Oando plc A strategic analysis of the company with
recommendations
MSc Strategy & International Business
3/10/2011
This report will conduct a strategic assessment of Oando plc’s current global competitive position with the help of Porter’s Diamond model. The analysis made will provide a basis for strategic recommendations that Oando plc should implement in the future.
2
Contents 1. Introduction ........................................................................................................................................ 3
2. Analysis of the current global competitive position ........................................................................... 3
2.1 Company Background ................................................................................................................... 3
2.2. External Analysis .......................................................................................................................... 5
2.2.1. Outlook on African Oil and Gas Industry ........................................................................ 5
2.2.2. Outlook on Nigerian Oil and Gas Industry ...................................................................... 6
2.3. Oil Industry Structure .............................................................................................................. 7
2.4. Internal Analysis - Oando’s Operations ....................................................................................... 9
2.4.1. Upstream .............................................................................................................................. 9
2.4.2. Midstream ............................................................................................................................. 9
2.4.3. Downstream .......................................................................................................................... 9
2.5. Strategic Position .................................................................................................................. 10
3. Analysis of Oando plc using Porter’s Diamond ............................................................................. 11
3.1. The Role of the Government ..................................................................................................... 11
3.2. Factor Conditions ....................................................................................................................... 11
3.3. Demand conditions .................................................................................................................... 12
3.4. Related and supporting industries ............................................................................................. 12
3.5. Firm strategy, industry structure and rivalry ............................................................................. 13
4. Conclusion ..................................................................................................................................... 14
4.1 Recommendations ...................................................................................................................... 14
4.2 Shortcomings .............................................................................................................................. 15
4.3. Summary .................................................................................................................................... 15
References ............................................................................................................................................ 16
Appendixes ............................................................................................................................................ 18
3
1. Introduction This report will conduct a strategic assessment of Oando plc’s current global competitive position
with the help of Porter’s Diamond model. The analysis made will provide a basis for strategic
recommendations that Oando should implement in the future.
Oando plc is one of Africa’s largest integrated energy solutions providers; it recently increased the
scope of its operations from purely downstream into mid- and upstream. This report will expose the
underlying reasons for this strategic shift through the lens of Porter’s Diamond. The chosen model
illustrates how Nigeria’s national competitive advantage has shaped Oando’s strategic development
to become integrated Oil and Gas Major in Africa. Oando now possesses a firm-specific advantage,
which could be characterized as resultant of favourable domestic demand, factor endowments,
related and supporting industries, industry structure, rivalry and firm strategy.
2. Analysis of the current global competitive position
2.1 Company Background
Oando plc commenced operations in 1956. It was listed on the Nigerian Stock Exchange in 1992,
following the acquisition of 60% majority stake in Unipetrol Nigeria Plc during the 1st phase of the
government’s privatisation process. It achieved a secondary listing on the Johannesburg Stock
Exchange in 2005 (Oando Plc, 2011).
From its genesis in the downstream petroleum sector (marketing, supply and trading), Oando has
redefined its business model to encompass the entire value chain in the oil & gas industry including
midstream (gas and power) and upstream (exploration and production) segments in recent years.
Oando consolidated its subsidiaries into an integrated energy group actively serving the West African
region, with expansion plans into the rest of Africa (see table 1 for company structure).
The upstream segment of the oil and gas industry has a higher EBITDA margin (Afrinvest WA, 2010),
strategic diversification in this segment has enabled the group to continue to achieve outstanding
performance (2010 Q3 turnover US$1,872.63m (Oando Plc, 2010) and higher margins.
The successful launch of an offer to raise N20 billion (US$129m) through the issuance of ordinary
shares in Nigeria and South Africa in January 2010, has led to it commencing its long-term strategy
implementation, which is to become an African Oil major by taking full advantage of the Nigerian
Content Act (2010).
4
Source: (COO, 2011)
Table 1: Oando Plc Company Structure
5
2.2. External Analysis
2.2.1. Outlook on African Oil and Gas Industry
Crude Oil and Gas Reserves
The major crude oil reserves are located in Libya and Nigeria (see appendix 2 table 1) while there is
potential for production in Somalia, Ghana and Uganda (see appendix 2 table 2). Algeria, Egypt, Libya
and Nigeria possess 91.5% combined of proved African reserves (Anyanwu, 2010).
