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COVER STORYCREATING WEALTH FOR
THE NATION
QUANTIFYING SOCIALINVESTMENTS
CHALLENGES OF THE FUTURE
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Dear Readers,
refuses to translate into production!
to explore and discover and the endless meetings at
barriers associated with the remoteness of location andis our endeavour to reach out to people working across
more shall follow, we have kept the focus on macrotrends of the sector and then relating the same to our
discoveries would be favourable!Do write back to us with articles/views, critical orotherwise at [email protected]
respective individuals and these views do not consult to
Editor’’s Note
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RO FE NM YENT
14 C R ES RP PO ON RS
AIB IL E S TY OCIAL
CONTENTS
Cairn India: Creating Wealth for theNation and Securing Energy
Cairn India and VedantaResources: FacingChallenges of theFuture
Drive to create O&Gworkforce of the future
Oil and Gas Companies:Socially Connected
2
COVER
STORY
O
Volatile Oil Markets:Securing the Future
Quantifying Social Investments: IFCFinancial Valuation Tool and Cairn India
1
6
PERSPECTIVE
12 H U
MAN
RESOURCES
EALT T
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People, Process,Environment
20 SOCIAL
MEDIA
SA
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Cairn India:Creating Wealth for theNation and Securing Energy
It is a classic story of the David andthe Goliath. A young E&P companydaring to dream, having the visionand perseverance, was set to alter thebalance of domestic energy productionfor India, the largest democracy in theworld. Cairn has been unlocking valuethrough discovery and developmentof hydrocarbons in the sub-continentfor more than 15 years. We pioneereddeepwater drilling in India throughAnnapurna. Cairn also developed one
auction –– Ravva, off the
coast of Andhra
Pradesh. Currently we are contributingdomestic crude production through our
approximately 7%. The discovery of the
Mangala in 2004, the largest onshorehydrocarbon discovery in India since1985, changed the scope and the natureof the business. The enormity of thediscovery, the largest in that year globally
the league of organisations
having a keyrole in the energy security hence futuregrowth trajectory of India. Three outof the seven landmark oil discoveriesmade in India between 2000 and 2005have been by Cairn and the joint venturepartners.
resource nationalisation amongstcountries and the emergence of the new
bill this year could reach $100 billion ifcrude prices hover in the range of $100-$120/barrel with uncertainties in supplyfrom the Middle East. This would not only
the country has experienced doubledigit growth in crude oil production for
2006-2007 the crude
production growthwas 5.6% which dipped to 0.4%,-1.8%and 0.5% respectively in the last few
2011, the production by Cairn India andReliance led to a double digit growth indomestic crude oil production for the““Seven Sisters”” –– the state run oil andto the 12th plan projects a
growth rate of 7% for commercial energy demand
C O V E R
S T O R Y
2 2
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RJ-ON-90/1
RAVVA
PR-OSN-2004/1
For more than a decade, Cairn has been undertaking pioneering activities
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Currently we arecontributing more thana fifth of the country’’sdomestic crude productionthrough our Rajasthanfields. This is helpingoffset India’’s crude oilimport dependency byapproximately 7%.
for a GDP growth of 9%. This is onlypossible through a major supply side
management.
Cairn India has been a
trailblazer in alot of areas in the oil and gas sector.Over the years the organisation hasbuilt an indigenous team with thecapability to execute projects across thewhole spectrum of the business - be itexploration, discovery, developmentand production. The team is capable of
executing projects with the scale of ourRajasthan development, maximise the
assets like Ravva (Andhra
Pradesh),applying technology to transform fromgas to oil in Suvali, Gujarat and designto implementation of new lines of
continuously heated and
insulatedpipeline from Rajasthan to Gujarat. Inour stage of transformational growthwith the pipeline operations bringing inthe desired scale, our safety standards
have been in the top quartile againstglobal benchmarks. Our terminal in
hydrocarbon facility, before
connectingwith the market through our pipeline is a
maintained at half the global averagelast year. Responsibility and concern forthe environment has been integrated inour operation strategy be it the usageof environment friendly completion
environmental footprint or
our well pad
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design with horizontal deviated drillingto optimise usage of land and minimisedisruption. We have been creating valuethrough substantial contribution to thegovernment exchequer with royaltiespaid more than USD 1 billion, direct andindirect taxes of more than USD 1 billion,government of greater than USD 5 billionin foreign exchange due to reduced
The continuous growth in productionand its asset base has led to increasingvaluation of the company, which hasultimately enhanced shareholders wealth.The investor community and the marketshave also endorsed our initiatives tocreate value for our shareholders as aresult of which the market cap of the
company has nearly doubled from USD6bn to USD 12bn since IPO.
