MSC I N FI NANCE AND I NTERNATI ONAL BUSI NESS,4TH SEMESTER AUTHORS:DEJANTALEVSKI ANDREDI OGENESLACETDELI MA ADVI SER: ERI KSTRJERMADSEN STRATEGI C AND FI NANCI AL ANALYSI SI N THE OI L I NDUSTRY: PETROBRAS SHAREHOLDERS VALUE POTENTI ALAND FAI R VALUE OF STOCK AARHUS SCHOOLOF BUSI NESS SEPTEMBER 2009 Page1 Abst r actPr i ces ofoi land gas sk yr ock et ed dur i ng t he pastcoupl e ofyear s, w i t h t hi s t r end r ever si ng f r om t he second hal fof2008. The pr evai l i ng gl obalr ecessi on has cutdow n oi ldemand and caused pr i ces t o pl unge. Wor l dw i de, oi lcompani es ar e cont i nual l y pr essur ed t o r epl ace depl et i ng oi lr eser ves, w hi ch has become har dert han evert o accompl i sh. Cl i mat e change and envi r onment alconcer ns ar e f ur t herconst r ai ni ng compani espr of i t abi l i t y i n t he i ndust r y. Consequent l y, oi lcompani esst ock s have seen cor r espondi ng decl i nes i n val ue i n 2008. Dur i ng t hi s per i od, t he Br azi l i an nat i onaloi lcompany, Pet r obr as, l ed a ser i es ofannouncement s ofhuge oi l f i el ds di scover i es, w hi ch t r i gger ed subst ant i ali ncr eases i n t he company s shar e pr i ce, how everf ol l ow ed by a huge dr op i n t he second hal fof2008. Thi s i ni t i at ed t he quest i on w het herPet r obr asst ockpr i ce gi ven by t he mar k etw as i t s act ualf ai rval ue, ori tmay have i n f actbeen under val ued. Fur t her mor e, t he l at erdevel opment s i n t he pet r ol eum i ndust r y, w hi ch chal l enged compani espr of i t abi l i t y and r et ur ns, made i ti ncr easi ngl y i nt er est i ng t o i nvest i gat e t he i mpactofal lt hi s on shar ehol der sval ue.Thus, t hi s paper s ai m i s t o exami ne t he pot ent i alofPet r obr as t o cr eat e shar ehol der sval ue and att he same t i me t o det er mi ne t he company s st ockf ai rval ue att he end of2008. Fort hi s pur pose, t hi s st udy uses t he t op-dow n appr oach t o i nvest i ng ( Rei l l y and Br ow n, 2002) . Thi s appr oach al l ow s i nvest or s t o acqui r e i mpor t anti n f or mat i on on t he at t r act i v eness oft he i ndust r y, i t s cur r entand f ut ur e out l ook , as w el las t he i nsi des ofa speci f i c company, bef or e i nvest i gat i ng i t s val ue. Thi s i s achi eved by conduct i ng a det ai l ed st r at egi c anal ysi s oft he i ndust r y and t he company, ul t i mat el y ai med att he company s f i nanci alposi t i on and val ue cr eat i on capabi l i t y. I n gener al , t he t heor et i calf r amew or k s appl i ed i n t hi s st udy coverdi f f er entsubj ectar eas w i t hi n st r at egi c management , f i nance, i ndust r i aleconomi cs and account i ng. The f i ndi ngs oft hi s st udy suggestt hatPet r obr asst r engt hs by f arout mat ch i t s t hr eat s and enabl e t he company t o del i verval ue t o shar ehol d er s i n t he l ong-r un. The f actt hatPet r obr as i s a nat i onaloi lcompany, w i t h a pr i vi l eged access t o oi lr esour ces i n Br azi l , w i t h t echnol ogi call eader shi p i n deepw at erand ul t r a-deep w at erexpl or at i on, si gni f i cant l y gr ow i ng oi lr eser ve base and a di ver si f i ed por t f ol i o ofpr oduct s, w i t h an accenton bi of uel s, gi ves i tcompet i t i v e advant age i n t he i ndust r y and secur es i t s val ue cr eat i on. By usi ng DCF val uat i on met hodol ogy, w e al so est abl i shed t hatt he company s st ockw as i ndeed under val ued by t he mar k etatt he end of2008, i mpl i cat i ng t hatPet r obr asshar es ofst ockar e i n f acta good i nvest ment . Page2 T abl e of Cont ent s I . I NT RODUCT I ON ........................................................................................................................ 41.1. Pr obl em St at ement.................................................................................................................................. 5 1.2. Met hodol ogy............................................................................................................................................... 7 1.3. Del i mi t at i ons.............................................................................................................................................. 9 1.4. Sel ect i on ofVal uat i on Met hods and St r at egi c Anal ysi s Fr amew or k s..........................10 1.4.1. Val uat i on Met hods ............................................................................................................................................ 10 1.4.2. Eval uat i on and Sel ect i on ofVal uat i on Met hods ................................................................................ 13 1.4.3. Di scussi on and Sel ect i on ofSt r at egi c Anal ysi s Fr amew or k s ..................................................... 15 I I . PET ROLEUM I NDUST RY ST RAT EGI C ANALYSI S ........................................................... 1 82.1. Macr o Envi r onment PESTEL Anal ysi s......................................................................................18 2.2. I ndust r y Compet i t i on Anal ysi s ( Por t er s f i v e f or ces)............................................................23 2.3. Oi lDevel opment s: Suppl y, Demand, Pr i ce ..................................................................................32 2.3.1. Oi lSuppl y............................................................................................................................................................... 32 2.3.1.1. Oi lr eser ves Out l ook ................................................................................................................................... 322.3.1.2. Oi lPr oduct i on Capaci t y Out l ook ............................................................................................................ 332.3.1.3. Al t er nat i ve ( Unconvent i onal )Li qui d Fuel s Out l ook........................................................................ 352.3.1.4. Geopol i t i calAspect s .................................................................................................................................... 36 2.3.2. Oi lDemand ........................................................................................................................................................... 38 2.3.3. Oi lPr i ce Devel opment s .................................................................................................................................. 40 2.3.3.1. Oi lPr i ce RecentRecor d .............................................................................................................................. 402.3.3.2. Oi lPr i ce Pr oj ect i ons .................................................................................................................................... 42 2.4. Nat ur alGas Devel opment s i n Br azi l..............................................................................................43 2.4.1. Demand f orNat ur alGas................................................................................................................................. 44 2.4.2. Nat ur alGas Pr i ce Devel opment ................................................................................................................ 45 2.5. OPEC and Br azi l : Economi c and Geopol i t i calAspect s ...........................................................48 I I I . PET ROBRAS: START EGI C &FI NANCI AL ANALYSI S; VALUAT I ON OF T HE ST OCK ........................................................................................................................................................ 5 33.1. Company Pr of i l e.....................................................................................................................................53 3.2. Pet r obr as St r at egi c Appr oach..........................................................................................................55 3.3. Pet r obr as Val ue Chai n..........................................................................................................................60 3.4. SWOT St r engt hs, Weak nesses, Oppor t uni t i es and Thr eat s...........................................64 Page3 3.5. Fi nanci alPar amet er s Over vi ew.......................................................................................................71 3.5.1. Rat i os ....................................................................................................................................................................... 71 3.5.2. Hi st or i c Devel opmentofSt ockPr i ce....................................................................................................... 73 3.6. Val uat i on ofPet r obr as St ock ............................................................................................................75 3.6.1. DCF Anal ysi s ........................................................................................................................................................ 75 3.6.1.1. Equat i ons....................................................................................................................................................... 753.6.1.2. For ecast s ......................................................................................................................................................... 793.6.1.3. Est i mat i ng CostofCapi t al( WACC)......................................................................................................... 853.6.1.4. Est i mat i ng St ockFai rVal ue ...................................................................................................................... 863.6.1.5. Mont e Car l o Si mul at i on .............................................................................................................................. 87 3.6.2. Mul t i pl es ................................................................................................................................................................ 92 3.7. Di scussi ng Mar k etVal uat i on and Tot alShar ehol der s Ret ur ns ........................................93 3.7.1. Pet r obr as Shar ehol der s Ret ur ns ............................................................................................................... 96 I V. CONCLUSI ON ......................................................................................................................... 9 8Li t er at ur e .......................................................................................................................................................... 