Supply
Africa is expected to
increase its share of
world production from
12% to 15% by 2015
(Anyanwu, 2010).
Gas production fell in
spite of a large
production capacity.
Production is expected
to increase by 3.6% by
2035 (Doma, 2010).
Demand
Crude oil consumption
in Africa has grown
steadily equalling 3.1
million b/d in 2009, representing about 3.7% of global consumption, reflecting low level of
development, industrialization, and technology (Anyanwu, 2010) – see appendix 2 table 3.
Natural gas consumption in Africa is still very low representing about 3.2% of global consumption –
(see appendix 2 table 4).
Production of Oil and Gas in Africa (2009)
Graph 1
6
2.2.2. Outlook on Nigerian Oil and Gas Industry
Table 2: PEST Analysis
8
7
2
9,5 5,5
3,5
6
7,5
4Pipeline network from the Nigerian Gas Company city gate to cover
Ikeja and the Greater Lagos Area (Oando, 2010)9,5 10
1Nigerian crude oil - Light, sweet quality crude is a preferred gasoline
feedstock (EIA, 2010)
West African Gas Pipeline (WAGP) for gas export to Ghana, Togo and
Benin - further project to expand it to Cote D'Ivoire (EIA, 2010)
9 4
8 8
2
8,5 8
9 10
Trans Saharian Gas Pipeline. Carry natural gas from Nigeria to Algeria
export terminal.Total and Gazprom interest (EIA, 2010)
9
10
10
7
9
5,5
3
6,5
8
8
2
3
4
7,5
9
8,5
10
4
2
3
1
5
1
2
3
4
5
9,5
3 2
Demand will grow - higher oil prices, depletion of resources and
better operational environment (Nigerian Content Act, 2010)
9 5
6 7
8 5
2
3
Large oil and gas reserves will remain a key economic driver (BMI,
2010). "New oil frontier” area of the West African coast (EIA, 2010)
6% GDP growth linked to an emergence of a new middle class (African
Business, 2010)
Opportunities
1
2
3
Oil exports as a percentage of governmental revenue accounts for
109% (African Development Banks, 2010)9,5 9
Renegotiated contracts with international companies for greater share
of profits from deep-water fields (African Business, 2010)
Slowdown in the privatisation process (BMI, 2010)
7 6
9
7
8
7
4
Imp
act
on
organ
isati
on
Certa
inty
Imp
act
on
organ
isati
on
Certa
inty
Threats
8,5
9,5
8
Limited infrastructure in place to develop the natural gas reserves
(EIA, 2010)
Refineries have never been fully operational due to pipeline
vandalism, poor maintenance and theft (EIA, 2010)
40 % of gas is flared given the lack in infrastructure (EIA, 2010)
Pipeline vandalism - (MEND) The Movement for the Emancipation of
the Niger Delta (EIA, 2010)
90.8% of Nigerians live on less than US$2 a day (BMI, 2010)
Largely unionised society makes reforms difficult (BMI, 2010)
25% of workers are infected with HIV/Aids. (Ross, 2003)
Semi skilled oil workers use their wealth to access impoverished girls
in the Niger Delta (Ross, 2003)
EIA (2010) worst case scenario predicts an oil price of $210 in 2035
Forecast volatility of net FDI into Nigeria in the period to 2014 (FT,
2010)
Oil exploration pollutes farmland and kills fish - key economic
resource for rural community (Udoh, 2007)
High corruption – Transparency International ranks Nigeria 121st out
of 180 in Global Corruption Perceptions Index (BMI, 2010)
5
4
6
The Nigerian economy is dependent on the oil sector - 92% of total
exports (African Development Banks, 2010)
Weak global demand, Euro zone debt crisis, Dollar exchange rate
against other currencies affecting volatility in prices (BMI, 2010)
6
6
5
6
7
1
4,5 3
4 4
6 5,5
8 7,5 4
7
1
Poli
tica
l
9 9Nigerian Content Development Bill - Increasing role of Nigerian
companies in oil and gas industry (Nigerian Content Act, 2010)
Plans to process at least half the crude oil produced in Nigeria by 2010
- Target still to be achieved (BMI, 2010)
Foreign minister plans to increase Nigeria's OPEC production quotas
and taxes on overseas companies (Bloomberg, 2010)
Full deregulation of the downstream sector of the petroleum industry
and privatisation of refineries (Okereke, 2009)
Formation of an Organisation of Gas Exporting Countries - Gas OPEC
(African Development Bank, 2010)
Government authorisation to allow private companies setting up
power plants using natural gas (Bloomberg, 2010)
Emission certificates gained from gas produced electricity (African
