that the MFIs could salvage existed due to the group liability model.

Asia remains microfinance’s largest market with 74m borrowers in 2011, and 37m deposit accounts. While $15b has been mobilized by depositors, there are $34b worth of loans outstanding, primarily from India and Bangladesh. The return on assets ratio has hovered around 3% in the last 5 years but with the downside that portfolio risk has shot up 5-fold. On the other hand in North Africa and the Middle East, outreach and scale are extremely low with loan balances being just 16% of per capita GNI. Corporates & SMEs compose only 5% of the total portfolio. Operating expenses are low, but this is attributed more to the inability to secure funding rather than funding at low cost, leading to RoA being highest among all regions at 4.7% and only 2.1% of the portfolio being at risk (overdue).

– by Sai Deo
Sai is a PGP-1 student at IIM, Ahmedabad. She graduated from BITS Pilani (Goa Campus) in 2012 with a B.Tech in Chemical Engineering. Sai’s interests include business in emerging markets, sustainable growth, new business development. She also follows the venture capital and financial services space