104 Appendi x A ............................................................................................................................................................ i iAppendi x B .............................................................................................................................................................v Appendi x C .......................................................................................................................................................... vi iAppendi x D ........................................................................................................................................................... i x Appendi x E ............................................................................................................................................................. x Appendi x F .......................................................................................................................................................... xi iAppendi x G ........................................................................................................................................................ xi i i Page4 I . I NT RODUCT I ON I n 2008, cr ude oi lhi tpr i ces neverseen i n t he i nt er nat i onalmar k etbef or e ( $147/ bar r elati t s peak ) . Dur i ng t he same per i od Pet r obr as, t he Br azi l i an nat i on aloi lcompany has l ed a ser i es ofannouncement s st at i ng oi lf i el d di scover i es, w i t h emphasi s on a gi gant i c of f shor e f i el d named Tupi . Thi s f i el d i s bel i eved t o cont ai n atl east5-8 bi l l i on bar r el s ofr ecover abl e oi land w oul d boostt he count r y' s t ot alr eser ves by about50%. The si ze oft hi s di scover y has notonl y sur pr i sed t he company and Br azi l i an aut hor i t i es, butt he i nt er nat i on alcommuni t y as w el l1. Br azi l i an of f i ci al s have sai d ot herof f shor e f i el ds coul d ul t i mat el y l eave t he count r y w i t h 80 t o 100 bi l l i on bar r el s ofpr oven r eser ves, some oft he l ar geston t he gl obe. By compar i son, SaudiAr abi a, t he l ar gestow neroft r adi t i onaloi lr eser ves, i s t houghtt o hav e about256 bi l l i on bar r el s. Thi s has l ef tr oom f orsuspi ci on t hatonce Br azi lbecomes capabl e ofexpor t i ng oi li n l ar ge quant i t i es, i tmay j oi n OPEC2.Pet r obr as has al so l eadi ng capaci t i es and t echnol ogi es i n t he ar ea ofet han oland bi odi eselpr oduct i on, w hi ch ar e l i k el y t o be r el ev antsour ces off ueli n t he f ut ur e. The gr een f uelt echnol ogy i s notsomet hi ng newi n Br azi l . The count r y has t ak en advant age ofi t s vastf i el ds ofsugarcane pl ant at i ons and st r at egi cal l y used t he et hanolf uelt echnol ogy t o over com e t he Oi lcr i si s oft he 70s, becomi ng ener gy sel f -suf f i ci ent . Now adays, mostcar s pr oduced i n t he count r y ar e equi pped w i t h hybr i d mot orengi nes, compat i bl e t o r un ef f i ci ent l y ei t heron et hanolorgasol i ne. As f orbi odi esel , l at el y, Br azi lhas been w or k i ng t o i ncr ease t he pr oduct i on ofr awmat er i al s used i n i t s pr oduct i on and i s al r eady mi xi ng bi odi eselw i t h di esel( pr oduced f r om pet r ol eum)f ordomest i c sal e. Thi s suggest s t hatnotonl y Pet r obr as has t he pot ent i alt o become on e oft he mosti mpor t antpl ayer s i n t he gl obaloi li ndust r y, buti tcan al so l ead t he gr een f uelr evol ut i on, w hi ch i s yett o com e3. As a mat t eroff act , oi land gas demand ar e expect ed t o st ar tgr ow i ng agai n i n 2010, t r end w hi ch i s expect ed t o l asti n t he l ong r un. Thi s i s dr i ven by t he r ecov er y oft he w or l d GDP af f ect ed f or m t he gl obaleconomi c cr i si s. I n cont r ast , exi st i ng pr oduct i on onl y t ends t o decl i ne, as oi lcompani es ar e havi ng di f f i cul tt i mes t o r epl eni sh t hei rdepl et i ng oi lr eser ves w i t h newones4. Even w i t h si gni f i cantener gy ef f i ci ency i mpr ovement s i n consumpt i on, demand i s st i l lexpect ed t o r i se, especi al l y w i t h t he accel er at ed gr ow t h seen i n k ey devel opi ng count r i es, such as Chi na and I ndi a. To meetpr oj ect ed demand, t he oi li ndust r y 1 Mor e bount y- The Economi st( Apr19, 2008)2 Br azi ldecl i nes t o j oi n OPEC i n f avorofr ef i ni ng ( Sep 17, 2 008)3 Lean, gr een and notmean- The Economi st( Jun 28, 2008)4 ht t p:/ / w w w .ei a.doe.gov/ st eo Page5 w i l lneed t o add some ext r a 80 mi l l i on bar r el s a day t o pr oduct i on by 2010 and t he costoft hatcoul d easi l y r each $1 t r i l l i on ( Longw el l , 2002) .I n such a scenar i o, t he di scover y ofl ar ge oi lr eser ves, j ustas t he ones r ecent l y announced by Pet r obr as, and t he capaci t y ofl ar ge-scal e pr oduct i on ofal t er nat i ve f uelsour ces, obvi ousl y cause a pr of ound i mpacton t he i ndust r y s out l ook , t he company hol di ng t he r eser ves, as w el las t he count r y w her e t hese bel ong t o. I n addi t i on t o t hi s, i fw e add t he w or l d s concer ns t ow ar ds gl obalw ar mi ng and cl i mat e changes, l egal l y-bi ndi ng r egul at i ons on gr eenhouse gases emi ssi ons and envi r onment alt r eat i es, i tbecomes evi dentt hatt he oi li ndust r y i s f aced w i t h a huge setofchal l enges. Ther ef or e, t hi s paperw i l lat t emptt o mak e a st r at egi c anal ysi s ofPet r obr as, ul t i mat el y ai med ati t s f i nanci alposi t i on and shar ehol der sval ue, al so consi der i ng t he company s i nt er nat i onaland geost r at egi c per spect i ve. The need f ort hi s k i nd ofanal yt i calpr oj ectcomes as a r esul toft he l at estdevel opment s af f ect i ng t he gl obaloi li ndust r y and Pet r obr as, butal so oft he company s i nt er nalevent s t hatcaused si gni f i cantf l uct uat i ons i n i t s st ockpr i ce.1 .1 . Pr obl em St at ementThe oi l&gas i ndust r y has a pecul i arbusi ness modelt hatcombi nes t echnol ogy, pol i t i calr el at i onshi ps, exper i enced per sonnel , envi r onment alpr ot ect i on and economi cs ( based on economi es ofscal e)i n t he hi gh-r i skpur sui tofa f i ni t e butvi t alcommodi t y. Thi s modeli mposes maj orchal l enges on pr of i t abi l i t y ofcompani es i n t hi s i ndust r y. They mustassur e t hatnew l y di scover ed r esour ces ar e used i n economi caland sust ai nabl e manner , w her e t echnol ogy and costef f i ci ency ar e k ey aspect s. Technol ogy i s al so r el evanti n over com i ng t he f actt hatnewsuppl i es ar e get t i ng l ocat ed mor e and mor e di st antf r om consumi ng mar k et s. That s especi al l y t r ue f orgas and of f shor e oi lr esour ces ( Pet r obr as AnnualRepor t2007) .I n Pet r obr ascase, t he newoi lr eser ves ar e l ocat ed of f shor e i n ul t r a-deep w at er , beneat h a ver y t hi ckl ay erofsal tt hatno ot hercompany has everat t empt ed t o expl oi tbef or e. Mor eov er , Pet r obr as has al so f ound di f f i cul t i es i n suppl yi ng nat ur algas t o t her malpow erpl ant s, especi al l y si nce i t s f i el ds i n Bol i vi a w er e quasi -nat i onal i zed. Forsuch r easons, one shoul d be ver y car ef ulw hen assessi ng t he pr of i t abi l i t y ofan oi lcompany. Forexampl e, af t ert he announcementofTupi s di scover y, Pet r obr asshar e pr i ce gr ewi nst ant l y by 26%. How ever , i n l ess t han a w eek , t he company announced poorr esul t s, w i t h oper at i ng pr of i t Page6 dow n by 22% compar ed w i t h t he same quar t eri n t he yearbef or e ( 2006)5, causi ng t he shar e pr i ce t o dr op.The at t ent i on gi ven t o cl i mat e changes, t he w or l dw i de depl et i on ofoi lr esour ces, t he decr easi ng oi ldemand ofdevel oped economi es and t he huge var i at i ons oft he oi lpr i ce dur i ng l astyearhave chal l enged t he pet r ol eum i ndust r y and compani es, mak i ng i ti ncr easi ngl y i nt er est i ng t o i nvest i gat e t he i mpactofal lt hi s on shar ehol der s r et ur ns. Addi t i onal l y, t he si gni f i cantf l uct uat i on ofPet r obr asst ockpr i ce dur i ng l at e 2007 and 2008, and i t s r el at i vel y l owval ue att he end of2008, i ni t i at ed t he quest i on w het hert he shar e pr i ce gi ven by t he mar k etw as t he act ualf ai rval ue ofPet r obr asst ockatt he end of2008, ori tmay have possi bl y been under val ued! As a consequence, ourgoali n t hi s paperi s t o det er mi ne Pet r obr as pr of i t abi l i t y and val ue cr eat i on capabi l i t y, ar r i vi ng att he company s st ockf ai rval ue att he end of2008; t her eby, t ak i ng i nt o consi der at i on t he t r ends oft he oi l&gas i ndust r y as w el las t he company s gener alcapaci t y t o st ay compet i t i v e i n i t . Fr om her e, t he pr i nci palpr obl em can be synt hesi zed i nt o: Whati s t he pot ent i alofPet r obr as t o cr eat e shar ehol der s val ue, nowand i n t he f ut ur e?And, w hatw as i t s st ock f ai rval ue att he end of2008?Get t i ng atPet r obr as shar ehol der sval ue and i t s f ai rst ockpr i ce i s f i r stgoi ng t o t ak e us t hr ough di f f er entst r at egi c and f i nanci alanal yses oft he i ndust r y and t he company. I n gr eat erdet ai l , t hi s r esear ch i s goi ng t o addr ess:di scussi ons oft he appr opr i at e model s f ori ndust r y anal ysi s and val uat i on of acompany s st ock ,st r at egi c anal yses oft he company and t he pet r ol eum i ndust r y,mar k etcondi t i ons and f ut ur e devel opmentofoi land gas pr i ces OPEC and car t elt heor yf i nanci alover vi ewoft he company and val uat i on ofi t s st ockI n t hi s cont ext , t he st udy i n f r ontofus w i l lat t emptt o gi ve answ er s t o ot heri mpor t antquest i ons t hatw i l li n t he end hel p col l ectt he det ai l s f oransw er i ng t he pr i nci palpr obl em. These quest i ons ar e: 5 Al lt hi s and oi lt oo -The Economi st( Nov 17, 2007) Page7 Based on Por t er s i ndust r y anal ysi s f r amew or k , howi s t he compet i t i ve si t uat i on i n t he i ndust r y i nf l uenci ng t he abi l i t y ofcompani es t o sust ai n pr of i t abi l i t y ? Howar e t he cur r entcondi t i ons i n t he oi land gas mar k et s and t he f ut ur e pr ospect s ofdemand and suppl y, al ong w i t h t he expect ed f ut ur e oi land gas pr i ces goi ng t o i mpactPet r obr asf ut ur e pr of i t abi l i t y? Whatar e t he posi t i ve and negat i ve aspect s f orPet r obr as/ Br azi loft he possi bl e Br azi l i an par t i ci pat i on i n OPEC?Whati s Pet r obr asst r at egi c appr oach and howdoes t he company cr eat e val ue t hr oughouti t s val ue chai n? Howar e Pet r obr asst r engt hs, w eak nesses, oppor t uni t i es and t hr eat s i nf l uenci ng i t s val ue? Whati s t he cur r entst at e ofPet r obr asf i nanci alposi t i on and howdoes i tcompar e t o t he peer s i n t he i ndust r y? 1 .2 . Met hodol ogy I n t hi s r epor t , i t s f ound necessar y t o conductbot h qual i t at i ve and quant i t at i ve r esear ch, usi ng pr edomi nant l y secondar y dat a, w hi ch i s cov er ed by publ i shed ar t i cl es, company annualr epor t s, f i nanci alagenci es r epor t s, book s and gener aleconomi c magazi nes. The qual i t at i ve par toft he anal ysi s w i l lt ak e mostoft hi s r esear ch, how ev erw i t h t he goalt o hel p us under st and t he aspect s i n t he f i nal - quant i t at i v e par t( t he f i nanci alanal ysi s) . The t ype ofanal ysi s st r uct ur ed i n t hi s w ay i s k now n as a t op-dow n appr oach w i t hi n i nvest mentand f i nanci alt heor y. Thi s appr oach al l ow s i nvest or s t o acqui r e i mpor t anti nf or mat i on on t he at t r act i veness oft he i ndust r y, i t s cur r entand f ut