Development Bank, 2010)
8 1
9,5
1
2
3
4
5
6
7
Eco
nom
icS
oci
al
3
2
3
4
5
4
5
6
7
1
Reforms of the financial industry give Nigerians in the Diaspora the
confidence to return home (African Business, 2010)
Arabic countries slowdown and hurricane in Gulf Mexico (OPEC, 2010)
Public debt cancelled by the Paris Club initiative - No heavy debt
servicing costs, capacity to invest in crucial infrastructure (BMI, 2010)
FDI from China could provide the necessary increase to foreign
investment inflows in the country (BMI, 2010)
The corruption record is improving - Nigeria's score with
Transparency International has risen to 2.5 in 2009 (BMI, 2010)
Promote economic diversification. Adopt Indonesian approach by
investing into manufacturing and agriculture (Ross, 2003)
Urgent efforts should be made to implement HIV/AIDs programs into
CSR (Ross, 2003)8 4,5
5
The Viva project - methanol plant, when completed (by 2012) would
be the world’s largest methanol plant (BMI, 2010)
3
5
Legend 0 to 10 = minimum to maximum
Dire electricity supply - It leaves businesses and homes dependent on
diesel-powered generators (African Business, 2010)
Correlation between changes in oil prices and construction cost
increases - costruction contributes to development (Olatunji, 2010)
Small construction sector relative to the country’s size and economic
growth levels (BMI, 2010)
3
4
5
6 2
8,5
5
7,5
8,5
8
6
Tec
hn
olo
gic
al
6
8,5
7
Graph 2: PEST IMPACT/CERTAINTY MATRIX
2.3. Oil Industry Structure
The oil and gas industry value chain is segmented in three major streams (Oilfielddirectory, 2011)
This segment involves exploration, drilling and production of oil and gas. It controls the supply of oil and gas which influences prices in the downstream.
This involves transportation of oil and gas from the extraction site to refineries. It is usually considered as an extension of the upstream or downstream.
This involves “the final processing, product distribution and marketing”. It includes oil refineries, crude oil, petroleum and natural gas distribution and retailing.
Cluster 1
Cluster 2
Cluster 3
8
Graph 3: Competitive landscape
Major competitors
Shell: is the biggest player in Nigeria with 10 gas plants, 1,000 producing wells, and 87 flow stations
(Shell, 2011).
ExxonMobil: is the second largest with over 90 offshore platforms, 283 flowing completions in 353
wells and a production capacity of about 720,000 barrels of crude, condensate and natural gas liquid
a day (Exxonmobil, 2011).
9
2.4. Internal Analysis - Oando’s Operations
2.4.1. Upstream
Oando’s upstream operations consist of two SBUs (Table 1).
Oando Exploration and Production Limited (OEPL) has grown successfully through oil and gas asset
acquisitions of onshore and offshore activities and is currently seeking new investments in nearing-
term production opportunities (Oando plc , 2011)
Oando Exploration Services (OES) is planning to take advantage of increased demand and is growing
via acquisitions and partnerships with global multinationals. It has recently increased its capacity
through the purchase of five drilling rigs and is intending to further invest US$500 million in the next
five years (Oando plc , 2011).
The bulk of OES’s services include fluids management services; however OES is trying to increase its
margins and shifting its focus to the lucrative swamp rig drilling. The latter is underdeveloped in
Africa; therefore Oando intends to capture the market whilst competition is low. Nevertheless the
company’s operations in drilling inputs and services have been suffering from reduced demand (CSL
Research, 2010).
OES draws its strength from being a specialist local company which understands the industry
challenges, knows how to add value to clients’ operations and has experience of working with
Multinationals. However, OES is subject to the threats of a hostile operational environment in the
Niger Delta (CSL Research, 2010).
2.4.2. Midstream
Oando Gas & Power (OG&P) oversees Oando Plc’s gas and power businesses; it pipes and distributes
natural gas to industrial and commercial consumers in Nigeria. The subsidiaries include various Gas
and Power companies (Table 1).
