INSTITUTE OF PROFESSIONAL EDUCATION AND RESEARCH, BHOPAL

IPER PGDM TRIM II OPERATION MANAGEMENT II ASSIGNMENT I

Submitted To:
Prof. (Dr.) Hersh Sharma

Submitted By:
Vishal Singh Vibhavary Shrivastava

Competitive analysis of world leading oil and Gas Corporation, British petroleum and Royal Dutch Shell:
This comparison has been done on the basis of following topics: Operational practices: Financial terms Market share Distribution network (SCM) Product range Environmental issues

BP Group background information

BP is one of the worlds leading international oil and gas companies. It operates or markets its products in more than 80 countries, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products for everyday items. BPs worldwide headquarters is in London. The UK is a centre for trading, legal, finance and other business functions as well as three of BPs major global research and technology groups.

Royal Dutch Shell plc background information

From 1907 until 2005, Royal Dutch Petroleum Company (Royal Dutch) and the shell Transport and Trading Company, p.l.c. (shell transport) were the two public parent companies of a group of companies known collectively as the Royal Dutch /Shell Group(Group). Operating activities were conducted through the subsidiaries of Royal Dutch and Shell Transport. In 2005, Royal Dutch Shell plc (Royal Dutch Shell)became the single parent company of Royal Dutch and Shell Transport, the two former public parent companies of the Group. Royal Dutch Shell plc(the company) is a public limited company registered in England and Wales and headquartered in the Hague, the Netherlands.

Shell is one of the worlds largest independent oil and gas companies in terms of market capitalization, operating cash flow and oil and gas production. It aims to sustain its strong operational performance and continue its investment primarily in countries that have the necessary infrastructure, expertise and remaining growth potential. Operational practices:
A best operational practice is a technique or methodology that, through experience and research, has proven to reliably lead to a desired result. A commitment to using the best practices in any field is a commitment to using all the knowledge and technology at one's disposal to ensure success. The term is used frequently in the fields of health care, government administration, the education system, project management, hardware and software product development, and elsewhere. As per recent operational practices in the both companies are:

Royal Dutch Shell:

Shall adopt Global Supply Chain process to increase profitability Drive Enterprise first strategy: As part of Shells Global Supply Excellence Program, the company focuses on three key management objectives: operational excellence, flexibility to respond to market opportunities, and margin optimization across the supply chain. After the company identified uncommon operating procedures at each of its many refinerieswhich led to inefficiencies and lower margins-Shell launched Enterprise First, an initiative designed to standardize processes and technology across the organization. Key to driving this strategyand meeting its objectivesis an integrated aspen ONE Supply Chain solution that helps Shell optimize refinery production, reduce costs, and increase margin.

British petroleum:
BP adopts safety and operational risk update: Under this BP progress their safety and risk factor to at the level of excellence which provide highly flexible to respond to market opportunities and provides with the help of below digram we can easy understand their practices:

Financial Terms:
In accounting terms, profits are referred to as net income. Net income is total revenue minus all costs of operation, interest on debt, and taxes. Net income is the amount available to management to use for providing a return to shareholders, or pursuing strategic goals for the company. the net incomes of the five major oil companies from 2007 to 2011. The data represent corporate earnings. Each business segment of the companies operations contributes to the total. The most used aggregate measures of net income sources in the oil industry are the upstream (exploration and production) and downstream (refining and marketing) sectors.
Table . Net Incomes of the 3 Major Oil Companies (millions of dollars) 2007 2008 2009 2010 2011

Chevron BP plc

18,688 17,287

23,931 25,593

10,483 16,578

19,024 -3,719

26,895 25,700 28,625

Royal Dutch Shell 27,564 26,277 12,518 20,127 plc source: Oil Daily, Profit Profile Supplements, various dates and company earnings reports.

Notes: Net income is earned from global operations. BP plc and Royal Dutch Shell plc net incomes are replacement cost profits and current cost of supplies profits, respectively, measures close to U.S. accounting standards.