ur e out l ook , as w el las t he i nsi des ofa speci f i c company, bef or e i nvest i gat i ng i t s val ue ( Rei l l y and Br ow n, pg.544) . I n gener al , t he t heor et i calf r amew or k s appl i ed i n t hi s st udy coverdi f f er entsubj ectar eas w i t hi n st r at egi c management , f i nance, i ndust r i aleconomi cs and account i ng. I n t hatdi r ect i on, t he f i r stqual i t at i ve par toft he r esear ch w i l lf ocus on t he i ndust r y. I ndust r y st r at egi c f r amew or k s w i l lbe used t o depi ctt he condi t i ons pr evai l i ng i n t he gl obalpet r ol eum i ndust r y. To i nvest i gat e t he busi ness envi r onmentand t he f act or s af f ect i ng t he i ndust r y, t he PESTEL f r amew or ki s goi ng t o be appl i ed. Howt he compet i t i v e si t uat i on i n t he i ndust r y i nf l uences t he abi l i t y ofcompani es t o sust ai n pr of i t abi l i t y i s goi ng t o be exami ned by Por t er s f i ve f or ces modelf ori ndust r y compet i t i on anal ysi s. Car t elt heor y and model s w i l lbe appl i ed t o i nvest i gat e t he det er mi nat i on ofgl obaloi lpr i ces and t he i mpacton t hese i fBr azi lj oi ns t he car t elofoi lexpor t i ng count r i es - OPEC. A sur vey oft he mar k etcondi t i ons i n Page8 t he oi l&gas mar k et s, as w el las expect ed devel opment s oft hese commodi t i espr i ces i s al so goi ng t o be appl i ed. I n t he second par toft he qual i t at i ve an al ysi s, t he f ocus w i l lbe puton Pet r obr as st r at egi c appr oach. Her e, usi ng t he SWOT fr amew or ki s goi ng t o hel p us under st and howt he company s st r engt hs, w eak nesses, oppor t uni t i es and t hr eat s ar e i nf l uenci ng i t s val ue. Fur t her mor e, t he i nsi de ofPet r obr asval ue cr eat i ng pr ocess w i l lbe r eveal ed usi ng t he Val ue Chai n f r amew or k .I n t he l ast- quant i t at i v e par toft hi s r esear ch t he emphasi s w i l lbe puton t he f i nanci alanal ysi s ofPet r obr as. The hi st or i c devel opmentofPet r obr asshar e pr i ce, as w el las i t s pr of i t abi l i t y, l i qui di t y and sol vency r at i os compar ed t o peer s ar e goi ng t o be i nvest i gat ed. The mosti mpor t antpar tt hough w i l lbe t he v al uat i on ofPet r obr asst ockby usi ng t he Di scount ed Cash Fl ow( DCF)anal ysi s. Notonl y t hi s met hod w i l lbe el abor at ed i n det ai l , butw e ar e al so goi ng t o be usi ng ot herval uat i on t echni ques f orcompar i son r easons, i .e. Mul t i pl es. Sensi t i vi t y and scenar i o anal yses as par toft he quant i t at i ve r esear ch ar e goi ng t o be appl i ed, t oo.The sel ect i on pr ocess and t he di scussi on oft he pr evi ousl y st at ed t heor et i calmodel s and f r amew or k s ar e pr esent ed i n det ai li n an upcomi ng sect i on. I n gener al , t hi s paperi s st r uct ur ed i n t he f ol l ow i ng w ay:I n Sect i on Iw e ar e: di scussi ng and sel ect i ng I ndust r y Anal ysi s f r amew or k s and Val uat i on met hods; I n Sect i on I I( Pet r ol eum I ndust r y St r at egi c Anal ysi s)w e ar e: conduct i ng PESTEL and I ndust r y compet i t i on anal ysi s ( Por t er s f i ve f or ces) ; anal yzi ng oi land gas mar k et s, and det er mi ni ng expect at i ons on oi l&gas pr i ces devel opment s; eval uat i ng Car t elt heor y and oppor t uni t i es f orBr azi lofj oi ni ng OPEC; I n Sect i on I I I( Pet r obr as St r at egi c and Fi nanci alAnal ysi s; Val uat i on ofSt ock )w ear e: i nt r oduci ng Pet r obr as i n gr eat erdet ai l ; i nvest i gat i ng i t s st r at egi c appr oach, val ue chai n and SWOT; anal yzi ng Pet r obr asf i nanci alr at i os and f l uct uat i ons ofi t s shar e pr i ce; det er mi ni ng t he st ockf ai rval ue by t he DCF met hod and appl yi ng mul t i pl es; di scussi ng and compar i ng t he f ai r&mar k etgi ven st ockval ues I n t he l astpages oft hi s paperw e out l i ne t he concl usi ons oft he r esear ch. Page9 1 .3 . Del i m i t at i ons The mai n f ocus oft hi s r esear ch w i l lbe puton t he pet r ol eum i ndust r y. The nat ur algas w i l lnotbe di st i ngui shed as a separ at e i ndust r y t hr oughoutt he qual i t at i ve r esear ch, and mostoft he anal ysi s on oi lw i l lbe consi der ed t o hol d f orgas t oo. Thus, oi land gas w i l lbe consi der ed as t he same i ndust r y. Thi s i s due t o t he f actt hatgas i s most l y f ound t oget herw i t h oi land oi lcompani es i n f ocus ar e att he same t i me pr oducer s ofgas. How ever , nat ur algas w i l lr ecei ve i ndi vi dualf ocus w hen t r yi ng t o est i mat e i t s suppl y &demand, and pr i ce devel opment s. Oi l&gas i ndust r y , oi li ndust r y orsi mpl y t he i ndust r yw i l lconsi derl ar ge, ver t i cal l y-i nt egr at ed ( i .e. f r om upst r eam t o dow nst r eam)nat i onaland i nt er nat i on aloi lcompani es ( NOCs and I OCs) . The deci si on f ort hi s w as based on t he f actt hatt he company i n f ocus oft hi s st udy, Pet r obr as, r epr esent s such an i nt egr at ed oi lcompany. How ever , w e ar e mai nl y goi ng t o st ay f ocused on t he upst r eam oper at i ons i n t he anal ysi s, as ar ound 50% ofPet r obr asbusi ness bel ongs t o t hi s segment6. The f ol l ow i ng f i gur e depi ct s t he di f f er entf unct i onalar eas oft he i ndust r y t hatar e goi ng t o be t ak en i nt o account : UPSTREAM M IDSTREAM DOW NSTREAM The di st i nct i on bet w een t he t w o t ypes ofcompani es ( NOCs and I OCs)i s t hatnat i onalar e f ul l y ormaj or l y st at e ow ned compani es w i t h a pr i vi l eged access t o oi lr esour ces i n home count r i es. NOCs ar e f orexampl e: Pet r obr as ( Br azi l ) , Ar amco ( SaudiAr abi a) , Gazpr om ( Russi a) , St at oi l Hydr o ( Nor w ay) , Pemex ( Mexi co) , et c. I nt er nat i onaloi lcompani es, on t he ot herhand, ar e maj or l y pr i vat el y ow ned, and ar e pr esentw or l dw i de. Some oft he bi ggestI OCs ar e: ExxonMobi l , RoyalDut ch Shel l , BP, Chev r on, ConocoPhi l l i ps and Tot alS.A. Anot hert ypi calf or m ofoi lcompani es ar e t he oi l f i el d ser vi ce compani es7, w hi ch ar e notsubj ectofanal ysi s i n t hi s r esear ch. They r at herappearas suppl i er s oft he oi lcompani es i n t hi s paper .I n t hi s st udy, w e w i l lactas ext er nalanal yst s w i t h no access t o i nt er nali nf or mat i on. Thi s i s noti deal , as w e w oul d pr ef ert o have a l otmor e f i nanci aldat a on t he company, especi al l y one t hatr ef er s t o f ut ur e pr oj ect i ons. How ever , t he assumpt i ons w e w i l lmak e shoul d be r easonabl e so t hatt he f i nalr esul t s and concl usi ons ar e cl ose t o r eal i t y. 6 ht t p:/ / w w w 2.pet r obr as.com.br / r i / i ng/ Apr esent acoesEvent os/ Conf Tel ef oni cas/ pdf / PN_2009-2013_I ng.pdf7 Oi l f i el d-ser vi ces compani es engage i n: sei smi c dat a acqui si t i on, pr ocessi ng and anal ysi s, w el ldr i l l i ng, compl et i on, eval uat i on and st i mul at i on, and pr oduct i on-r el at ed ser vi ces ( w el lmoni t or i ng, pr oduct i on mai nt enance, f l owassur ance and enhanced r ecover y t echnol ogi es)( I EA, 2008)Explora t ion Development Product ion Tra nsport a t ion Ref inement Dist ribut ion Page10 The t i m e span cover ed i n t he r esear ch i ncor por at es t he l astcoupl e ofdecades oft he 20t h cent ur y, buti tal so goes one decade i nt o t he f ut ur e ( t he qual i t at i v e anal ysi s) .I nf or mat i on beyond t he f i r sthal fof2009 ( 31.06)w i l lnotbe consi der ed. 1 .4 . Sel ect i on of Val uat i on Met hods and St r at egi c Anal ysi s Fr amew or k s1 .4 .1 . Val uat i on Met hodsChoosi ng t he r i ghtval uat i on met hod i s ofexcept i onali mpor t ance, as i ti s di r ect l y i nf l uenci ng t he st ockval ue. The det er mi nat i on oft he f ai rval ue ofPet r obr asst ocki s an i mpor t anti ssue i n t hi s st udy, as w e doubtt he val ue gi ven by t he mar k et . Di f f er entval uat i on appr oaches pr oduce di f f er entr esul t s and t hus, pi ck i ng t he mostaccur at e and r el i abl e one i s essent i al . The f ol l ow i ng sect i on i s goi ng t o di scuss and descr i be t he mostw i del y used val uat i on appr oaches and met hods;Ma r ketVa l ua t i on Met hods The mar k etval uat i on met hods ar e k now n as r el at i ve val uat i on met hods ( al so mul t i pl es met hods)because t hey ar e assi gni ng a val ue t o a company orassetby st udyi ng t he pr i ces ofsi mi l arcompani es/ asset s, w hi ch have been t r aded i n a mar k et . These met hods der i ve t he val ue ofa company by t he pr i ce ofcompar abl e compani es. The compar i son bet w een t he compani es i s made by l ook i ng atsome st andar di zed var i abl es, such as ear ni ngs, di vi dends, cash f l ow s, sal es and nett angi bl e asset s, orr at i os der i ved by t hese var i abl es, i .e. pr i ce-ear ni ngs r at i o ( P/ E) , pr i ce-t o-book( P/ B)and pr i ce-t o-sal es r at i o. The compani es t hatar e bei ng compar ed have si mi l aroper at i ng and f i nanci alchar act er i st i cs and i n mostcases come f r om t he same i ndust r y. The mar k etval uat i on met hod t hus assumes t hatt he val ue ofot hercompani es i s appl i cabl e t o t he company i n quest i on ( Pal epu etal ., 1997, Ch.7) .Book Va l ue Ba sed Met hods Based on account i ng t echni ques, t hese met hods val ue a company by i t s bookval ue. Essent i al l y, t he bookv al ue ofa company i s i t s equi t y, w hi ch i s der i ved by subt r act i ng t he asset s by t he l i abi l i t i es. Ot herappr oaches based on t he account i ng t echni ques ar e t he l i qui dat i on and t he r epl acementmet hod. The l i qui dat i on val ue ofa company i s t he t ot alamountone w oul d r ecei ve by sel l i ng t he var i ous asset s ofa company separ at el y. The r epl acementval ue ofa company i s t he t ot alamountone w oul d have t o pay i ft hey w er e t o r epl ace al loft he comp any s asset s i n or dert o st ar ta newcompany w i t h t he same ear ni ng pow er( Pal epu etal ., 1997, Ch.7) . I ncome Ba sed Va l ua t i on Met hods I ncome-based met hods ar e by f art he mostpopul arval uat i on appr oaches among anal yst s and i nvest or s. Ther e ar e sever ali ncome-based Page11 met hods, outofw hi ch f ourw i l lbe di scussed her e, i .e. t he di scount ed cash f l owmodel , di vi dend di scountmodel , EVA modeland t he ear ni ngs-capi t al i zat i on model . Di scount ed cash f l owmodel( DCF)i s an appr oach t hatder i ves t he val ue ofa company by di scount i ng i t s expect ed f ut ur e cash f l ow s by t he company s r i sk -adj ust ed r at e ofr et ur n ort he est i mat ed costofcapi t al . The modelempl oys det ai l ed mul t i pl e yearf or ecast s oft he cash f l ow s, w hi ch ar e based on hi st or i c per f or mance and f ut ur e expect ed devel opment s. I ti s essent i alt hatt hese f or ecast s ar e as accur at e as possi bl e as t hey ar e di r ect l y i nf l uenci ng t he accur acy oft he val uat i on. Fur t her mor e, pr eci se di scountr at e i s cal cul at ed f oreach per i od, w hi ch t ak es i nt o accountr i skand hi st or i c vol at i l i t i es ( Fer nandez Pabl o, 2002, pg.24-47) . Anal yst s and i nvest or s t end t o f r equent l y use t hi s