The company has invested over N16 billion in developing a gas pipeline network. This investment
has garnered OG&P control of a considerable share market. There has also been an N18billion
investment to develop a 128km cross-country gas pipeline in the South-East. Oando justifies huge
investment due to expected guaranteed growth of the manufacturing and power sectors (Bakare,
2010).
It went further to acquire an Oil Prospecting License (OPL) 236 to serve identified customers in some
regions. They have also invested in the development of a 12MW independent power project for the
Lagos State Water Corporation (Bakare, 2010).
Key challenges that could hinder future growth plans in the gas to power initiative are funding,
regulations, sanctity of contract, and community issues (Osunsanya, 2010).
2.4.3. Downstream
There are three SBUs under the downstream operations (see Table 1).
10
Oando Marketing Limited (OML) delivers services that provide a stronger platform for competitive
advantage. These strategic services are quality assurance, guaranteed stock availability, professional
stock management and flexible pricing. Although the upstream activities are more profitable than
the downstream, OML is a leader in its industry with over 500 outlets based in West Africa (Oando,
2010). It has a varied product offering ranging from Aviation Turbine Kerosene (ATK) to Oando
insecticide.
Oando Supply and Trading looks after the trading and bulk supply of crude oil and refined petroleum
products within the local, regional and international markets. The three main trading activities that
Oando is currently involved in are: Clean Products, Specialized Products and Crude Oil. It also has
subsidiaries in London and Bermuda that deal with the trading of crude oil and refined petroleum.
Oando Refining and Terminaling is the newest addition to their operations. When entering this
specialist field Oando’s objectives were to achieve a footprint in all sections of the industry value
chain. (OPEC, 2010).
2.5. Strategic Position
Graph 4: GE Matrix
11
3. Analysis of Oando plc using Porter’s Diamond
Following the analysis of firm-specific advantages of Oando plc an assessment of the country specific
advantages is necessary. Porter’s Diamond allows for an in-depth investigation into why a particular
country is successful in a specific industry. Oando’s operations are largely local and regional, thus
this model would be appropriate for the analysis of the industry in the area in which Oando is
operating. Porter’s Diamond is comprised of elements that promote the development of national
competitive advantage (Hill, 2009) and this would add substantial value when building up future
recommendations.
3.1. The Role of the Government
Government’s role influences each of the determinants of Nigeria’s oil industry national competitive
advantage. Oil and gas is a highly regulated industry given its high share in government revenues and
country exports.
3.2. Factor Conditions
Nigeria is endowed with abundant physical resources. Its reserves of crude oil account for 37.2
billion barrels and gas reserves put it among the top 4 countries in Africa (Anyanwu, 2010).
Consistent with the Heckscher-Ohlin Theory (Hill, 2009), Nigeria exports its natural endowments to
global markets. This argument could be expanded by referring to the government’s revenues for the
crude oil (Anyanwu, 2010) which is identified as the country’s main export. Conversely, gas reserves
are not being developed at full capacity given a lack in advance factors endowments, namely
infrastructure for gas exploration and extraction; however this is being overcome by government
and private companies’ investment.
Given the small size and lack of know-how of the Nigerian construction sector, the national
disadvantage in advance factors for the oil and gas industry has been tackled by major foreign oil
companies through investment in the development of infrastructure for oil exploration, extraction
and skilled workforce in the upstream sector.
The export trend of natural resources and the national disadvantage in important infrastructure for
processing the crude oil (refineries) and extracting natural gas has influenced Oando’s strategy. The
company shifted from operating in the downstream sector to functioning in the industry’s entire
value chain (FT.com, 2009), therefore building up its firm specific advantage through exploiting the
12
country’s specific advantage. This was eased by government intervention requiring a major share in
the industry for Nigerian companies (Nigerian Content Act, 2010).
3.3. Demand conditions Porter (1998) stated that home demand conditions for an industry’s product or service help firms
shape their rate of improvements and innovation. Demand is very high for Nigerian oil and its
economy is hugely dependent on oil exports (92%).
Electricity supply is poor therefore local demand for petroleum products for cars and generators is
high. In addition, the government has been dependent on imports of refined crude for its citizens as
a result of the poor state of refineries.