Upstream Net Incomes of the Five Major Oil Companies

(millions of dollars)
2007 2008 2009 2010 2011

Chevron BP plc Royal Dutch Shell

14,816 26,927 14,686

27,710 37,915 20,235

10,431 24,942 8,354

17,677 30,970 15,935

24,786 30,500 24,687

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 Chevron BP plc Royal Dutch Shell

Table Downstream Net Incomes of the Five Major Oil Companies

(millions of dollars)
2007 Chevron BP plc Royal Dutch Shell plc 3,502 2,617 6,951 2008 3,429 4,176 446 2009 565 4,517 3,054 2010 2,478 7,239 4,448 2011 3,591 5,474 4,274

8,000 7,000 6,000 5,000 Chevron 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 BP plc Royal Dutch Shell plc

Return on equity The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity BPs return on equity in 2010 was -3.5%, while in 2009 was 16.4%. This means that the companys ability to use shareholders money to generate profit has decreased as the year went on. Average shareholders equity is always above zero, so the only reason for return on equity to fall below zero is that the net income in 2010 is below zero. As Return on equity could be divided into two parts: Return on assets product financial leverage. And the only way for return on equity to fall below zero is return on assets has fall below zero, financial leverage in this case, if exaggerated, could made ROE performance even worsen. However, when we look at the annual report of Royal Dutch Shell plc, we can come to the conclusion that Royal Dutch Shell plcs management is overall doing a better job as compared with what they did in 2009. The ROE of BP in 2010 for Royal Dutch Shell plc has rise from 9.2% in 2009 to 13.7% in 2010. So from the ROE, we can concluded that BPs management has done a worsen job as compared to its competitor Royal Dutch Shell plc, if one put one dollar as an investor to BP, he would end up lose 0.035 dollar when the year ends, but if he put the dollar to its competitor---Royal Dutch Shell plc, he will gain 0.137 dollar when the year of 2010 is over. Return on assets Return on assets is an important ratio for companies deciding whether or not initiates a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it, ROA is the return they would receive. Simply put, if ROA is above the rate that the company borrows at then the project should be accepted, if not then it is rejected. The return on assets rate in 2010 for BP is -1.2%, while in 2009 it was 7.1%. However, its competitor Royal Dutch Shell plc has done a much better job. Not only has Royal Dutch shell plcs return on assets is able to be above zero, but also increased from 4.4% in 2009 to 6.3% in 2010. The situation that BPs return on equity much worsen in 2010 than in 2009, is due a lot to it return on assets worsen of performance. Financial leverage

Accounting leverage is total assets divided by total assets minus total liabilities. The most obvious risk of leverage is that it multiplies losses. A corporation that borrows too much money might face bankruptcy during a business downturn, while a less-levered corporation might survive. An investor who buys a stock on 50% margin will lose 40% of his money if the stock declines 20%. There is an important implicit assumption in that account, however, which is that the underlying levered asset is the same as the unlevered one. If a company borrows money to modernize, or add to its product line, or expand internationally, the additional diversification might more than offset the additional risk from leverage. Or if an investor uses a fraction of his or her portfolio to margin stock index futures and puts the rest in a money market fund, he or she might have the same volatility and expected return as an investor in an unlevered equity index fund, with a limited downside. So while adding leverage to a asset always adds risk, it is not the case that a levered company or investment is always riskier than an unlevered on. In fact, many highly-levered hedge funds have less return volatility than unlevered bond funds, and public utilities with lots of debt are usually less risky stocks than unlevered technology companies. (From Wikipedia, the free encyclopedia) Both BP and its competitor Royal Dutch Shell plc use a higher financial leverage in2010 than in 2009. In 2010, BPs financial leverage rise from 2.31 in 2009 to 2.84, and Royal Dutch Shell plcs financial leverage rise from 2.12 in 2009 to 2.15 in 2010. However, as we have discussed before, that in 2010, the return on asset ratio for BP unfortunately fall below zero, so the rising financial leverage in 2010 for BP has broaden its financial losses based on equity invested, the tool of financial leverage in 2010 for BP has been badly used, brought a even worsen effect on its profit performance. While, its competitor, Royal Dutch Shell plc has a positive return on asset, the rising financial leverage in 2010 as compared to 2009 has been doing well for return on equity. Royal Dutch shell plcs operation is much effective, so borrowing money from debtors can help them gain more profit. Net profit margin Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue. The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safely: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin. (From Wikipedia, the free encyclopedia) The net profit margin for BP in 2010 has decreased from 6.8% in 2009 to -1.1%, this means that in 2010, when a sale is made, the company is actually not profitable, although Royal Dutch shell plcs net profit margin has also dropped from 647.2% in 2009 to 5.4%, we can see it is still above zero. So when compared to its competitors, BP seems to lose the ability to generate net

