Team 4

Academic Honesty Policy

Richard Bullock (rbull011@fiu.edu)

Maria Christian (mchri008@fiu.edu)
Michael Hodson (mhods002@fiu.edu)
Charles Schulze (cschu038@fiu.edu)
Adrian Boloix (aboloi01@fiu.edu)
CERTIFICATION OF AUTHORSHIP: We certify that we are the authors of this paper and that any
assistance we received in its preparation is fully acknowledged and disclosed in the paper. We have
also cited any sources from which we used data, ideas or words; either quoted directly or paraphrased.
We also certify that this paper was prepared by us specifically for this course.

Richard Bullock:
Maria Christian

Maria Christian

Michael Hodson mhods002@fiu.edu

Charles Schulze Charles Schulze
Adrian Boloix

Adrian Boloix

International Acquisition Proposal

Team 4
Strategic Management (MAN 6726)
Professor Charles M. Newman II, Ph.D.
17 August 2014

Executive Summary

Team 8 recommends that ConocoPhillips, a major multinational company in the

Energy industry, enter the BRIC markets, initially targeting ___________ as the first
country, through an acquisition or joint venture with one of the key local companies in
the Energy industry.

Table of Contents
Purpose...................................................................................................................... 5
I. Background Information and Analysis....................................................................5
A. Global Structure & Environment of the Energy Industry......................................5
B. United States Structure & Environment of the Energy Industry..........................9
C. Importance of the BRIC Countries to the Energy Industry.................................12
Brazil.................................................................................................................. 13
Russia................................................................................................................. 13
India................................................................................................................... 15
China.................................................................................................................. 16
II. Determination of the target BRIC country for the Proposed Acquisition..............17
A. Comparative risk, opportunity and overall business climate of the BRIC
countries............................................................................................................... 17
B. Comparative industry market potential and structure of the BRIC countries....17
C. Recommendation.............................................................................................. 17
References................................................................................................................ 20

Purpose
This report presents research and analysis to support consulting client
ConocoPhillips (NYSE: COP) in a strategic decision to make a foreign direct investment
to acquire or form a joint venture with another company in one of the BRIC (Brazil,
Russia, India, and China) countries. Specifically, the first part of this report evaluates
the market potential of the BRIC countries in the context of what is happening globally
and in the U.S. for the Energy Industry to include the country/industry comparative
analysis to support our recommendation on which BRIC country to do the foreign direct
investment in. It should be noted, the initial analysis is based only on market size and
growth potential for the Energy Industry in each of the BRIC countries.
I. Background Information and Analysis
A. Global Structure & Environment of the Energy Industry
Energy has enabled progress of civilization and has driven economic
transformation over the last 250 years. Energy is a basic input allowing individuals,
businesses, industries and governments to function in the modern world. Development
of the modern world has been underpinned by new uses for and a constantly growing
demand for energy. As emerging countries continue to develop, significant amounts of
energy will be needed to accommodate the exponential demand from new consumers
(World Economic Forum, 2013). To examine the Energy Industry potential, the first step
is to understand the Energy Industry structure. In other words, who are the main
players and specifically, who are the producers and consumers (Grant, 2012).
Energy production is focused on providing a range of energy sources to meet the
demands of society. Production covers many conventional energy sources such as

petroleum, natural gas, electrical power, coal and nuclear segments. More recent
entrants include renewable energy sources such as wind and solar (Energy
development, n.d.). Additionally, the Energy Industry is the largest industry by market
capitalization at $4.09 trillion (as of 08/08/2014) with Banks coming in second at $3.27
trillion (Fidelity, n.d.).
Total energy production is often measured in tonne of oil (toe) equivalents and is
used in the graphics below. As noted in the following graph, total production of energy
increased by 1.1% in 2013 and has increased by approximately 35% since 2000.

2013 Global Energy Production (Enerdata, n.d.)

It is interesting to note from the graphic that as of 2013, BRIC countries
accounted for 35% of world energy production in 2013. This was not the case in 2000
as shown in the comparisons below. Specifically, since 2000, China's energy

production has increased 129%, Russia's 36%, India's 52% and Brazil entered the Top
10 producing countries with a 71% increase as noted the following graphic.

Top 10 Energy Producing Countries in 2000 vs. 2013 (Enerdata, n.d.)

The other side of production is consumption. World energy consumption is
expected to continue its steady growth well into the future. The majority of the energy
consumption will be in non-Organization for Economic Cooperation and Development
(OECD) countries which are countries other than United States, Canada, Mexico,
Austria, Belgium, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Iceland, Ireland, Israel, Italy, Luxembourg, the Netherlands, Norway,
Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, the United
Kingdom, Japan, South Korea, Australia, and New Zealand. Demand in these nonOECD countries is driven by strong, long-term economic growth. For both OECD and
non-OECD countries, the industrial sector accounts for the greatest portion of energy
consumption. Specifically, the industrial sector consumes half of global energy
produced (U.S. Energy Information Administration, 2013).
A closer energy consumption examination by country shows demand continues
to be driven by the BRIC countries. Further, energy consumption has matched energy
demand with a 35% increase since 2000 as highlighted in the following graphic.