Increasing demand for stable electricity supply in the country has led Oando to begin developing
electricity infrastructure. This was successfully implemented for the Lagos state government and
further projects are being planned for the Rivers’ state government and other West African regions.
The home conditions of Nigerian Oil and Gas industry helped shape Oando’s growth process. From a
marketer and distributor of petroleum products, Oando shifted to meeting local needs for gas, by
constructing the infrastructure needed for power generation.
Demand conditions are also affected by the Petroleum Products Prices Regulatory Agency (PPPRA)
Act of 2002 having the power to fix the price of domestic oil, which is becoming increasingly
expensive (Okediran, 2005).
Home demand has also been influenced by the government’s privatisation process and the Nigerian
Content Act 2010, which seeks to increase indigenous participation in the industry. Oando also
expanded into regional African markets where demand was also growing.
3.4. Related and supporting industries
Through mergers and acquisitions, Oando has overcome most of its national competitive
disadvantage (lack of good infrastructures) by using its partners’ resources, which has led to the
development of its own firm specific advantages. Oando’s value chain has become self sufficient,
however there is some dependency on both local and foreign assistance in the completion of
projects and the supply of necessary materials & equipment.
The Nigerian National Petroleum Corporation (NNPC) used to be the only supplier of refined
petroleum. As a result of their inefficiencies, Oando vertically integrated backwards to manage their
supply chain (Adegboyega, 2008). The company is now the supplier of its downstream business,
though there are a few alternative sources of supply such as the NNPC and other oil majors. Oando’s
business in the upstream sector has been assisted by a strategic alliance with Halliburton who supply
all input materials for oilfield operations (Adegboyega, 2008).
13
Oando has outsourced part of the activities in its outbound logistics. Transportation is a separate
business unit requiring distinctive expertise, and Oando depends on both local and foreign
companies for this (Adegboyega, 2008).
Other collaborations for project support include a strategic alliance with Gazprom to develop
projects in oil and gas assets and infrastructures in the West sub-region and the Gulf of Guinea. Also,
OG&P has incorporated subsidiaries in West Africa to collaborate with local companies to deliver gas
distribution services to the region (Oando Plc, 2011).
3.5. Firm strategy, industry structure and rivalry
Nigerian petroleum industry is managed by the federal government which has ownership and
control rights anchored in the 1969 Petroleum Act (Akpan, 2006). The current two contractual fiscal
regimes dominating the upstream segment, namely Joint Ventures and Production Sharing
Contracts, represent a system for the government to generate revenues through the E&P activities
of MNEs. It could be argued that this distribution of forces led to a certain degree of strategic
herding, as industry players have to deal with the government and bureaucracy on a regular basis.
Indeed, they are heavily dependent on the sole provider of natural resources, which is the Nigerian
State resulting on a state of co-opetition (Pipelineinternational.com, 2010).
Shell, ExxonMobil, Chevron, Agip, Total and Phillips currently dominate the country’s upstream
sector (Akpan, 2006), where Oando still has to prove itself. Intense competition with major
multinationals is likely to drive the company’s efforts for achieving sustainable competitive
advantage in this segment; current legislative changes - PIB are also estimated to be favourable for
indigenous companies like Oando. In the midstream sector Oando will benefit from the PIB as well.
The bill will encourage the development of natural gas over crude oil, which the government
believes can stimulate economic growth (PFC Energy, 2010).
Oando’s leadership in the downstream segment could be deemed resultant of the highly
competitive Nigerian industry structure. The company managed to sustain their leading position in
spite of increased competition by the world’s largest energy companies (Total, Chevron and Shell).
To become an African major, Oando plans to shift from the nearly saturated downstream market
towards the more profitable upstream and midstream. By 2013, Oando aims to generate only 20%
of their profits from the downstream. It is now investing heavily in production & exploration,
building terminals and pipelines, in order to reduce operating costs and increase returns. Oando
aims to leverage the synergies generated from having production and transportation assets (FT.com,
2009). It is currently building $100m of gas pipeline in Nigeria annually for domestic consumption. It
has its own production operations on land and swamp, and invests in offshore operations of
international companies (FT.com, 2009).
Oando’s focus is local; being an integrated energy company with local assets provides them with
better returns, reduces currency risk and makes it possible to offer better products for the customer.