modelbecause i tr el i es sol el y on t he company s cash f l owr at hert han on account i ng based ear ni ngs, w hi ch can be mi sl eadi ng. Addi t i onal l y, t he met hod has a cl ose l i nkt o economi c t heor y and compet i t i ve st r at egy and i s r at herst r ai ght f or w ar d t o i mpl ement( Kol l eretal ., 2005, pg.101) . Based on t hese aspect s, t he DCF w i l lbe t he mai n appr oach i n t he det er mi nat i on ofPet r obr asst ockval ue and w i l lbe descr i bed i n det ai li n t he val uat i on pr ocess oft he company.Di vi dend di scountmodel( DDM)i s a pr ocedur e f orval ui ng t he pr i ce ofa st ockby usi ng pr edi ct ed di vi dends and di scount i ng t hem backt o pr esentval ue. I n or dert o empl oy t hi s met hod, i n addi t i on t o expect ed di vi dends, ot herf act or s such as t he costofequi t y and t he equi t y oft he company mustbe est i mat ed as w el l . The i dea i s t hati ft he val ue obt ai ned f r om t he DDM i s hi ghert han w hatt he shar es ar e cur r ent l y t r adi ng at , t he st ocki s under val ued. Thi s met hod i s onl y appl i cabl e f orcompani es t hatpay outdi vi dends ( Mi l l erand Modi gl i ani , 1961, pg. 411-433) . The equat i on f ort hi s modeli s: Val ue ofSt ock =Di vi den d pershar eDi scoun tRat e Di vi den d gr ow t h r at e Economi c val ue added ( EVA)has been devel oped as an al t er nat i ve t o t he DCF model . I n shor t , EVA i s t he netoper at i ng pr of i t( af t ert axes)mi nus a char ge f ort he oppor t uni t y costofal lcapi t ali nvest ed i n a company. I n ot herw or ds, i ti s an est i mat e oft he economi c pr of i t , ort he amountby w hi ch ear ni ngs exceed orar e l ess t han t he r equi r ed mi ni mum r at e ofr et ur n t hatshar ehol der s coul d getby i nvest i ng i n ot hercompani es ofcompar abl e r i sk( St ew ar t , 1991) . The basi c f or mul a f orEVA i s: EVA = NOPAT WACC Capi t alempl oyedEar ni ngs capi t al i zat i on met hod i s an i ncome-val uat i on appr oach t hatdet er mi nes t he val ue ofa company based upon pr esentval ue ofest i mat ed f ut ur e ear ni ngs orpr of i t , Page12 di scount ed by t he capi t al i zat i on r at e ( cap r at e) . The capi t al i zat i on ofear ni ngs i s par t i cul ar l y usef ulw hen t he f ut ur e ear ni ngs can be pr edi ct ed easi l y and accur at el y; Val ue =Ear n i n gs i nFut ur e Year sDi scoun tRat e Gr ow t h r at e Rea lOpt i ons Realopt i ons ar e yetanot herpossi bl e val uat i on met hod. They st and outas super i orf r om t he r estoft he val uat i on appr oaches, because t hey expl i ci t l y capt ur e t he val ue off l exi bi l i t y. Realopt i ons pl ace val ue t o management s abi l i t y t o r eactt o f ut ur e event s and newi nf or mat i on ort o changi ng mar k etcondi t i on s. Regul arDCF anal ysi s, on t he ot herhand, does notf ul l y i ncor por at e t he val ue off l exi bi l i t y. Whati tuses i s adj ust mentoft he di scountr at e ort he cash f l ow s, w hi ch do notpr oper l y accountf orchanges i n t he r i skovert he pr oj ect s l i f e and f ai lt o appr opr i at el y adaptt he r i skadj ust ment( Amr am and Kul at i l ak a, 1999) . Ther e ar e di f f er entt ypes ofr ealopt i ons, such as: gr ow t h opt i ons, opt i ons t o abandon, opt i ons t o def er , opt i ons t o al t erorexpand, et c.I n Schl umber geron r ealopt i ons i n oi land gas, Bai l ey ( 2005)di scusses t he appl i cabi l i t y ofr ealopt i ons i n t hese i ndust r i es. The oi li ndust r y deal s w i t h char act er i st i cs t hatar e i deal l y sui t ed f orr ealopt i ons, i .e. l ar ge capi t ali nvest ment s, uncer t ai n r evenue st r eam, of t en l ong l ead t i mes t o achi eve t hese cer t ai n cash f l ow s, uncer t ai nt y i n t he am ountofpot ent i alpr oduct i on, numer ous t echni calal t er nat i v es, pol i t i calr i skand mar k etexposur e. Consequent l y, r ealopt i ons have a nat ur alpl ace i n t he oi li ndust r y management -deci si on-mak i ng pr ocess. Realopt i ons ar e abl e t o capt ur e t he pr esence ofuncer t ai nt y, l i mi t ed i nf or mat i on and t he exi st ence ofdi f f er ent , butval i d, devel opmentscenar i os. Whatf ol l ow s i s howt hey f i ti n t he di f f er entst ages oft he devel opmentofoi lf i el ds ( Bai l ey, 2005, pg.44-49) ; - Expl or at i on and appr ai sal : Ext entofi nvest ment s needed i n acqui r i ng sei smi c dat a? Ext entofr i skshar i ng ( cont r actpar t ner shi ps) ? Numberofexpl or at i on w el l s t o del i neat e t he f i el d?; - Devel opment : Number , l ocat i on and or derofw el l s t o be dr i l l ed? Compl exi t y ofpr oducer s w el l s ( devi at ed/ hor i zont al ) ? Numberofpl at f or ms, and i fof f shor e: f l oat i ng orper manent ? Type ofi nt er vent i ons: r out i ne orw or k -over ? Numberand l ocat i on ofi nj ect or s? Si ze ofpr ocessi ng f aci l i t y? Need ofnewpi pel i ne?; - Pr oduct i on: Mor e unsw eptar eas t hatcan st i l lbe expl oi t ed? Need t o di vestpar tort he ent i r e assett o ot hercompani es? Need f orf ur t hersei smi c dat a? Opt i ons t o ext end t he l i f e ofa f i el d? Re-ent er i ng w el l s t o i mpr ove t hei rper f or mance?; - Abandonment : Ul t i mat e abandonmentcost ? Envi r onment alcostofcl osi ng dow n?; et c. Page13 I n spi t e oft hi s enor mous usef ul ness t hatr ealopt i ons can f i nd w i t hi n t he oi li ndust r y, t hey onl y seem t o be excel l entf oreval uat i ng di f f er entpr oj ect s, butar e r at herunpr act i cali n det er mi ni ng t he val ue f ort he w hol e company!As show n above, t he pr ocess ofext r act i ng oi li s made up ofa numberofdi f f er entopt i ons. Atever y st ep oft he w ay, t her e i s an opt i on, ora st r at egi c choi ce t o be made. How ev er , w hen l ook i ng att he company as a w hol e, t he numberofopt i ons becomes t r emendous. Anot herdr aw backi s t hatw e do notpossess t he necessar y i nf or mat i on t o per f or m a sound r ealopt i on anal ysi s due t o conf i dent i al i t y r easons oft he company. How ever , t he bi ggestdi f f i cul t y comes f r om t he f actt hatr ealopt i ons t heor y i s notf ul l y devel oped i n di r ect i on ofval uat i ng ent i r e compani es; model i ng and val ui ng r ealopt i ons i s f armor e di f f i cul tt han val ui ng and model i ng st andar d cash f l ow s. I tmay al so be t hatt he bundl es ofasset s and oppor t uni t i es t hatcompani es ow n cannotbe pr act i cal l y val ued as opt i ons. 1 .4 .2 . Eval uat i on and Sel ect i on of Val uat i on Met hods Af t erhavi ng descr i bed and di scussed t he di f f er entval uat i on met hods, t he st ep t hatf ol l ow s i s t o compar e t hem and choose t he on e( s)t hatbestsui t s ouranal ysi s. A r ange ofcr i t er i a can be used i n t he eval uat i on, w her e w e w i l lmost l y r el y on Copel and &Keenan ( 1998) . The t abl e bel owgi ves an over vi ewoft he maj ordi f f er ences bet w een t he model s, w her e t he compar i son i s made upon f i ve cr i t er i a, i .e. r i sk -adj ust ment , mul t i -per i od per spect i ve, capt ur i ng f l exi bi l i t y, based upon cash f l owand pr act i cabi l i t y/ f easi bi l i t y; Ta bl e 1 . Compa r i son of Va l ua t i on met hods Ri sk -adj ust ed M ul t i -per i od Capt ur es Fl exi bi l i t y Cash fl ow -based Pr act i cabi l i t y Ma r ketVa l ue ( ) Book Va l ue I ncome Based Rea lOpt i ons Par t l y sour ced f r om Copel and and Keenan ( 1998)As seen f r om t he t abl e, t he mul t i pl es ( mar k etval ue met hods)ar e r el at i vel y unr el i abl e. They do notl ookata mul t i -per i od, ar e notcash f l ow -based, norcapt ur e f l exi bi l i t y. How ever , t hey ar e ver y pr act i caland easy t o use and under st and. Wi t h t hese met hods i ti s al so possi bl e t o i ncor por at e r i skadj ust ment s, w hi ch t heor et i cal l y t hough, do nothol d. Kapl an and Ruback( 1995)on t he ot herhand, concl ude t hatest i mat es made by f ut ur e i ncome met hods ar e f armor e pr eci se t han out put s f r om mul t i pl es. Equal l y, Fr ank eland Lee ( 1996) Page14 concl ude t hat t he EVA met hod pr edi ct s t he var i at i on i n t he st ockmar k etf arbet t ert han t he mul t i pl es . The maj ordi f f i cul t y usi ng mul t i pl es i s t o f i nd appr opr i at e compar abl e busi nesses and i ndi cat or s. How ever , t he mul t i pl es ar e of t en and w i del y ut i l i zed among i nvest or s because oft hei rf easi bi l i t y.The bookval ue met hods ar e scor i ng l ow estf r om t he ones di scussed above. They onl y seem t o be si mpl e and f unct i onal , butar e undependabl e based on t he ot hercr i t er i a. They ar e al so notappl i cabl e f orcompani es w i t h mor e t han j ustt angi bl e asset s ( Haw aw i ni , 2001) . Bookval ue met hods r el y on account i ng t echni ques, w hi ch usual l y di f f eracr oss count r i es, and dat a i n st at ement s, ver y of t en, may be subj ect i vel y i nf l uenced by account ant s ormanagement( t he cases ofEnr on and Wor l dcom) . As al r eady ment i oned, i ncome based met hods ar e def i ned by r esear cher s as f armor e r eal i st i c and r el i abl e t han f orexampl e t he mar k et( mul t i pl e)met hods. Namel y, a st r ong cor r el at i on has been f ound bet w een DCF val uat i on and t he act ualmar k etval ue ofcompani es ( Copel and etal ., 2000) . As t he t abl e above suggest s, i ncome based met hods ar e r i sk -adj ust ed, t ak e i nt o accountmul t i -per i od per spect i ve, ar e cash f l ow -based and ar e pr act i calf orval uat i on ofcompani es. The onl y dr aw backi s t hatt hey don tcapt ur e f l exi bi l i t y as good as r ealopt i ons. When compar i ng t he di f f er entmodel s w i t hi n t he i ncome based val uat i on, t he f i nance l i t er at ur e ar gues i n f avouroft he DCF appr oach ( Copel and etal ., 2000) . Whatmak es t hi s met hod especi al l y popul aramong anal yst s and i nvest or s i s t he f actt hati ti s st r ai ght f or w ar d t o car r y out , r at herr el i abl e and notaf f ect ed by account i ng met hods. Al lt hi s mak es us t o be i n f avouroft he DCF and t o adopti tas t he mai n val uat i on t ooli n ouranal ysi s.A l othas been sai d pr evi ousl y on r ealopt i ons and t he pr os and cons ofusi ng t hem i n val uat i on. They ar e i ndeed t he mostsophi st i cat ed t ooli n val uat i on, butunf or t unat el y ar en tdevel oped i n a w ay t o be sui t abl e i n val uat i on ofent i r e compani es. Thi s i s t he r eason w hy w e ar e notgoi ng t o i mpl ementt hem i n t he val uat i on ofPet r obr as st ock .Osmundsen etal . ( 2005)i n t hei rVal uat i on ofI nt er nat i onalOi lCompani es ar gue t hatoi lcompani es ar e pr i mar i l y val uat ed by t he use ofmul t i pl es and i ncome based met hods. Ci t i ng Damodar an ( 2002) , t hey st at e t hatr el at i ve val uat i on ( mul t i pl es)i s w i despr ead f ort he oi li ndust r y as i tr equi r es f arf ew erexpl i ci tassumpt i ons t han t he exhaust i ve DCF val uat i on , i ti s easi ert o pr esentand r ef l ect s t he cur r entmood oft he mar k et . Thi s encour ages us t o br i ef l y use mul t i pl es as a suppl ementt o t he mai n val uat i on met hod. Page15 Based on t he