2013 Global Energy Consumption (Enerdata, n.d.)

While the supply has matched demand, the mix and magnitude of countries in
demand has changed since 2000 as shown in the following tables. Specifically, while
the U.S. energy consumption actually went down from 2000 to 2013, consumption in
China went up by 159%, in Russia by 17%, in India by 80% and in Brazil (not shown in
table) 55%.

Top 10 Energy Consuming Countries in 2000 vs. 2013 (Enerdata, n.d.)

Overall, energy consumption in the 69 countries covered by the Economist

Intelligence Unit forecast is expected to grow from 11,654 Mtoe in 2010 to 15,311 Mtoe
by 2020. China will likely remain the leading energy-consuming economy in 2020, with
consumption rising to 3,721 Mtoe by 2020. In contrast, in the US, the next largest
forecasted consumer, energy use will remain fairly constant growing to about 2,440
Mtoe by 2020. Finally, India and Russia will likely remain in third and fourth place
respectively, due to their continued rapid economic expansion (EIU, 2012).
B. United States Structure & Environment of the Energy Industry
As noted in the graphics above, the U.S. is the 2 nd largest producer of energy in
the world. The U.S. lost the top spot to China in 2005. Similarly, the U.S. is the 2 nd
largest consumer of energy in the world. Again, the U.S. lost the top spot to China in
2009. An interesting point to note from the above graphics is that U.S. energy
consumption has actually gone down (-4%) while the rest of the world's consumption is
going up. The production side tells a similar story with only a 12% increase in U.S.
production (Enerdata, n.d.).
The U.S. Energy Industry is currently in a state of flux. Policies designed to
improve energy efficiency, reduce reliance on foreign energy imports and increase
energy capacity renewable energy sources with the aim of reducing emissions of
greenhouse gases are widely accepted (Energy in the United States, n.d.). Additionally,
in 2011, the U.S. became a net exporter of petroleum products as shown in the graphic
below.

U.S. Net Oil Imports. Source: American Petroleum Institute, 2013

Some of the key findings from the U.S. Energy Information Administration's 2014
Annual Energy Outlook are as follows (U.S. Energy Information Administration, 2014):
Growing domestic production of natural gas and oil continues to reshape
the U.S. energy economy
Industrial production expands over the next 10 to 15 years as the
competitive advantage of low natural gas prices provides a boost to
the industrial sector with increasing natural gas use
There is greater upside uncertainty than downside uncertainty in oil and
natural gas production; higher production could spur even more
industrial growth and lower the use of imported petroleum
Evolving natural gas markets spur increased use of natural gas for
electricity generation and transportation, as well as expanded export
opportunities.
Improved efficiency of energy use in the residential and transportation
sectors and a shift away from more carbon-intensive fuels such as
coal for electricity generation help to stabilize U.S. energy-related
carbon dioxide (CO2) emissions.

10

As shown in the table below, the Energy Sector is one of the largest,
representing over 25% of the market capitalization of the largest 500 corporations in the
U.S.

Source: Fidelity. (n.d.).

Within this industry, the table below shows the largest companies in the U.S.
Energy Industry by market capitalization. The far left column also shows the world rank.
2014 World Rank
1
2
7
12
17
20
24
26
27
28
31
33
35
39
41

Company Name
ExxonMobil
Chevron
Schlumberger
ConocoPhillips
Occidental
Enterprise
Duke Energy
Phillips 66
EOG Resources
Halliburton
Anadarko
Dominion
Kinder Morgan
Southern Company
Apache

Market Cap ($US bn)

442.1
240.2
118.7
86.6
76.7
61.9
48.7
46.2
45.8
43
39.9
37.5
37.3
36.2
34.3

Source: IHS. (n.d.)

Source: IHS. (n.d.)

11

The table above clearly shows the dominant U.S. players are also the dominant
World players. ConocoPhillips is a leader in the Energy Industry, but far behind the
super majors like Chevron and ExxonMobil. The following section will evaluate possible
areas for growth to help ConocoPhillips reach the next level.
C. Importance of the BRIC Countries to the Energy Industry
The acronym BRIC stands for Brazil, Russia, India and China. These countries
represent the largest of the world's developing economies which will have an
increasingly important role in the global economy. These four countries account for
25% of global land area and over 40% of the global population. Further, as shown in
the graphic below, the BRIC countries have the fastest growing middle class.