profit from sales they make. This could be a fault of non-operation income too high, or operating profit too low, or taxation cost too much, a much higher expenses can also be a way to explain to the bad performance of net profit margin ratio. So we have to move on to explore what the real problem lays. Total asset turnover Total asset turnover is the amount of sales generated for every dollars worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Asset turnover measures a firms efficiency at using its assets in generating sales or revenue -the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. ( http://www.investopedia.com/terms/a/assetturnover.asp) In 2010, BPs total asset turnover rise from 1.04 in 2009 to 1.13. This means BPs e fficiency at using its assets in generating sales or revenue has been better. And its competitor Royal Dutch Shell plc in 2009, is not doing a good job in managing its assets, however, we can see from the ratio of total asset turnover for Royal Dutch Shell plc has rise from 0.01 in 2009 to 1.17 in 2010. This means the management of Royal Dutch Shell plc has improved a lot, to further explore which assets has contributed the most to improve total assets turnover, we will have to calculate the fixed asset turnover, inventory turnover, current asset turnover and noncurrent asset turnover individually. Operating profit margin In business, operating margin, operating income margin, operating profit margin or return on sales (ROS) is the ratio of operating income (operating profit in the UK) divided by net sales, usually presented in percent. Operating margin=operating income/revenue BPs operating margin dropped slightly from 97.2% in 2009 to 96.2% in 2010, means that the part that operating income taken as per share in revenue has decreased slightly. Overall, BPs operating section is not doing a bad job. But when the operating profit margin check comes to its competitor---Royal Dutch Shell plc, it is doing a much worsen job. In 2009, it did gorgeous to have achieved 14157.2% in operating profit margin, but in 2010, only 97.3%. From this, we can come to at least two conclusions: first, Royal Dutch shell is doing better each year compared to BP in operating profit margin, even its operating profit margin dropped dramatically in 2010 to 97.3%, it is still 1.1% higher than that of BPs; Second, there must be some reason for Royal Dutch Shell plcs operating profit margin to dropped so dramatically, operating income to a

company is much more stable than non-operating income, if a company relies its profit much on non-operating income, in the long run, it has some potential management risk. Effect of non-operating items The effect of non-operating items reflects everything in the companys income statement between its operating income and its earnings before taxes. If the company has net nonoperating expense, the ratio of income before tax to operating income is less than 1.0; on the other hand, if the company has net non-operating income, this ratio is greater than 1.0. The effect of non-operating income is often referred to as the interest effect or interest burden because for many companies the interest expense is the primary non-operating expense. Companies with higher interest expense have lower ratios of income before taxes to operating income, whereas companies with larger non-operating income have higher ratios of income before taxes to operating income. (Certified financial analyst program, corporate finance and portfolio management) Effect of non-operating items for BP in 2010 is much stronger than 2009, from 10.5% in 2009 to -1.6% in 2010. The ratio effect of non-operating items in 2010, 2009 for BP and Royal Dutch Shell plc are all below 1.0, means that the two above companies all has net non-operating expense. In 2010, BPs effect of non-operating items is below zero, means that non-operating expense has taken up more than operating income. In 2010, Royal Dutch Shell plcs effect of non-operating items rise from 7.6% in 2009 to 9.6%, means that more share of income before taxes has taken part in the total operating income.