di scussi on above, t he concl usi on i s t hatt he DCF appear s t o be t he mostsui t abl e met hod f orest i mat i ng t he st ockval ue ofPet r obr as. Addi t i onal l y and as a suppl ement , mul t i pl es anal ysi s w i l lbe al so appl i ed br i ef l y, butonl y f orcompar i ng Pet r obr as t o i t s peer s i n t he i ndust r y and notf ort he det er mi nat i on ofi t s f ai rval ue.1 .4 .3 . Di scussi on and Sel ect i on of St r at egi c Anal ysi s Fr amew or k sNotonl y has i tappear ed essent i alt o sel ectt he r i ghtval uat i on model s, i ti s al so ver y i mpor t antt o choose t he appr opr i at e st r at egi c and i ndust r y anal ysi s f r amew or k s. Thi s comes as a r esul toft he appr oach w e have chosen t o f ol l owi n t hi s st udy, i .e. t he t op-dow n appr oach i n i nvest mentt heor y. Namel y, Rei l l y and Br ow n, ( 2002, Ch.11)ar gue t hatt he t op-dow n appr oach ( w her e t he val uat i on anal ysi s st ar t s w i t h t he macr oeconomi c envi r onmentand t he f i r m s i ndust r y, bot h ofw hi ch hav e si gni f i canti nf l uence on t he secur i t y val ue and i t s r at e ofr et ur n)has empi r i cal l y pr oven t o be mor e l ogi caland r el i abl e t han t he bot t om-up appr oach ( w her e i nvest or s ar e nott ak i ng i nt o accountt he condi t i ons pr evai l i ng i n a f i r ms mar k etand t he i ndust r y) . Essent i al l y, t he t op-dow n appr oach enabl es i nvest or s t o acqui r e i mpor t anti nf or mat i on on t he economi c, i ndust r i aland st r uct ur alaspect s r el at ed t o t he company i n scope, i t s cur r entand f ut ur e pr ospect s and per f or mance.Havi ng made t he deci si on t o f ol l owt hi s appr oach, w e f i r sthave t o anal yze t he t hr ee di f f er entst r at egi c l evel s bef or e t ur ni ng t o t he act ualval uat i on ofPet r obr asst ock . Fort hi s r eason, by consul t i ng Dess etal . ( 2004, Ch.2, 3, 5)and Rei l l y and Br ow n, ( 2002, Ch.11-15) , w e have const r uct ed t he t abl e bel ow , cont ai ni ng a setoft he most l y used f r amew or k s f ort he di f f er entst r at egi c l evel s. The nextst ep i s t o di scuss and compar e t he di f f er entmodel s, and sel ectt he mostappr opr i at e ones f ort hi s r esear ch;Ta bl e 2 . St r a t egi c Ana l ysi s: Level s a nd ModelsM a cr o Envi r onmentI ndust r yCompa ny > PEST( EL)> Por t er s Di amon d > I n dust r y Compet i t i onAn al ysi s ( Por t er s f i ve f or ces)> S- C- P Par adi gm> Val ue Net> Busi n ess & I n dust r y Li f e Cycl e > SWOT > Compet i t i ve St r at egi es( Por t er )> Val ue Chai n Const r uct ed f r om Dess etal . ( 2004) , Ch.2, 3, 5 and Rei l l y and Br ow n, ( 2002) , Ch.11-15 The f i r stst r at egi c l evel , t he macr o envi r onment , shoul d gi ve a pi ct ur e oft he gener alenvi r onmentw her e t he company oper at es and howi ti s ul t i mat el y i nf l uenci ng i t s val ue. One oft he model s appl i cabl e her e i s t he PEST ort he Pol i t i cal , Economi c, Soci o-cul t ur aland Technol ogi calf act oranal ysi s. The PEST f r amew or khas i t s ext ended ver si on encompassi ng Page16 t w o addi t i onalar eas/ f act or s, i .e. Envi r onment aland Legal( Dess etal ., 2004, pg. 48) . We f i nd t hese t w o addi t i onalar eas ver y i mpor t anti n t he case oft he pet r ol eum i ndust r y, so i n t hi s r esear ch, t he ext ended ver si on, i .e. PASTEL, w i l lbe appl i ed.As f ort he Di amond f r amew or k , Por t er( 1990)has used i tt o descr i be t he compet i t i ve advant age ofnat i ons based on f ouri nt er l i nk ed advanced f act or s and act i vi t i es ( i .e. f act orcondi t i ons; r el at ed and suppor t i ng i ndust r i es; demand condi t i ons; and st r at egy, st r uct ur e and r i val r y) . On t he cont r ar y, Por t ercl ai ms t hati n her i t ed ornat ur alf act orendow ment s ( such as l and, nat ur alr esour ces ( oi l , gas, et c.) , l abour , et c.) , cannotbe i nf l uenced by t he st at e and cannotbe a sour ce ofa nat i on s compet i t i ve advant age f ora sust ai ned i ndust r i algr ow t h. Nowt hi s f r amew or kmay be usef ulf ordepi ct i ng t he macr o-envi r onmentf ort he maj or i t y ofi ndust r i es butdoes notseem t o be r el evantf ort he oi li ndust r y. Hence, w e w i l lonl y dr awon t he PESTEL f r amew or katt hi s st r at egi c l evel . We bel i ev e t hi s f r amew or ki s suf f i ci entf ort he anal ysi s oft hi s l evel , as i tcover s vi r t ual l y al lt he maj ormacr o-envi r onmentar eas.Att he i ndust r y l evelt her e exi sta setofmodel s t hatcoul d be used t o expl ai n t he i nf l uence oft he i ndust r y condi t i ons on a company s pr of i t abi l i t y and r et ur ns. A common appr oach i n t hi s anal ysi s, accor di ng t o Rei l l y and Br ow n ( 2002, Ch.14)w oul d be t o l ookatt he busi ness cycl e and t he r espect i ve i ndust r ys l i f e cycl e, bef or e i nvest i gat i ng t he compet i t i ve st r uct ur e oft he i ndust r y. Speci alat t ent i on, t hough, w i l lnotbe gi ven t o t hese f r amew or k s, si nce t he mai n poi nt s t hatw e w oul d nor mal l y der i ve f r om t hem, w i l lbe depi ct ed i n ot herpar t s oft hi s r esear ch.One oft he mostw el lk now n f r amew or k s i n Tabl e 2 i s cer t ai nl y Por t er s f i ve f or ces modelf ori ndust r y compet i t i on anal ysi s ( i .e. r i val r y among exi st i ng f i r ms, t hr eatofnewent r ant s, bar gai ni ng pow erofbuyer s, bar gai ni ng pow erofsuppl i er s, and t hr eatofsubst i t ut e pr oduct s and ser vi ces) . I n or dert o posi t i on Pet r obr as i n i t s busi ness envi r onmentand det er mi ne t he degr ee ofbar gai ni ng pow eri thas i n t he pet r ol eum i ndust r y, w e ar e goi ng t o appl y Por t er s I ndust r y Anal ysi s f r amew or k . Thi s modeli s goi ng t o hel p us map Pet r obr as ext er nalenvi r onmentand t he maj orf or ces i nf l uenci ng t he company s compet i t i ve posi t i on and i t s abi l i t y t o gener at e val ue.Anot herusef ulf r amew or kl i st ed i n Tabl e 2 i s t he Val ue Net . The val ue net , si mi l ar l y as i n t he f i ve f or ces model , r epr esent s al lt he pl ayer s i n an i ndust r y ( i .e. Cust omer s, Suppl i er s, Compl ement s and Subst i t ut es)and howt hei ri nt er act i ons w i t h t he company i n quest i on af f ectt he company s val ue ( Dess etal ., 2004, pg. 62) . Unl i k e t he f i ve f or ces f r amew or k , w hi ch det er mi n e howa f i r m can enhance i t s posi t i on r el at i v e t o t he f i ve f or ces, t he val ue net Page17 concent r at es on t he r el at i onshi ps bet w een t he di f f er entent i t i es, w hi ch can be const r uct i ve and cooper at i ve, and t hus benef i ci alf orever yone. How ever , as w e do notpossess t he necessar y i nsi deri nf or mat i on on t he r el at i onshi p s Pet r obr as i s devel opi ng w i t h t he di f f er entent i t i es i n t he i ndust r y, w e w i l lnotdr awupon t hi s f r amew or k . I nst ead, w e w i l luse t he Val ue Chai n t o anal yze Pet r obr asext er nalpar t ner shi ps t hr oughouti t s val ue chai n.The St r uct ur e-Conduct -Per f or mance Par adi gm ( SCP)i s yetanot hermodelatt he i ndust r y l evel , abl e t o gi ve a det ai l ed pi ct ur e oft he i ndust r y w her e Pet r obr as oper at es and howi t s per f or mance i s i nf l uenced by t hi s. Thr ough t he basi c i ndust r y condi t i ons ( suppl y and demand) , t he gover nmentr ol e ( publ i c pol i cy) , as w el las t he st r uct ur e oft he i ndust r y ( numberand si ze ofbuyer s and sel l er s, concent r at i on, ent r y and exi tcondi t i ons, pr oductdi f f er ent i at i on/ homogen ei t y, i nt egr at i on)and t he conduct( pr i ci ng behavi ourand pol i ci es, pr oduct i on and mar k et i ng st r at egi es, car t el / col l usi on, R& D/ i nnovat i on, et c.) , t he SCP enabl es us t o under st and t he per f or mance ofPet r obr as ( Li pczynsk ietal ., 2005, Ch.1) . The suppl y and demand condi t i ons pr esenti n t he oi land gas i ndust r i es ar e goi ng t o be el abor at ed i n det ai li n a separ at e chapt er ; Mostoft he st r uct ur e oft he i ndust r y i s goi ng t o be expl ai ned by t he Fi ve f or ces f r amew or k ; PASTEL i s goi ng t o r ef ert o gover nmentr ol e and publ i c pol i cy i n Br azi l ; And t he pr i ci ng pol i ci es and pr oduct i on st r at egi es, t oget herw i t h car t el / col l usi on t heor y ar e al so goi ng t o be anal yzed i n a separ at e chapt er .Fort he company-l evelanal ysi s, w e have l i st ed t hr ee model s: SWOT, Por t er s Compet i t i ve St r at egi es and t he Val ue Chai n. The St r engt hs, Weak nesses, Oppor t uni t i es and Thr eat s anal ysi s w i l lhel p eval uat e Pet r obr as st r at egi es meantt o expl oi ti t s compet i t i v e advant ages ordef end agai nsti t s w eak nesses. St r engt hs and w eak nesses i nvol ve i dent i f yi ng t he f i r m s i nt er nalabi l i t i es orl ackt her eof . Oppor t uni t i es and t hr eat s i ncl ude ext er nalsi t uat i ons, such as compet i t i v e f or ces, di scover y and devel opmentofnewt echnol ogi es, gover nmentr egul at i ons, domest i c and i nt er nat i onaleconomi c t r ends ( Rei l l y and Br ow n, 2002, pg.547) . I n addi t i on t o t he SWOT, t he Company St r at egi c Appr oach al ong w i t h Por t er s Compet i t i ve St r at egi es and t he Val ue Chai n ar e al so goi ng t o be appl i ed. We ar e i nt er est ed i n seei ng howval ue i s cr eat ed t hr ough Pet r obr asval ue chai n an d howdoes t he company cur r entst r at egy f i ti nt o one oft he t hr ee gener i c st r at egi es by Por t er . Thati s al so advi sed by t he t op-dow n appr oach i n val uat i on, advocat ed by Rei l l y and Br ow n ( 2002, Ch.15) .Thi s concl udes t he chapt eron t he di scussi on and sel ect i on ofVal uat i on met hods and St r at egi c Anal ysi s f r amew or k s. Thr ough t he model s w e have sel ect ed, w e nowt ur n t o an empi r i cali nvest i gat i on oft he macr o envi r onment , i ndust r y and Pet r obr as i t sel f , w i t h a goalt o det er mi ne t he f ai rval ue oft he company s st ockand i t s val ue cr eat i ng pot ent i ali n gener al . Page18 I I . PET ROLEUMI NDUST RY ST RAT EGI C ANALYSI S 2 .1 . M acr o Envi r onment PEST EL Anal ysi s The f i r stf r amew or kf r om t he st r at egi c anal ysi s i s att he macr o l ev eland i s goi ng t o hel p us assess t he ext er nalenvi r onmentoft he company, howi tcan i mpactt he devel opmentoft he i ndust r y and howi t s ul t i mat el y i nf l uenci ng t he val ue ofcompani es oper at i ng w i t hi n i t . The PESTEL anal ysi s consi st s ofsi x aspect s; The Pol i t i calaspect s have r at hersi gni f i canti nf l uence on t he pet r ol eum i ndust r y. Count r i es ar ound t he w or l d have a gr eati mpacton t he i ndust r y s pl ayer s, si nce pr i mar i l y t hey ar e t he ow ner s ofhydr ocar bon ( i .e. oi land gas)r esour ces. Cont r ol l i ng hydr ocar bon r eser ves al l ow s gover nment s t o sel lconcessi ons t o di f f er entcompani es, w hi ch gr antan excl usi ve r i ghtf orexpl or at i on and pr oduct i on ofoi lw i t hi n a speci f i ed geogr aphi calar ea ata gi ven t i me hor i zon. Thi s