Source: Goldman Sachs, 2010.

Concerning the Electricity Industry, the BRIC countries will likely become the
most important group in the global power industry. Despite their recent economic
growth and success, these BRIC countries only consume about 20% of U.S. energy
levels on a per capita basis. Because of this, in the upcoming decades, the BRIC
countries will attract investments totaling $4.6 trillion to support large scale infrastructure
projects. The following paragraphs highlight the opportunities developing in each of the
BRIC countries (KPMG, 2009).
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Brazil
Brazil is the most populous country in Latin America with a population of
approximately 191 million and population growth rate of 1.43% over the last 10 years
(EIU, 2012). Brazil's population is expected to grow to about 220 million by 2020 and
have labor force of around 114 million people (CIA, n.d.). Concerning economics,
Brazil's economy is specialized around agriculture. Of the BRIC countries, Brazil has
the 4th largest economy with a GDP of $1,981 billion. Brazil's annual economic growth
is around 5.8% (KPMG, 2009). Combination of these factors will drive energy
consumption in Brazil up by 67% in the coming years as noted in the graph below.

Brazil Energy Consumption. Source: (KPMG, 2009; EIU, 2012)

Russia
Russia has a population of approximately 142 million (EIU, 2012). Unlike the
other BRIC countries, Russia's population is shrinking by .4% a year (EIU, 2012).
Because of this, Russia's population, by 2020, will be around 135 million. Further, the
labor force could fall to 71 million by 2020 from its current value of 76 million (CIA, n.d.).
Concerning economics, Russia's economy is specialized around commodities. Of the
BRIC countries, Russia has the 3rd largest economy with a GDP of $2,260 billion.
Russia's annual economic growth is around 9.2% (KPMG, 2009). Combination of these

13

factors will drive energy consumption in Russia up by 27% in the coming years as noted
in the graph below.

Russia Energy Consumption. Source: (KPMG, 2009; EIU, 2012)

It is important to note, Russia has the worlds largest natural resource reserves;
Russia also has the second largest coal reserves; and the seventh largest oil reserves.
Russia exceeded Saudi Arabia as the worlds leading oil producer in September 2009
for the first time since the collapse of the Soviet Union. About 65% of Russias exports
are comprised of oil and natural gas. More than 70% of Russia crude oil production is
exported and the rest is available for local consumption. The oil and natural gas
industry accounts for 30% of Russia's GDP and 60% of its export revenues. Russia's oil
and natural gas sector attracts major multinational and local companies. Further,
Russia's energy industry is dominated by state run firms. Additionally, most Russian oil
companies have control over the entire production cycle ranging from exploration to
transmission (EIU, 2012). Finally, the worlds largest natural gas company accounts for
83% of Russias natural gas production and 17% of global gas production. With the
exception of Gazprom, most other companies in the sector are predominantly oil
producers, with natural gas comprising only a portion of their proved reserves (Thomas
White International, 2011).

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India
India is the second most populated country (behind China) with 1.1 billion people
which is approximately 17% of the world population (EIU, 2012). India's population
growth is around 1.7%, which is the highest of any of the BRIC countries. If this high
growth rate continues, it could give India a bigger population than China in the early
2020s. It is important to note that over 70% of this population currently lives in rural
areas, but populations in urban areas are expected to double in size over then next
decade (KPMG, 2009). India's labor force is currently 523 million and could grow to
over 700 million by 2020 (CIA, n.d.). Concerning economics, India's economy is
specialized around manufacturing. Of the BRIC countries, India has the 2nd largest
economy with a GDP of $3,357 billion. India's annual economic growth is around 10.2%
(KPMG, 2009). Combination of these factors will drive energy consumption in India up
by 100% in the coming years as noted in the graph below.

India Energy Consumption. Source: (KPMG, 2009; EIU, 2012)

Indias huge population will ensure the country remains one of the worlds largest
energy consumers. The government is seeking new sources of energy to fuel Indias
fast-growing economy, and the national oil company, Oil and Natural Gas Corporation
(ONGC), is exploring opportunities in the Middle East, Russia, South-East Asia, and

15

West Africa. Indias energy policy in the period to 2020 will focus on increasing energy
supply. Around one-half of total gas consumed in India will continue to be used in
electricity generation. Growth in gas consumption will also be driven by the increasing
use of compressed natural gas (CNG) as an automotive fuel, particularly in urban areas
(EIU, 2012).
China
With approximately 20% of the world's population, China is the most populated
country with 1.3 billion people (EIU, 2012). China's population growth rate is only .6%
which is below the global average of 1%. Due to China's policies, this growth rate will
remain stable in the future giving China a projected population of 1.4 billion by 2020
(KPMG, 2009). The current labor force is around 808 million and is expected to grow to
854 million as the labor force moves towards urban centers (CIA, n.d.). Concerning
economics, China's economy is specialized around manufacturing. Of the BRIC
countries, China has the largest economy with a GDP of $8,148 billion. China's annual
economic growth is around 13.4% (KPMG, 2009). Combination of these factors will
drive energy consumption in China up by 100% in the coming years as noted in the
graph below.

