Executive Summary Sinopec, one of the world largest oil companies, started to establish an oil storage project in Batam, Indonesian 2012. This report is made for the Batam local government and aims to analyse and predict the current and future investment of Sinopec. It will also evaluate and predict the influence of the Batam project. The final objective is to provide strategic choices for Batam government.
The data of this report are all from open source. They are from three main aspects which are Sinopec, Batam and international oil industry. The most data are collected from Internet via various search engines such as Google and Discovery. The official websites of Sinopec and Batam has also provided amounts of data. In addition, some existent reports and journals is an important component of this report’s data collection.
In findings, this report firstly analyse the current global expansion strategy of Sinopec. Then in strategic importance of the Batam Project is determined. Based on those two findings, the author justifies the Batam Project and predicts that there will be more similar investment of Sinopec in this area in the future. Moreover, this report also evaluates the predicable influences on local society from Sinopec’s new project. In terms of positive, this project can pull the development of local economy in some aspects such as promoting employment and increasing government income. However, the project is also a potential threat of local environment and the tourist industry.
At the final part, this report provides two strategies to local government. In the industry- oriented strategy, the government is suggested to concentrate on the oil industry development. In the environment-oriented strategy, the author recommends client to restrict this kind of investment and to put the environment at the first place in order to acquire long-term benefits.
Introduction China Petrochemical Corporation (Sinopec Group), which is established in July 1998, is a super-large petroleum and petrochemical enterprise group. Sinopec Group is a state-owned company solely invested by the State, functioning as a state-authorized investment organization in which the state holds the controlling share. Headquartered in Beijing, it has a registered capital of £18.2 billion (Sinopec, 2012).
Following the rapidly development of China economy, as one of the most important Chinese state-owned company, Sinopec has significantly increased its market power and influence in international petrochemical market in last decade. Nowadays, it has become one of the largest petrochemical enterprises worldwide and is ranked the 5th in Fortune Global 500 in 2012 (Fortune, 2012). Originally, although Sinopec has great business scale and market value, it has held their most business within China.
Compared with its competitors such as British Petroleum and Royal Dutch Shell, Sinopec still has a weaker international market position. However, in recent years, Sinopec start to spread its business overseas. On 10th October 2012, Sinopec announced its Batam Oil Storage Project which located in the West Point Industrial Park of Batam, Riau Islands Province of Indonesia. The project will be built with 2.6 million cubic meters of crude oil and oil products storage facilities, and supporting piers (Sinopec, 2012).
Batam is one of the largest islands in the Riau Archipelago and is actually one of fastest growing tourist destinations in Indonesia (Batam, 2013). Such an investment certainly will have a deep influence on local society. Therefore, as a consultant hired by Batam local government, the author will focus on evaluating and predicting the influence of the new project and, in addition, also provide reasonable strategies to client in order to respond the Sinopec’s investment. Data collection
This report has only sought the open source information which refers publicly available information appearing in form of electronic or print. Because that this type of information is plentiful and costless to obtain. Another advantage of open source information is that it may be the most timely and accurate information available (Operations Security Intelligence Threat Handbook, 1996). Besides that, collecting open source is completely legal. The author has collected data from three main aspects which are Sinopec’s strategies, Batam’s information, and the external environment of petrochemical industry.
Firstly, in order to analyse Sinopec’s Batam Project, it is necessary to review Sinopec’s development direction and strategies of recent years. The annual report may be the most official and accurate open source. Through past several years Sinopec’s annual reports, the changes and development of its strategies can be defined.
The official website of Sinopec is an effective open source because the official news there can be ensured both timeliness and reliability. Secondly, the basic information of Batam such as population, culture, social class and economy may decide the degree of the influence from Sinopec’s Project. Thus, it has deep impacts on the local government’s response. That information has been mostly collected from the island’s home page on Internet.
Thirdly, the existent reports and journals of petrochemical industry and companies are also used as references to evaluate the influences of Sinopec’s Batam Projects on local society. They may provide previous and similar cases to help the author to analyse the data and to present optional strategic choices to the client. In addition, the relevant reports from public media can be used to collect extra information as replenishments which may contribute the data more comprehensive and more particular.
In terms of the methods used to collect data, Internet and traditional methods such as textbook and business journal are the two main techniques. The former provide a fast way to search and obtain relevant information. Several search engines such as Google would present a wide range of source. In addition, various websites of public media, for example, Wall Street journal, and Reuters may provide some useful business report with professional insights which are important components of this report data.