al so al l ow s gover nment s t o f avournat i onaloi lcompani es and excl ude f or ei gn ones f r om t he pr ocess, w hi ch can t er mi nat e oper at i ons oft hese compani es ( EI A, 2008) . I n addi t i on t o i ndi vi dualcount r i es, a ver y i nf l uent i ali nt er -gover nment alor gani zat i on i n t he w or l d pet r ol eum scene i s OPEC ( t he Or gani zat i on oft he Pet r ol eum Expor t i ng Count r i es) . OPEC cont r ol s 75.5% oft he w or l d s oi lr esour ces ( and t hati s one oft he cheapest -t o-pr oduce oi lon t he pl anet ) . I t s geopol i t i cali nf l uence i s onl y l i k el y t o enhance, as oi li s depl et i ng el sew her e on t he gl obe ( BP St at i st i calRevi ew , 2008) . Mor e on OPEC w i l lbe di scussed f ur t heri n t hi s paper .I nt er nalpol i t i caland br oadergeopol i t i calr i sk s may hol d backupst r eam i nvest menti n many count r i es i n spi t e off avour abl e pol i ci es and st r ong economi c i ncent i ves. I nst abi l i t y, changes i n t he r egul at or y envi r onment , expr opr i at i on ornat i onal i zat i on ofpr oper t y, t er r or i sm, ci vi lconf l i ct s, st r i k es and act s ofw ar , can al lcause di scour agementand di sr upt i on ofi nvest ment s and oper at i ons. These ar e i ndeed ver y common among oi l -r i ch-count r i es ar ound t he w or l d. Fori nst ance, no maj oroi lcompany has yetdeci ded t o i nvesti n I r aq; geopol i t i calt ensi ons i n t he Mi ddl e Easthas si nce al w ays di scour aged f or ei gn i nvest ment s; pol i t i calr esi st ance i n Mexi co t hatw oul d gi ve pr i vat e compani es a bi ggerr ol e i n expl or at i on and devel opmenti s al so t he r eason f ordi ver t i ng i nvest or s ( I EA, 2008) . Al loft hese pol i t i calaspect s event ual l y negat i v el y af f ectt he val ue cr eat i on ofoi lcompani es.Pol i t i caldeci si ons among w or l d l eader s t o st i mul at e ot hercl eanersour ces ofener gy due t o cl i mat e changes ar e al so goi ng t o gr eat l y i mpactt he pet r ol eum i ndust r y. Passi ng envi r onment alt r eat i es such as t he Kyot o pr ot ocol , w hi ch est abl i shes l egal l y bi ndi ng Page19 commi t ment s f orcount r i es t o r educe gr eenhouse gases, i s onl y goi ng t o r esul ti n subst ant i alr educt i ons i n pr of i t abi l i t y and st r at egi c gr ow t h oppor t uni t i es bei ng adver sel y af f ect ed.Ther e i s no ot heri ndust r y so much i nt er dependentw i t h t he w or l d Economy as t he oi li ndust r y. Notonl y i s t he gl obaleconomy dependenton cont i nualsuppl y ofoi latr easonabl e pr i ces, butal so, t he pr ogr ess oft he i nt er nat i onaleconomy i s cr uci alf ort he oi li ndust r y s devel opment . Thi s i s under st andabl e as t he demand f orener gy i s l ar gel y dr i ven by economi c gr ow t h, pr osper i t y and r i si ng popul at i on. Whenevert her e i s a dow nt ur n i n t he economy, t he demand f orener gy, and especi al l y t he one f orcr ude oi ldecr eases. Thi s i s due t o t he f actt hatmosti ndust r i es and t r anspor t at i on r un on oi l . The cur r entf i nanci aland economi c cr i si s, w hi ch i s t he w or stand deepestsi nce t he gr eatdepr essi on, has had a r emar k abl e ef f ecton oi lmar k et s. Gl obaldemand i n gener ali s cur r ent l y on a dow nhi l l . Thi s i s l ar gel y dr i ven by pl ummet i ng demand i n devel oped OECD count r i es, w hose economi es ent er ed r ecessi on. The out l ooki s notposi t i ve f ort he r estoft he year , as i tdoesn tonl y mean l ow eroi ldemand, butal so pl ungi ng pr i ces ( pr i ces have f al l en f r om $147 att he peaki n 2008, t o ar ound $50/ bar r eli n 2009)( Abosedr a, 2009) . Demand has been how everi ncr easi ng and i s expect ed t o i ncr ease i n t he comi ng decades i n devel opi ng count r i es, especi al l y i n count r i es exper i enci ng r at herhi gh gr ow t h i n GDP, such as Chi na and I ndi a. A good f eat ur e ofoi ldemand i s t he f acti t s i nel ast i c. Namel y, i tt ak es l ong t i me f orbusi nesses and consumer s t o r espond t o oi lpr i ce changes, w hi ch i s a posi t i ve aspectf oroi lcompani es. I n addi t i on t o GDP and t he mar k etdemand, anot heri mpor t anteconomi c aspectaf f ect i ng pet r ol eum and t he i ndust r y i s t he val ue oft he dol l ar , t he cur r ency i n w hi ch oi li s t r aded i nt er nat i onal l y. When t he oi lpr i ce w as soar i ng i n 2008, f orexampl e, t he val ue oft he dol l arw as dow n subst ant i al l y. Thi s occur s due t o exchange r at es. Oi lpr oducer s ( w hi ch sel loi li n dol l ar s)ar e r egul ar l y exposed t o changes i n t he exchange r at e bet w een t hei rnat i on alcur r enci es and t he dol l ar . Thus, w hen t he US dol l arw eak ens, f ori nst ance, cr ude oi lmar k etpar t i ci pant s push t he pr i ce ofoi lhi gheras oi lpr oducer s ar e ent i t l ed t o atl eastt he same pr i ce ofoi las bef or e i n t hei row n cur r enci es, af t erexchangi ng USD i nt o t hei rcur r enci es. Thi s i s w hy a good managementoft he US economy ( and t he dol l ar )shoul d pr ovi de gr eat erst abi l i t y f oroi lpr i ces and pr of i t abi l i t y ofoi lcompani es ( Bai l ey, 2008) .Soci o-cul t ur alf or ces det er mi ne t he val ues, bel i ef s and l i f est yl es ofsoci et i es ( and t he w or l d i n gener al )w her e oi lcompani es oper at e. These f or ces have been al so shapi ng t he pr ef er ences ofsoci et i es f ordi f f er entener gy t ypes. Even t hough t he w or l d demand f orener gy has been i ncr easi ng, especi al l y t he one f oroi l , t he shar e ofoi li n t he t ot alener gy consumpt i on has been decr easi ng i n t he l astdecades ( i t s shar e st ood atar ound 45% i n t he Page20 ear l y 80s and i t s at35% t oday) . Thi s t r end i s expect ed t o cont i nue, w her e gr eenersour ces ofener gy ar e l i k el y t o i ncr ease t hei rshar e ( EI A, 2008, pg.1) . Af t erf ear s ofgl obalw ar mi ng pr oved t o be f ounded, soci alconsi der at i ons and r esponsi bi l i t y ofsoci et i es and gover nment s r esul t ed i n i ncr eased f ocus on al t er nat i ve ener gi es ( w i nd, sol arener gy, bi of uel s, hydr o, et c.) . Peopl e i n gener alst ar t ed put t i ng gr eat erval ue t o heal t hy l i vi ng sur r oundi ngs and ar e show i ng mor e concer n aboutt he envi r onment . As newand mor e envi r onment -f r i endl y f uel s ar e devel oped and t he costoft hei rpr oduct i on i s r educed, t he pi ct ur e i s goi ng t o getl ess f avour abl e f oroi lpr oducer s.Compani essoci alr esponsi bi l i t y i s yetanot herf act oraf f ect i ng compani esoper at i ons i n t hi s i ndust r y, mai nl y t hr ough t hei ri mage. Ther ef or e, many bi g oi lcor por at i ons cl ai m i n t hei rannualst at ement s t hatt hey ar e act i vel y pl ayi ng a dedi cat ed r ol e i n suppor t i ng sust ai nabl e human devel opmenti n soci et i es t hey oper at e. Pet r obr as f ori nst ance, i nvest s i n di f f er entsoci al , cul t ur aland envi r onment alact i v i t i es and admi t s t hati tdepl et es nat ur alr esour ces t hatar e par tofever yone s her i t age, hence i t s dut y t o r enderaccount s t o soci et y8. Si mi l art o Pet r obr as, BP t oo, st at es t hati tal so con t r i but es t o l ocalcommuni t i es devel opmentei t hert hr ough i nvest ment s i n educat i on ( w hi ch cr eat es sk i l l ed l abour ) , ort hr ough t r ai ni ng and f i nanci ng pr ogr ams t hatst i mul at e l ocalsuppl i er s ( BP AnnualRepor t , 2008) . The oi land gas i ndust r y i s ext r emel y Technol ogy-dr i ven, as r esear ch and t echnol ogy pl ay a cr i t i calr ol e i n addr essi ng t he w or l ds ener gy needs and chal l enges. Technol ogy i s t he k ey el ementf r om f undament alexpl or at i on al lt he w ay t o r ef i nementofoi l . I nnovat i ons and i mpr ovement s oft echnol ogi es i n t he upst r eam pr ocesses have made i tpossi bl e t o ext r actbi ggervol umes ori mpr ove t he r ecov er y ofoi land gas, and t o ext r actmai nt ai ni ng r eser ves i n some f i el ds w hi ch w er e pr evi ousl y consi der ed exhaust ed. Thi s has al l ow ed f ori ncr easi ng pr of i t abi l i t y and gai ns f r om exi st i ng oi l f i el ds ( BP AnnualRepor t , 2008) .Technol ogi caladvances, how ev er , have made br eak t hr oughs especi al l y i n t he expl or at i on and ext r act i on oful t r a-deep-w at err eser voi r s. These ar e i ndeed t he har destt o r each, f orsome ofw hi ch t echnol ogy i s st i l lbei ng devel oped9. As an exampl e ofsuch oi lf i el ds ar e t he r ecent l y di scov er ed ones of ft he Br azi l i an shor e, Tupibei ng t he mosti mpor t ant . Pet r obr as has been dedi cat ed i n devel opi ng appr opr i at e t echnol ogi es dur i ng t he l astyear 8 As a r esul tofi t s act i vi t i es, Pet r obr as ear ned t he r i ghtt o be l i st ed on t h e DowJones Gl obalSust ai nabi l i t y I ndex ( DJSI ) , t he mosti mpor t antgl obalsust ai nabi l i t y i ndex, used as an anal ysi s par amet erby soci al l y and envi r onment al l y r esponsi bl e i nvest or s. The company i s l i st ed as one oft he ei ghtmostsust ai nabl e Br azi l i an compani es ( ht t p:/ / w w w 2.pet r obr as.com.br / r i / i ng/ Responsabi l i dadeSoci al / Soci al .asp)9 ht t p:/ / w w w .bl oomber g.com/ apps/ new s?pi d=20601086& r ef er =new s& si d=a5d8FWu4LE5k Page21 and managed t o l i f tt he f i r stoi lf r om t he Tupir eser voi ron 1st May, 200910. By depl oyi ng advanced t echnol ogi es i n l ocat i ng f i el ds and expl or at i on, compani es can secur e compet i t i ve advant age. Technol ogy i s al so an i mpor t antdevel opment -dr i veri n t he mi dst r eam and dow nst r eam sect or s. I n t he mi dst r eam, f ore.g. f orunder w at eroi l -t r anspor t i ng pi pel i nes atsi gni f i cantdept hs and pr essur e; i n t he dow nst r eam, f oropt i mi zi ng r ef i ni ng pr ocesses ofpet r ol eum ofvar yi ng qual i t y, w hi ch can ul t i mat el y i mpr ove compani esmar gi ns ( BP AnnualRepor t , 2008) .The gener ali mpr essi on i s t hatt echnol ogy w i l lhave a pr of ound i mpacton t he f ut ur e devel opmentoft he oi li ndust r y, and especi al l y on i t s l ong-t er m sust ai nabi l i t y. Thi s comes as a l ogi calr easoni ng, as hydr ocar bon r eser ves ar e i ncr easi ngl y depl et i ng and newdi scover i es ar e show i ng atext r eme dept hs, w hi ch so f ar , had notbeen pr of i t abl y ort echnol ogi cal l y f easi bl e t o expl oi t .Envi r onment ali ssues ar e i ncr easi ngl y af f ect i ng oi lcompani es and t hei rr et ur ns. Namel y, t he oi li ndust r y i s bel i eved t o be one oft he di r t i est and mostpol l ut i ng i ndust r i es i n t he w or l d. I ti s not hi ng newt hatpet r ol eum i s r esponsi bl e f ora numberofi nci dent s i ncl udi ng oi lspi l l s occur r i ng atsea orconsi der abl e pol l ut i on f r om oi lpl at f or ms. Al mostever y oi lcompany has been i nvol ved i n t hese t ypes ofenvi r onment alcat ast r ophes.I ti s t her ef or e pr act i ce t hatpol l ut er s coverenvi r onment aldamages t hey ar e r esponsi bl e f or . And notonl y t hi s; w henevernegot i at i ons f orconcessi on r i ght s ar e made, det ai l s and aspect s ofhowt o cl ean