China Energy Consumption. Source: (KPMG, 2009; EIU, 2012)

16

II. Determination of the target BRIC country for the Proposed Acquisition
A. Comparative risk, opportunity and overall business climate of the BRIC countries

B. Comparative industry market potential and structure of the BRIC countries

C. Recommendation
The following analysis and subsequent recommendation is based solely on
potential in terms of market size and forecasted future growth for energy. Based on the
above data, there are two key drivers that need to be evaluated: Population and
Economy.

Population Size. Source: (KPMG, 2009; EIU, 2012)

Population is a key element of energy demand. In the BRIC countries,
population growth will be driver for domestic goods and services as well as industrial
output (KPMG, 2009). The above chart shows BRIC country population forecasts
versus the rest of the world. Regarding population, it is clear China and India are
currently dominant players and will continue to be in the future.
Another key driver of energy demand is the size of the economy and the
forecasted growth of the economy. An accepted measure of the economy is Gross
Domestic Product (GDP). The following chart shows BRIC country GDP forecasts.
17

This chart shows that by both absolute size and forecasted growth, India and China are
the largest markets among the BRIC countries.

Nominal GDP. Source: (KPMG, 2009; EIU, 2012)

2020 Forecasts. Source: (KPMG, 2009; EIU, 2012)

In summary, as noted in the above table, looking just at the population factor, the
decision is between India and China. Looking at the economic factor of GDP to discern
between India and China, it is clear China has a much larger economy. It should also
be noted, the 2020 China forecast in the above table represents a 329% increase from
2008 base line values versus a 278% increase for India. While the energy consumption
and production factors are derivative of the economy size, the final factor to help
discriminate between India and China is the 'Energy consumption per capita'. This
number not only reflects a growing population and economy, but captures the affect of

18

the growing middle class. Based on solely on market size and forecasted growth data,
ConocoPhillips should consider making a foreign direct investment to acquire or form a
joint venture with another company in China.

19

References
American Petroleum Institute. (2013). Energy in charts Energy Industry Statistics.
Retrieved August 14, 2014, from http://www.api.org.
CIA. (n.d.) The World Factbook. Retrieved August 16, 2014, from
https://www.cia.gov/library/publications/the-world-factbook/
EIU. (2012-11-20). Economist Intelligence Unit World: Energy outlook. Provided as
Florida International University, Strategic Management (MAN 6726) course
material.
Enerdata. (n.d.). Global Energy Statistical Yearbook 2014. Retrieved August 11, 2014,
from http://yearbook.enerdata.net/#energy-primary-production.html
Energy development. (n.d.). In Wikipedia. Retrieved August 11, 2014, from
http://en.wikipedia.org/wiki/World_energy_production
Energy in the United States. (n.d.). In Wikipedia. Retrieved August 13, 2014, from
http://en.wikipedia.org/wiki/Energy_in_the_United_States
Fidelity. (n.d.). Sectors & Industries Overview. Retrieved August 11, 2014, from
https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_mar
ket.jhtml
Goldman Sachs. (2010-05-20). BRICs Monthly. Issue No: 10/03 Retrieved online:
http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/brics-decadepdf.pdf
Grant, R. (2012) Contemporary Strategy Analysis: Text Edition, 8th Edition. John Wiley
& Sons UK.
IHS. (n.d.) 2014 IHS Energy 50. Retrieved August 13, 2014, from: http://www.ihs.com.
KPMG. (2009). Think BRIC. KPMG Comparative Study. Retireved on August 16, 2014
from http://www.kpmg.de/docs/Think_BRIC_Comparative_Study.pdf
Thomas White International (2011). Oil & Natural Gas Sector in Russia Fueling Growth.
Retrieved From: http://www.thomaswhite.com/global-perspectives/oil-natural-gassector-in-russia-fueling-growth/
U.S. Energy Information Administration. (2013-07-25). International Energy Outlook
2013. Retrieved August 12, 2014, from
http://www.eia.gov/forecasts/ieo/index.cfm.

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U.S. Energy Information Administration. (2014-05-07). Annual Energy Outlook 2014.

Retrieved August 14, 2014, from
http://www.eia.gov/forecasts/aeo/executive_summary.cfm
World Economic Forum. (2013) Energy Vision 2013 Energy transitions: Past and
Future. Geneva, Switzerland. Retrieved from: www.weforum.org

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