The latter is more complex to conduct compared with Internet. However, tradition methods such as collecting data in library can access to some information which is unavailable on Internet. In addition, Discovery of University of Liverpool is a professional search engine where can acquire numerous academic data such as journal articles and publications in form of electronic. This report has combined those different methods to obtain data. Findings
Sinopec’s Global Business Strategy Sinopec’s Batam Project is not an isolated incident. The author believes that it is a part of its global expansion strategy. In recent years, Sinopec has a rapid development. Based on its annual reports from 2009 to 2011, the operating income has kept an increase rate over 30% and the amount has almost doubled in these three years (Sinopec 2011 annual report, 2012). Its total assets have also increased over 10% per year (Sinopec 2011 annual report, 2012).
Consider the scale of Sinopec’s business (above £174.5 billion), the domestic market is certainly difficult to support such speed of development. Obviously, the expansion of overseas market is an inevitable choice of Sinopec. As the evidences, the proportion of overseas assets in Sinopec‘s total assets had increased from 10.6% to 36.56% between 2005 and 2011(Chinese News, 2012). In 2012, Sinopec’s overseas assets were above £60 billion (Chinese News, 2012).
Sinopec’s expansion has two main structures. On the one hand, Sinopec has built facilities in their supplier countries such as the Batam project. On the other hand, it keeps seeking opportunity to purchase foreign companies as Merger and acquisition (M&A). Actually, in recent years, Sinopec has repeatedly invested in foreign market. In October 2011, Sinopec bought Daylight Energy Ltd., a Canadian oil and natural-gas producer, for 2.12 billion US dollars (Welsch, 2011). In July 2012, Sinopec injected around $2.1 billion into Australia Pacific LNG to finalize its acquisition of 25% equity totally in the joint venture (Forster, 2012).
February 2013, Sinopec purchased an oil and natural-gas field straddling the Oklahoma and Kansas border from Chesapeake Energy Corp, an US company, for 1 billion US dollar (Lefebvre, 2013). Those examples can prove that Sinopec is actively expanding outward and focus on the developed countries. Therefore, the author deems the Batam project as a part of Sinopec’s global expansion strategy and believes Sinopec will continue this kind of projects. Sinopec’s Batam Project
Besides of Sinopec’s global strategy, the future actions can also be predicted via analyzing of Batam project itself. This project, in details, has been invested $850 million and planned to build between 18 and 24 months and will be the largest oil storage terminal in Southeast Asia (Pachymuthu and Chen, 2012). The author believes that this investment has great strategic importance and may create huge benefits for Sinopec.
Firstly, according to the media data, above 70% of Sinopec crude oil resource is rely on import and Indonesia is one of its main supplier countries (Zhao, 2012). Thus, locating the faculties near the suppliers can reduce amounts of transportation expenses. Secondly, Batam is only 20 km away to Singapore (Batam, 2013) which is the region’s top trading hub and is the world’s top three export refining centres (Singapore EDB, 2009). Therefore, the Batam project can be a foothold in order to contribute Sinopec to spread its business into Southeast Asia, Northeast Asia and Middle East markets. In addition, this project can also play an important role in safeguarding the oil supply and energy security of China.
Therefore, as the first overseas oil storage terminal of Sinopec, the Batam project will be a start and example of this expansion structure. The author predicts that after this project Sinopec will continue its investment in this area in order to enhance its market position. Predictable Influences of the Batam Project
As mentioned before, Batam’s information is a key factor which may decide the influence of Sinopec’s project. Based on the research, Batam has population of around 1 million and its economy structure is mainly composed by Oil support industry, electronics industry and tourist industry (Batam, 2013). Obviously, Sinopec’s new project will deeply influence the local society in both positive and negative terms. Positive Impacts
In terms of Positive impacts, firstly, the project can make considerable economics contribution. In 2011, Sinopec has totally paid taxes of £ 32.98 billion (Sinopec 2011 corporate social responsibility report) and part of it should be paid to host governments. Therefore, the new project can increase the financial income of Batam government. Secondly, the project will create amounts of jobs. According to the corporate social responsibility report of Sinopec (2011), their overseas employees has been over 40,000 include 27,000 international employees which making up 67% of total.
In Batam, Worker is an important part of population. Besides the local people, various ethnic groups from all over Indonesia have come here in search for jobs with the rapid growth and development of the area (Batam, 2013). Thus, the project can meet these demands. Sinopec also has held various forms of comprehensive trainings in host countries for employees (Sinopec 2011 corporate social responsibility report). It can not only improve the personal skills of employees but also can make contribution of the development of local oil industry.