af f ect ed ar eas ar e al so cl ar i f i ed11. Mor eover , compani es ar e r equi r ed t o spend shar es oft hei rpr of i t s i n envi r onment alr est or at i on and r emedi at i on, w hen cl ean-ups ofi nact i ve si t es ar e made. I nact i ve si t es can i ncl ude r ef i ner i es, chemi calpl ant s, nat ur algas pr ocessi ng pl ant s, oi land nat ur algas f i el ds, ser vi ce st at i ons, t er mi nal s and w ast e di sposalsi t es. Al loft hi s, ofcour se, r epr esent s bur den f orcompani es pr of i t abi l i t y ( BP AnnualRepor t , 2008) .St r ongerenvi r onment alr est r i ct i ons w i l lal so ent ai lheavy i nvest ment s i n advanced t echnol ogy t o r educe pol l ut i on t o mi ni mum l evel s. How ever , saf et y and qual i t y ofpr oduct s, and al lmodes oft r anspor t at i on ofhydr ocar bons, w hi ch cont ai n i nher entr i sk s, ar e essent i alt o be t ak en speci alcar e of . Thi s i s notonl y goi ng t o pr eventhar mi ng t he envi r onmentand 10 ht t p:/ / w w w .agenci apet r obr asdenot i ci as.com.br / mat er i a.asp?i d_edi t or i a=39& i d_not i ci a=6508 11 USAs Oi lPol l ut i on Act , f ori nst ance, st at es: A company cannotshi p oi li nt o t he Uni t ed St at es unt i li tpr esent s a pl an t o pr eventspi l l s t hatmay occur . I tmustal so have a det ai l ed cont ai nmentand cl eanup pl an i n case ofan oi lspi l lemer gency ( ht t p:/ / w w w .epa.gov/ OEM/ cont ent / l aw sr egs/ opaover .ht m) Page22 peopl e, buti t s al so goi ng t o secur e gr eat err eput at i on and sust ai nabi l i t y oft he i ndust r y, t hr ough sat i sf i ed cust omer s and st ak ehol der s, l eadi ng event ual l y t o a sust ai nabl e val ue cr eat i on f orshar ehol der s ( BP AnnualRepor t , 2008) . Fi nal l y, Legalel ement s oft he macr o-envi r onmentpl ay an i mpor t antr ol e i n shapi ng t he i ndust r y. The oi li ndust r y i s subj ectt o st r i ctl egalr egul at i ons, w hi ch r ange f r om t he i mposi t i on ofspeci f i c dr i l l i ng obl i gat i ons, envi r on ment al -heal t h- and-saf et y pr ot ect i on cont r ol s, cont r ol s overt he devel opmentand decommi ssi oni ng off i el ds, et c. The hydr ocar bon pr oduct s ar e al so t r aded i n r egul at ed commodi t y mar k et s. Addi t i onal l y, compani es ar e bur dened w i t h l ar ge upf r ontconcessi on f ees and speci alr oyal t i es and t axes on pet r ol eum, w hi ch compar ed t o t hose payabl e f orot hercommer ci alact i vi t i es, ar e r at herhi gh. Ther e i s al so a degr ee ofuncer t ai nt y r el at i ng t o t he i nt er pr et at i on orchanges t o di f f er entl aw s and r egul at i ons, as a r esul tofw hi ch compani es coul d be r equi r ed t o cur t ai lorcease oper at i ons, ort hey coul d si mpl y i ncuraddi t i onalcost s ( BP AnnualRepor t , 2007) .How ever , t he maj orl egalconcer ns af f ect i ng compani es come f r om compl i ance w i t h l aw s, r egul at i ons and obl i gat i ons r el at i ng t o envi r onmentand cl i mat e change. Ther e ar e ext ensi ve i nt er nat i onal , nat i onal , st at e and l ocalr egul at i ons r egar di ng pr oduct s, oper at i ons and act i vi t i es. Cur r entand pr oposed f uelspeci f i cat i ons, emi ssi on cont r ol s and cl i mat e change pr ogr ams undera numberofenvi r onment all aw s w i l lhave a si gni f i cantef f ecton t he pr oduct i on, sal e and pr of i t abi l i t y ofmany compani es. Envi r onment all aw s al so r equi r e t hatcompani es r emedi at e t he envi r onment ali mpact s ofpr i ordi sposalorr el eases ofchemi cal s orpet r ol eum subst ances ( BP AnnualRepor t , 2008) .Fi nal l y, t he mosti mpor t antchar act er i st i cs oft he gener almacr o envi r onmentcan be f ound summar i zed i n t he gr aph bel ow ; Page23 Gr a ph 1 . Summa r y of Ma cr o- Envi r onment -PESTEL Fa ct or s v 2 .2 . I ndust r y Compet i t i on Anal ysi s ( Por t er s fi ve for ces)I n or dert o cr eat e a pr of i t abl e compet i t i v e st r at egy, a f i r m mustf i r stexami ne t he basi c compet i t i ve st r uct ur e ofi t s i ndust r y t hr ough t he compet i t i v e f or ces, because t he pot ent i alpr of i t abi l i t y oft he f i r m i s heavi l y i nf l uenced by t he pr of i t abi l i t y ofi t s i ndust r y. Fort hi s pur pose, cor por at e st r at egi st s advi se t he use oft he Por t er s I ndust r y Anal ysi s f r amew or k , w hi ch descr i bes t he compet i t i ve envi r onmenti n t er ms off i ve basi c compet i t i v e f or ces. Based on Por t er s f r amew or k , f ori nst ance, compet i t i on i n an i ndust r y ar i ses notonl y f r om est abl i shed pr oducer s, pr oduci ng same orsi mi l arpr oduct s, butal so f r om suppl i er s ofsubst i t ut es and f r om pot ent i alnewent r ant s i nt o t he mar k et . A f i r m i s abl e t o mai nt ai n hi gh r at es ofr et ur n because t her e ar e si gni f i cantbar r i er s t o ent r y, orbecause t he f i r m has si gni f i cantadvant ages overi t s compet i t or s ( Rei l l yand Br ow n, 2002, pg.497) .Thi s anal ysi s w i l lal l owus t o i nvest i gat e howt he compet i t i ve si t uat i on i n t he pet r ol eum i ndust r y i nf l uences t he abi l i t y ofoi lcompani es t o sust ai n pr of i t abi l i t y nowand i n t he f ut ur e. Lega l Fa ct ors - Subjectt o st r i ctl egalregul at i ons: dr i l li ng, envi r onment al -healt h-and-saf et y pr ot ect ion cont r ols, cont r ols overdevel opmentand decommi ssi oni ng off i el ds, et c. - Large upf r ontconcession f ees and speci al r oyalt i es f or oil f i elds bur den f orcompani es - Obl igat i ons r el at ing t o envi r onmentand cl i mat e change negat ive ef f ecton pr of i t abi li t y Polit ica l Fa ct ors - Gover nment s cont rol li ng worl d hydr ocar bon reser ves si gni f i canti mpact - OPEC cont r ol li ng 75.5% ofwor l d r eser ves highly inf l uent i al - Poli t i cal r i sks: Inst abil it y, expr opr i at i on/ nat ionali zat i on ofpr oper t y, t er ror i sm, ci vilconf l ict s, st r i kes, war s, et c. adver se ef f ect- Envi ronment alt reat i es (Kyot o pr ot ocol) negat i ve i mpact Technologica l Fa ct ors - Ext r emel y t echnol ogy-dr iven: i mpr oved upst r eam t echnol ogi es bet t errecover y ofhydr ocar bon, r ecover ing oilf r om reser ves consider ed exhaust ed i mpr oved pr of it abi l it y (gai ns) - Br eakt hr ough t echnology i n ult r a-deep-wat erext r act i on compet i t i ve advant age f orPet r obr as - Advanced t echnol ogy pr of ound i mpacton long-t er m sust ai nabi li t y Environment a l Fa ct ors - One oft he mostpol lut ing i ndust r i es i n t he worl d r equi rement s f or cover i ng envi ronment al damages and r est or at i on ofi nact i ve si t es bur den f orcompani es pr of i t abil i t y - Speci al car e ofsaf et y and qual it y ofpr oduct s and t r ansport at ion gr eat er r eput at i on and sust ai nable val ue cr eat i on posi t i ve i mpact Economic Fa ct ors - Int er dependence bet ween worl d economy and oi l i ndust r y: economi c gr owt h gr owi ng demand f or oi l ; butal so:cont i nual suppl y ofoi l atr easonabl e pr ices st abl e economy - Inel ast i c demand posit i ve ef f ect- US doll ar(and US economy) si gni f i canti mpact- Exchange r at es i mpacton buyer s and suppl ier s Socio-cult ura l Fa ct ors - Values and bel ief s shape pr ef erences f or ener gies ener gy mi x changing t owards gr eenerener gi es - Need f or compani es t o show soci alr esponsibi li t y suppor t i ng sust ai nabl e human devel opmentt hr ough i nvest ment s i n educat ion, t r ai ni ng, soci aland envi r onment alact i vit ies OI L I NDUSTRY Page24 Thr ea tof NewEnt r a nt s The t hr eatofnewent r ant s r ef er s t o t he f or ce ofnewpot ent i alcompet i t or s i n t he i ndust r y t hatcan at t ackcompani espr of i t s. Undoubt edl y, t he t hr eatofnewent i t i es ent er i ng t he oi li ndust r y i s i nsi gni f i cant , despi t e t he at t r act i v eness oft he i ndust r y. Thi s i s expl ai ned by t he hi gh bar r i er s t o ent r y t hatexi st( Dess etal ., 2004, pg.57) ; Fi r st , t her e ar e huge capi t alr equi r ement s associ at ed w i t h t he act i vi t i es per f or med by maj oroi lcompani es, mostofw hi ch ar e ver t i cal l y posi t i oned i n al mostal lupst r eam, mi dst r eam and dow nst r eam act i vi t i es oft he i ndust r y. Enor mous f i xed up-f r onti nvest ment s ar e r equi r ed f ort he devel opmentofoi lf i el ds orset t i ng-up pr oduct i on f aci l i t i es. The cost s i ncur r ed her e si mpl y cannotbe suppor t ed by ever yone. Devel opi ng oi lf i el ds, f orexampl e, can costf r om coupl e ofbi l l i ons ofdol l ar s f orr el at i vel y easi l y accessi bl e r eser ves ( i n t he Mi ddl e East )12, t o some $50bn, f orsuch as t he Br azi l i an of f shor e Tupif i el d13, w hi ch i s f ound 4000 met er s bel owt he seabed, i n a pr e-sal tl ayer , r equi r i ng ver y sophi st i cat ed t echnol ogi es f orext r act i on. The I nt er nat i onalEner gy Agency ( I EA, 2008)r epor t s t hatt he uni tcost s i n t he upst r eam oi li ndust r y have i ncr eased consi der abl y, i n t he l astdecade ( aver age r i se of90% bet w een 2000 and 2007) . Thi s does notonl y i ncl ude cost s f orexpl or at i on ofnewf i el ds, butal so f ordr i l l i ng, oi l f i el d ser vi ces, sk i l l ed l abour , sci ent i f i c r esear ch, mat er i al s and ener gy, al lofw hi ch cr eat e subst ant i albar r i er s f orpot ent i alent r ant s.Anot herbar r i erpr eval enther e ar e economi es ofscal e. Due t o t he i ncr eased uni tcost s i n t he expl or at i on and pr oduct i on ofoi l , onl y bi g oi lcompani es and r ef i ner i es t hatar e abl e t o t ak e advant age ofeconomi es ofscal e ( and scope)can sur vi ve. Thi s mak es t hi ngs ver y di f f i cul tand r i sk y f ornewpl ayer s, si nce t hey usual l y don thave access t o a bi g numberofoi lr eser ves, and somet i mes t hey can teven ow n t hese i n a f or ei gn count r y. The l at t eri s t he case f ormany oi l -r i ch-count r i es, apar tf r om t he US, Canada, Br azi l , Nor w ay ( I EA, 2008) .The need t o secur e access t o di st r i but i on channel s can al so cr eat e bar r i er s t o ent r y ( Dess etal ., 2004, pg.58) . Usual l y onl y maj oroi lcompani es ( bot h nat i onaland i nt er nat i onal )possess w el lest abl i shed channel s ofdi st r i but i on, w het heri t s i n t he upst r eam, dow nst r eam orbot h segment s. Oi lpi pel i nes f orsome compani es, and gas st at i ons and di st r i but i on st or es f orot her s, orbot h, as means ofdi st r i but i on, ar e cost l y and r equi r e t i me t o bui l d. Thi s cr eat es obst acl es f ornewent r ant s.How ever , some oft he gr eat esti mpedi ment s f orpot ent i alent r ant s come f r om di sadvant ages i ndependentofeconomi c f act or s, i .e. f r om di f f er entgover nmentpol i ci es t hat 12 ht t p:/ / w w w .f i nanci al expr ess.com/ new s/ occi dent al -oust s-shel l -i n-devel opi ng-oman-oi l -f i el d/ 131414/13 Del oi t t e pr edi ct i ons: ht t p:/ / w w w .t opi x.com/ com/ pbr / 2008/ 10/ devel opi ng-br azi l s-t upi -oi l -f i el d-may-cost -50-bi l l i on-del oi t t e-pr edi ct s Page25 f avournat i onalcompani es i n di f f er entw ays. Oi