Academic journal article IUP Journal of Business Strategy

Investment Decision Making in the Upstream Oil Industry: An Analysis

Academic journal article IUP Journal of Business Strategy

Investment Decision Making in the Upstream Oil Industry: An Analysis

Article excerpt

Introduction

Oil is the world's biggest and most pervasive business, the greatest of the great industries that arose in the last decades of the 19th century.

These words of Daniel Yergin in his book, The Prize (1991), which chronicles the development of the world's oil industry, highlight the importance of oil industry in the recent times. In an environment of growing competition, higher resource costs, and significant price uncertainty, 'Investment Decision Making' is given top priority. There are many decision making techniques in academic literature. Some fundamental concepts were formulated more than 200 years ago. But their application became apparent only in the 1950s and 1960s. Their application in practical decision making has been made recently. It is an acknowledged fact that the current practice techniques used for investment decision making in most industries lag behind the current decision theories.

The allocation of funds and capital to the various projects is the most important aspect of the investment decision of a firm. The investment decisions are mainly driven by the purpose of earning the maximum profit from the available investment projects, thereby, increasing the worth of firm. The various criteria that are taken up while taking the investment decisions are based on the type of the projects, the requirements of the projects, the return that is promised by the project, life time of a project and the duration of the return value of the project, etc.

World oil supply depends upon a number of factors, investment decisions by individual companies being one of them. The other factors include the political decisions of countries with regard to licensing and degree of foreign investment or market psychology or OPEC (Organization of Petroleum Exporting Countries) policy or unexpected events or resource availability, etc. The opportunities available for investment would depend on the investment regime and the risk involved. The incentives would be in the form of oil prices and the rate of return.

The oil and gas industry regularly faces drastic changes in market and political conditions that force it to continually re - examine investment decisions. Making the right capital expenditure decisions has become more critical than ever in these challenging times. From a technology standpoint, fragmented and soiled data make it difficult to get real-time information from the numerous sources needed to make sound investment decisions. The ability to model risks and plan for contingencies is another critical consideration when executing large-scale capital projects.

Current Capabilities in Upstream Oil and Gas Industry

The oil and gas industry has been instrumental in fuelling the rapid growth of the Indian economy. India has total reserves of 775 Million Metric Tons (MT) of crude oil and 1,074 Billion Cubic Metres (BCM) of natural gas as on April 1, 2009, according to the Ministry of Petroleum. By the end of the 11th Plan the refinery capacity is expected to reach 240.96 MMTPA. As regards production, crude oil production during 2009-10 was 33.68 MT, compared to 33.50 MT in 2008-09, refinery production in terms of crude throughput was 160.03 MT in 2009-10 and the production of natural gas went up to 47.57 BCM tons in 2009-10 from 32.84 BCM in 2008-09.

The sales/consumption of petroleum products during 2008-09 were 133.40 MT (including sales through private imports), an increase of 3.45% over sales of 128.94 MT during 2007-08, according to the Ministry of Petroleum. India's domestic demand for oil and gas is on the rise. As per the Ministry of Petroleum, demand for oil and gas is likely to increase from 186.54 Million Tons of Oil Equivalent (MMTOE) in 2009-10 to 233.58 mmtoe in 2011-12.

The refining capacity in the country increased to 177.97 Million Tons Per Annum (MTPA) as on April 1, 2009 as compared to 148.968 MTPA as on April 1, 2008.

India's natural gas demand is expected to nearly double to 320 million standard cubic meters per day by 2015, according to a report released by global consultancy firm McKinsey at the VI Asia Gas Partnership Summit. …

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