Moreover, Sinopec’s project can also promote the economic of scale of oil industry. Singapore is located by about 70% of the international oil and gas suppliers manufacture (Tan, 2010) and the region around it include Batam has become the new target of global oil companies’ oil infrastructure projects, for example, Vopak and Virol began their constructions in southern Malaysia in progression (Pachymuthu and Chen, 2012). Therefore, those oil projects will generate a regional economic of scale which can push the development of local oil industry. Sinopec’ current and future investments will play a role in this background. Negative Impacts
However, the Batam project will have negative impacts on local environment and tourist industry. On the one hand, the environmental problem are very serious for oil companies (Tian et al, 2011) a recent example is the Deepwater Horizon oil spill on 2010, which leaded to a horrendous environmental disaster. This tragedy was deemed as the worst oil spill in U.S. history and caused widespread economic consequences from Texas to Florida (Alijani et al, 2012).
Therefore, such a large-scale oil project will be a potential threat of environment especially in Batam which is a tourist destination. On the other hand, this oil project will consume amounts of resource such as water and electric power which may cause encumbrances of local society. Moreover, the tourist industry could be damaged by Sinopec’s project which includes the pollutions of both construction and daily petrochemical production after operating. Strategic Implications
Based on the findings, Sinopec’s Batam project is an implementation of its global expansion strategy. It chose Batam’s as the location in order to close Indonesia which is the main oil supplier countries and Singapore which is one of the world largest trading and refining centres. To acquiring a stronger international market position, Sinopec will invest in this area further. For Batam’s local government, the client, this project can stimulate Batam’s economic growth and also is a potential threat in terms of local environment and tourist industry.
This report provides two strategic choices based on two orientations respectively which are oil industry-oriented and environment-oriented. Industry-oriented strategy
Generally, this strategy suggests that the local government can focuses on the oil industry growth. It should utilise the trend of Sinopec’s strategy to introduce more foreign oil investments. The core principle is to promote the Sinopec’ project and continue attracting similar investments. Moreover, local government should also pay attention on environment protection.
Firstly, the government should create a favourable environment for foreign oil investment. On the one hand, relevant preferential policies such as reducing the taxation rate and distributing bonuses to those oil companies should be set before the project finish which within 18 months. On the other hand, government can be an actively intermediary between foreign investors and local business groups immediately in order to enhance the communication and improve the relationships between them. For example, government can promote the cooperation between local pipeline producers and Sinopec in order to contribute its construction.
Secondly, government should provide convenient to Sinopec in terms of the infrastructure and labour resource. The former mainly refers to the transportation conditions which can seriously influence the oil companies. Based on the actual situation, road should be upgraded and maintained. Besides the road construction, traffic regulation is important as well. A reasonable transportation system can not only reduce the transportation cost but also increase the efficiency. For example, the special railway lines can be established for heavy tracks of Sinopec which ensure the safety and efficiency at same time.
Because those actions need be adjusted in real situation they are planned to be done within half year after the Batam project finish. For the later, local government can open the labour market for Sinopec while it seeking employees. In addition, some basic skills training program such as language class should be started to hold for local people in order to reduce the training cost of Sinopec.
Thirdly, planning ahead of the location of oil projects is essential to maximise the economic benefits and synergy effects. One is that extra land around current project should be prepared in case of possible extension. Another one is that government should make plan to move current and future oil projects into a same region in order to create external economic of scale. It also can attract further investment from oil industry.
However, environment problems cannot be ignored. The oil industry area should keep away from the living and tourist areas in Batam in order to reduce the influences of possible pollution from production. Government also should set environmental policies to standardize Sinopec’s operation. Environment-oriented Strategy
Although Sinopec’s Batam Project will create amounts of benefits for local society, it will be a potential threat of environment and may hurt tourist industry. Therefore, this strategy suggests that local government should put the environment at the first place. It should cautiously face the Sinopec’s current and future investments in order to protect the local tourism resource.
On the one hand, government should formulate strict polices of environmental protection and determine oil production standards for Sinopec and other current oil companies. Specifically, government should set restriction and punishment mechanism in order to avoid resource wasting and pollution. Moreover, the frequent monitoring and testing systems are also necessary. Those actions should be done as soon as possible. On the other hand, for the possible investment in the future from Sinopec, government should have more comprehensive evaluation which will focus on the environment influences rather than economic growth.
Obviously, restricting those oil companies’ investment will slow the development of local economy. Therefore, in order to keep the economic growth, the government should focus on developing the tourist and service industries vigorously instead of the oil industry.
The principal financial data of Sinopec in the 2011 Annual Report
Total Assets of Sinopec in the 2011 Corporate Social Responsibility Report
Taxes Paid of Sinopec in the 2011 Corporate Social Responsibility Report
The overseas employment of Sinopec in the 2011 Corporate Social Responsibility Report
The official announcement of the Sinopec’s Batam Project
Appendix 2 The author of this report agreed to the information within the same being used by Module Leader Dr J. Ferdinand.