land gas ar e st at e ow ned r esour ces and gover nment s t end t o gi ve access t o t hese r awmat er i al s t o nat i onalcompani es. Mostoft he oi l -r i ch count r i es al so al l owot hercompani es t o engage i n t he expl oi t at i on ofoi lf i el ds, buti n par t ner shi p w i t h t he nat i onalcompany. Exper i ence and k now -howar e essent i al , as cut t i ng edge t echnol ogy i s i ncr easi ngl y r equi r ed i n r eachi ng mor e and mor e i naccessi bl e r eser ves. I n t he case oft he new l y di scover ed oi lf i el ds of f shor e Br azi l , f ori nst ance, speci al i zed dr i l l i ng t echnol ogi es ar e needed t hatnotev en maj ori nt er nat i onaloi lcompani es possess. Pet r obr as has been engagi ng i n such expl or at i on t hr oughouti t s l i f et i me and t hus has acqui r ed compet i t i ve advant age overot heroi lcompani es i n t he f i el d. Al lt hi s can onl y di ver tpot ent i alnewent r i es i n t he i ndust r y.Some oft he ent r y bar r i er s suggest ed by Dess etal . do nothol d f ort he oi li ndust r y t hough. Namel y, t her e i s no pr oductdi f f er ent i at i on, as oi li s a commodi t y pr oduct ; and t her e ar e no sw i t chi ng cost s t hatbuyer s f ace w hen havi ng t o t ur n t o a di f f er entsuppl i er . How ever , t hi s doesn tchange t he f actt hatnewent r ant s i n t he i ndust r y f ace r at hert ough obst acl es pr event i ng t hem t o endangerest abl i shed compani es and t hei rpr of i t s.Ba r ga i ni ng Powerof Buyer s Dess etal . ( 2004, pg.58)suggestt hatbuyer s can i nf l uence t he pr of i t abi l i t y ofan i ndust r y because t hey can bi d dow n pr i ces ordemand hi gherqual i t y ormor e ser vi ces by bar gai ni ng among compet i t or s. How ever , t he pet r ol eum i ndust r y i s a speci f i c one w her e t he pr i ce ofcr ude oi li s det er mi ned on a gl oball evel , based on t he economi c r el at i onshi p bet w een gl obaldemand and suppl y ofoi l . Thi s uni que w or l d pr i ce ofoi lusual l y r ef er s t o t he spotpr i ce ofl i ghtcr ude as t r aded on t he NewYor kMer cant i l e Exchange ( NYMEX) . Opposed t o t hi s, i ti s al so ver y common t hatoi li s t r aded over -t he-count erbet w een t w o par t i es, butagai n, att he gl obalpr i ce. Based on t hi s, t he w i l l i ngness t o pay i s mor e orl ess t he onl y bar gai ni ng pow ert hatbuyer s possess.Among buyer s ofoi lusual l y t ur n up r ef i ner s, maj ori nt er nat i onalcompani es, nat i onaloi lcompani es ( f ul l y i nt egr at ed) , mar k et er s, di st r i but or s and t r ader s. Count r i es t hemsel ves can al so appearas buyer s. Lar ge consumer s such as t he US, t he EU, Chi na and Japan, w hi ch accountf ormor e t han hal foft he w or l d consumpt i on ofoi l , may i ndeed be i n posi t i on t o exer tsome degr ee ofbar gai ni ng pow er , t hr ough di f f er entvol umes ofdemand. Al t hough mostr ecent l y, count r i es ar e adopt i ng di f f er entpol i ci es t o sw i t ch f r om t hei rheavy dependence on f ossi lf uel s t o r enew abl e ener gi es, t he w or l d i s st i l lgoi ng t o r el y most l y on f ossi lf uel s i n sat i sf yi ng i t s ener gy needs i n t he year s and decades t o come, w hose demand i s i n f actexpect ed t o r i se ( especi al l y f ort r anspor t at i on and i ndust r y) ( I EA, 2008) . Page26 So f ar , empi r i calevi dence suggest s t hatonl y t he l ar gestbuyer s, t hr ough t he oi lquant i t y demanded, can exer tsome bar gai ni ng pow eri n t he mar k et . I n addi t i on, Dess etal . ( 2004, pg.59)gi ve some t heor et i calcondi t i ons w hi ch can hel p det er mi ni ng w het herbuyer s possess pow er . Cont r i but i ng t o buyer s bar gai ni ng pow eri s t he st andar d and undi f f er ent i at ed pr oduct , and agai n, buyer s w ho do notf ace sw i t chi ng cost s. These t w o condi t i ons ar e notsuf f i ci entt o putpow eri n t he hands ofbuyer s, si nce t he i ndust r y s pr oducti s ext r emel y i mpor t antf ort he buyer s pr oduct s orser vi ces; and, i tdoesn tseem t hati ndi vi dualbuyer s ar e any t hr eatw hen i tcomes t o t he vol umes t hey pur chase.Ba r ga i ni ng Powerof Suppl i er s Same as buyer s, suppl i er s t oo, can er ode f ut ur e i ndust r y r et ur ns by r ai si ng pr i ces orl ooseni ng t he qual i t y oft he pr oduct s and ser vi ces t hey pr ovi de ( Dess etal , pg.59) . Bi g oi lcompani es, l i k e Pet r obr as orExxonMobi l , have a compl ex chai n ofsuppl i er s, r angi ng f r om suppl i er sofoi l( f i el ds) , t o suppl i er s ofengi neer i ng, f i el d devel opmentmanagement , pi pel i ne i nst al l at i ons, speci f i c equi pmentand mat er i al s, oreven sci ent i f i c r esear cher s and engi neer s.Count r i es r i ch w i t h oi l( al so r ef er r ed as oi lpr oduci ng count r i es) , w hi ch i n t hi s cont extappearas suppl i er s oft he basi c i ngr edi ent oft he i ndust r y, ow n si gni f i cantbar gai ni ng pow er . Oi li s a scar ce r esour ce and w i t houtcount r i esopenness i n al l ow i ng cor por at i ons t o expl oi ti t , t he l at t erhave si mpl y no r easons t o oper at e i n t he i ndust r y. Today s OPEC nat i ons w er e t he ones t o act ual l y nat i onal i ze oi lpr oduct i on i n t hei rcount r i es and t ak e overmostoft he busi ness f r om bi g oi lcor por at i ons. As OPEC nat i ons ow n 2/ 3 oft he w or l ds pr oven r eser ves, w i t h oi lt hati s one oft he cheapestt o pr oduce, t hey i n f actpossess si gni f i cantbar gai ni ng pow ert o oi lcor por at i ons. Thus, OPECs bar gai ni ng pow eri s r at herevi dentw hen i tcomes t o gr ant i ng oi l -f i el ds-concessi on r i ght s t o i nt er nat i onalcompani es. Oi l -r i ch-count r i es ( especi al l y ones bel ongi ng t o OPEC)w er e especi al l y meant o f or ei gn oi lcompani es w hen t he oi lpr i ce w as sk yr ock et i n g l astyear . How ever , t hi s bar gai ni ng pow ermi sbal ance have somew hatchanged si nce t he begi nni ng of2009, w hen t he oi lpr i ce dr opped al mostt hr eef ol d f r om i t s peaki n 2008. Namel y, as oi lpr i ces decr eased subst ant i al l y ( t o ar ound $50/ bar r el ) , count r i es f ound many f i el ds nott o be economi calt o devel op ( by t hemsel v es and t hei rnat i onaloi lcom pani es) , and ar e nowt ur ni ng t o maj ori nt er nat i onaloi lcompani es f orhel p14. The l at t erar e i n advant age due t o t he f actt hat : t hey possess speci al i zed k now -howand exper t i se i n devel opi ng f i el ds w i t h di f f er entaccessi bi l i t y; 14 John Por r et t o, Bar gai ni ng pow ershi f t s i n t he gl obalhuntf orcr ude; West er n compani es l ookt o expand, Associ at ed Pr ess: ht t p:/ / w w w .new ser .com/ ar t i cl e/ d977f 9i o0/ bar gai ni ng-pow er -shi f t s-i n-t he-gl obal -hunt -f or -cr ude-w est er n-compani es-l ook -t o-expand.ht ml Page27 t hey have st ock pi l ed cash w hen pr of i t s w er e hi gh ( i .e. cheap ercapi t al )and can shi f toper at i ons t o any cor neroft he gl obe, al lofw hi ch al l ow s t hem t o st r i k e deal s w i t h st at e-cont r ol l ed pr oducer s on ver y f avour abl e t er ms . Unl i k e t he di st r i but i on ofpow eri n f avourofsuppl yi ng count r i es, pow eri s di st r i but ed mor e i n f avourofoi lcompani es w hen i tcomes t o t he ot hert ypes ofsuppl i er s i n t he i ndust r y. Thi s i s due t o t he f actt hatt he oi li ndust r y has a w i de r ange ofsmal lsub-suppl i er s comi ng f r om var i ous i ndust r i es. Mostoft hese ar e notconsol i dat ed, and gi ven t he f actt hatbi g oi lcor por at i ons r epr esentl ar ge-vol ume buyer s w i t h hi gh pr of i t s f ort hem, i tdi mi ni shes t hei rbar gai n i ng pow er . The oi lcompani es ar e i n f acti n posi t i on t o choose pr ef er r ed suppl i er s, pr ovi di ng t hei rbusi ness w i t h hi gh qual i t y suppl i es ofmat er i al s and ser vi ces.Anot heri mpor t antcat egor y i n t he i ndust r y ar e engi neer s and sci ent i f i c r esear ches, w hom oi lcompani es ow e t hei rk now - howand t echnol ogi caladvancement . Her e, oi lcompani es ar e f aci ng gr eatsuppl y shor t ages oft hese qual i f i ed l abourcat egor i es. Due t o t he cycl i calnat ur e oft he pet r ol eum busi ness and i t s l ost gl amour , uni ver si t y gr aduat es ar e si mpl y noti nt er est ed i n t he i ndust r y15, w hi ch gi ves t hem bar gai ni ng pow ert o oi lcompani es. The gener alpi ct ur e oft he pow erdi st r i but i on bet w een oi lcompani es and t hei rsuppl i er s i s t hati tal ldepends on t he t ype oft he suppl i er . When l ook i ng att he mor e convent i onalsuppl i er s ofmat er i al s and ser vi ces, t he i mpr essi on i s t hatbi g oi lcompani es can exer tpow erdue t o t hei rposi t i on. How ever , t he pi ct ur e i s t ot al l y di f f er entw hen l ook i ng att he suppl i er sofoi lf i el ds, w i t h OPEC count r i es as a speci f i c exampl e, w hi ch hol d mostoft he easy-t o-access oi lr eser ves i n t he w or l d. These count r i espol i ci es can i n f actmak e f i r ms t o go outofbusi ness as compani espr esentoi lr eser ves dr y out .Thr ea tof Subst i t ut e Pr oduct s a nd Ser vi ces Subst i t ut e pr oduct s and ser vi ces l i mi tt he pr of i tpot ent i aloff i r ms and t hei rsour ce ofval ue cr eat i on ( Rei l l y and Br ow n, pg. 498) . How ever , oi li s a domi nantand pr evai l i ng sour ce ofener gy, st i l li r r epl aceabl e i n many sect or s, especi al l y i n t r anspor t at i on and i ndust r y. Notonl y has t hi s been t he case i n t he past , butaccor di ng t o t he I nt er nat i onalEner gy Out l ook2008 ( EI A) , oi li s goi ng t o st ay t he pr edomi nantener gy sour ce t hr ough 2030 ( see gr aph bel ow ) . Thi s i s most l y due t o t he f actt hatoi li s cheapercompar ed t o ot herf uelt ypes. As dr i l l i ng and expl oi t at i on t echnol ogy i s get t i ng evermor e sophi st i cat ed, w hi ch i s goi ng t o out pace r i si ng depl et i on cost s, oi li s l i k el y t o st ay one oft he cheapestsour ces ofener gy i n t he f ol l ow i ng year s. Subst i t ut es ofoi l , 1 5 Mi chaelBr adf or d, Oi li ndust r y gr appl es w i t h l aborshor t age: ht t p:/ / w w w .busi nessi nsur ance.com/ cgi -bi n/ ar t i cl e.pl ?ar t i cl eI d=24938 Page28 t hough, become a t hr eatonce t he cr ude oi lpr i ce i ncr eases si gni f i cant l y. The mostused subst i t ut e f uel s ar e i n t he f ol l ow i ng or der : coal , nat ur algas, r enew abl es ( w i nd, sol arener gy,Fr om t he subst i t ut es, based on t he Ener gy I nf or mat i on Admi ni st r at i on, nat ur algas i s expect ed t o have a hi ghergr ow t h r at e t han oi l . The pr oj ect i ons ar e t hatgas i s goi ng t o gai n si gni f i cantmar k etshar e i n t he i ndust r i al , r esi dent i aland commer ci alsect or s. Thi s i s, by any means, good new s f orcompani es such as Pet r obr as and ot heroi lcompani es, as mostoft hem pr oduce gas al ong w i t h oi l , ( due t o t he f actt hatoi land gas ar e of t en f ound t oget her ) . These t r ends ar e al so occur r i ng si nce nat ur algas emi t s a l otl ess gr eenhouse gases, w hi ch doesn tadd much ofcar bon di oxi de t axes t o i t s pr i ce. Forcompar i son, nat ur algas