Product comparison:
Comparison point
Farm / Outdoor Oils. comparison point
M ULTIFARM

SHELL
A GROMA MP

BP
SUP E R TOU

STOU 15W40

15W40

AGRITRANS DONA X TD GL-4

TRA CTRA N TDH

P RE MIUM GL-4

CHAIN & BAR OIL TWO STROKE TC

CHA INSA W BA R OIL LA WN 2 MOWE R OIL NA UTILUS

CHA IN-N-BA R

P OWE R CUT

OUTBOARD

HITIDE 2i

Hydraulic Oils.
COMPARISO N POINT
SUPERDRAULIC ISO 22 SUPERDRAULIC ISO 32 SUPERDRAULIC ISO 46 SUPERDRAULIC ISO 68 SUPERDRAULIC ISO 100 SUPERDRAULIC ISO 150 SUPERDRAULIC HVI ISO 32-150 BARTRAN HV ISO 32-150

SHEL L
TELLUS 22

BP
BARTRAN 22

TELLUS 32

BARTRAN 32

TELLUS 46

BARTRAN 46

TELLUS 68

BARTRAN 68

TELLUS 100

BARTRAN 100

TELLUS 150

BARTRAN 150

TELLUS T SERIES

HYDRATRANS

10W

Petrol Engine Oils.

COM PARISON POINT
SYN 5W40 H E LI X U LT R A SM /CF F U LL 5W40 SYN TH E TIC 5W40 SM /C F VI SC O 7000

SHELL

BP

SE M I-SYN 10W40 SM /CF

H E LI X P LU S

SE M I SY N T H E T I C SE MI 10W40 SL/C F SYN TH E TIC E U R O TE CH 5W30 C3 E XT R A LOW SAPS 5W30

H E LI X U LT R A

20W50 SG/CD

H E LI X R E D

VI SC O 2000

20W50 SG/C D

20W50 SH /C D

20W50 SJ/CF -4

VI SC O 3000

20W50 SJ/C F

H E LI X 20W50 SL/CF -4 ST AN D AR D

20W50 SL/C F

20W50 SM /CF -4

H E LI X

20W50

15W50 SM /CF -4

H E LI X 15W50 SJ/C F

10W30 SM /CF -4

H E LI X

10W30

10W40 SM /CF -4

15W40 SL/CF -4

H E LI X SU P E R

VI SC O D I E SE L

15W40 SL/C F

15W40

15W40 SM /CF -4

H E LI X SU P E R

15W40

H E LI X H I GH 25W60 SJ/CF -4 M I LE A GE

C OR SE P LU S

25W60 SH /C F 25W60

Supply chain management:

Royal Dutch Shell
in the supply chain management they are using building block system for better implementation their innovation in supply chain management concepts that is enterprise first

British petroleum:
From oil exploration to exploring new forms of alternative energy and finding the best ways to market our products, BPs business interests are wide. Professionals in Procurement and Supply Chain Management work across every part of it and in places as diverse as Angola, Egypt, the USA, and Indonesia. Wherever they are, innovative improvements are valued and our teams take on strategic as well as operational goals in their work with suppliers, contractors and government bodies. We encourage our people to progress as specialists in key markets areas or sometimes by becoming involved with more than one large global project at a time.

Environmental issues
Royal Dutch Shell environmental issues
Royal Dutch Shell is engaged in a variety of business activities across the world which of necessity involves the extraction, production, handling, processing, storage and transportation of hazardous products, including hydrocarbons and chemicals. On 13 May 2008, Shell released a report setting out ambitious plans to meet the global energy challenge that can be summed up as more energy, less CO2. The report describes Shells plans to invest in second generation biofuels and carbon capture and storage. It also discusses utilization of natural gas and wind power combined with the necessity to reduce greenhouse gas emissions and operational oil spills. The vast scale of operation means that even with the highest safety and maintenance standards in current and future activity, accidents and events arising from human error or misjudgment and or plant or equipment failure, are likely to occur. The record of past environmental incidents and events detailed in this article should be considered in that context.

Environmental issue of British petroleum:

As the oil spill coming from BPs Deep water Horizon exploratory drilling rig accidents (blowouts) of April 20 and 22, 2010 continues unabated, many questions are raised and many gaps uncovered in our knowledge. Most importantly, the long-term effects of such catastrophic spill on humans, marine life and environment are hard to predict, while various clean-up methods seem to raise a series of additional issues (such as the controversy related to the dispersants used). So far, few environmental issues became evident including:

the formation of underwater oil plumes the danger from the dissolved contamination the impact of oil plume on the sensitive gulf coastal wetlands

While the oil continues to be spilled and scientists struggle to investigate and better understand and address, the long-term impact of the spill on environment, ecosystems and humans remains hard to predict.