Oando’s expansion plans are primarily in Nigeria, but they would also consider the Gulf of Guinea,
Ghana, Angola and Gabon. Oando competes with international majors in Nigeria; the company’s
local interest is also a differentiation point from competition, the investment focus being on
14
increased wealth generation in the country, whereas multinationals usually prefer exporting those
revenues (FT.com, 2009).
Oando possesses significant internal resources for achieving its long-term strategic goals. Firstly, the
company is adaptable and able to operate in a tumultuous environment in spite of changing
governments and legislation. Secondly, Oando has the potential of further utilising the scale of its
integrated operations, in order to drive higher returns across different divisions. The release of some
downstream resources should drive the increased focus on the upstream.
Thirdly, the company has succeeded in building a very strong local brand, focusing mainly on Nigeria,
which is a great differentiator against competition and has also helped the company gain access to
finance. Oando’s fourth key resource is its people, the human assets in who the company invests a
lot and who will be shaping its future. Finally, Oando is strong in Corporate Social Responsibility,
having a real interest in developing local communities. This strength can be leveraged in
negotiations with the government (COO, 2011).
4. Conclusion
4.1 Recommendations
Looking at Oando as a corporate entity, the argument developed leads to recommend for the
company to concentrate on the upstream as a first priority and midstream as a second.
Referring back to the GE Matrix, considering the potential growth and market attractiveness of the
SBUs, it is recommended that Oando pursues the strategy of increasing the scale and scope of its
upstream operations. The company can build up its assets in the medium term through strategic
acquisitions by using the resources made available through divestitures in the downstream (up to
49% of its Marketing division – (COO, 2011). Current legislative changes in the industry will
encourage local participation in the oil and gas industry in the medium to long term; international oil
companies are expected to divest of assets in the upstream segment (Oando, 2009). Oando can take
advantage of this opportunity and capture some of those E&P assets. At the same time, Oando can
also leverage partnerships with domestic and global players to further increase the scope of its
upstream operations.
OES is in a very strong position as they have 85% of the market share for swamp rigs (COO, 2011). It
is recommended that they protect their competitive position in this market segment, as EBITDA
margins are between 45-50%. Oando will furthermore benefit from the Nigerian Content Policy and
their indigenous status. They can therefore leverage the positive industry outlook and their internal
strengths, by concentrating on onshore swamp operations and partnering up with multinationals,
especially in the view that they already have experience in international partnerships (through their
alliances with Halliburton and Baker Hughes).
Given the dynamics of the Porter’s diamond in terms of National Competitive Advantage, Nigeria is
an interesting case for investment into the midstream energy sector (gas). The local policy initiatives
15
encourage the development of gas industry and there are excellent factor endowments in Nigeria.
Oando should continue building its gas infrastructures in order to expand its distribution capacity in
Nigeria. The company should also leverage the existing partnership with the Russian Gazprom and
find other partners among large gas companies to build alliances which will be beneficial in terms of
knowledge acquisition and exploiting environmental opportunities.
In the medium to long term, Oando could expand into other West African countries, building up on
the advantage of having existing Marketing subsidiaries in Ghana, Togo and Benin. This will give the
company an opportunity to generate further economies of scale through integration of midstream
and downstream in those countries.
Oando can take advantage of the Trans Saharan Gas Pipeline (PEST table) as it will enhance their
ability to export gas.
4.2 Shortcomings
The conducted analysis is limited since it was mainly based on the Porter’s Diamond model. It would
have been beneficial to complement this analysis with a resource-based view in order to justify the
company’s long-term strategic success and competitive differentiation. However, the perspective of
the Porter’s model justifies the attractiveness of the oil and gas industry in Nigeria which led to the
establishment of the national competitive advantage transformed into a firm specific advantage by
Oando.
4.3. Summary
To conclude, given the government’s heavy dependence on oil exports, high factor endowments in
gas reserves and technological opportunities (PEST), Oando should hedge risk of its portfolio by
diversifying in the gas segment. Also, the technological threat of discontinued electricity supply in
Nigeria and the political opportunity of benefits provided by emission certificates could create a
market space for Oando in gas-powered electricity plants.
16
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Appendixes
Appendix 1: Oando Plc 2009 Annual Report
Appendix 2: Africa’s Oil and Reserves and Consumption
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