Cairn India with the help of its jointventure partners including ONGCcontinues to create value and wealthfor the nation and strive towards
5
imports.making the dream of
India, an energy independent country - a reality. As we
the organisation will keep
working closelywith governments and communitiesacross the globe to develop faster, betterand more cost effective solutions for theenergy needs of growing economies thusenriching lives of the local populace.
30th Aug 2011
Price
% chg since
NIFTY
5,001
28
*Cairn India IPO on 9th Jan 2007
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has helped democratise the
sector in
markets post the 2008 downturn,traditional instruments of trading andhedging used by organisations have to
be conducted in a different light. On theother hand, demand in both the sectors
continue to be stoked from emergingmarkets in the east rather than thewestern countries while the supply sidehas been constrained due to multiplereasons of geopolitical risks, resourcenationalism, complexity of developmentprojects and location of resources acrossincreasingly remote and unfamiliarterritory.
transformation in terms of cost pressures,consolidations, and nature of businessas well as vertical integration, bringingabout a change in the way we do
business. While a lot of the public oiland gas majors, even the big guns,have been vertically integrated withtheir presence across the chain fromupstream to downstream and/orretailing, independent O&Gs have alwayspreferred a particular segment for their
on a global scale, competition
is actuallyincreasing with the appearance of new
companies from emerging economies.
commercial manner, along with furtherprivatisations in OECD countries such6
6
PERSPECTIVE
Cairn India and Vedanta Resources:Facing Challenges of the Future
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every step of the value chain (particularlyin the U.S.) have also added to globalcompetitive pressure. To differentiatefrom new competition, international
marketing, technological capabilitiesto explore and produce on the mostchallenging frontiers and scale and scopeto invest in new forms of energy. In themining industry, there is the scrambleto secure supplies of scarce resourcesand to gain greater control over prices ofproduction units in an age of increasing
cost pressures, while many end users ofmining products have also gained controlof upstream assets. Companies are alsolooking at other ways of achieving theirintegration objectives, such as combiningstrategic investment and off-take orpartnership agreements to lower therisk associated with integration, but still
investment in African
Minerals with 20year off-take arrangement.
Sectors like oil and gas and
miningcontinue to climb up the political prioritylist and according to a recent poll of
global CEOs by PwC –– stakeholdermanagement, sustainability issues, etc.are the key concerns of management
changing economic and social priorities,governments across the globe aretightening their grip on national resourcesand are revisiting royalties and taxationpolicies. It is common knowledge thatSovereign Wealth Funds (SWFs), initiallyset up with oil money, heavily invests inthe sector but non-commodity basedSWFs are gradually increasing theirexposure in the mining industry in a bidto diversify their investment portfolio.
Sectors like oil and gas and mining are continuing to climb up the politicalpriority list and according to a recent poll of global CEOs by PwC.
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They also look for and leverage on theunder-valued resources. A key shifthas been the political overtones behindSWF investments, with SWF route beingoften used to lead the charge by foreigngovernment to secure national resources.
In such evolving times for both thesectors, the acquisition of a majority stakein Cairn India by Vedanta Resources plcprovides the perfect platform to build
the natural resource champion of the
resource champion”” are
some of the
energy philosophy and
aspirations.
major to foray into oil and gas, while thisacquisition puzzled many. While about
gas, received in inheritance
and built over
ore miner, inked a deal with
Petrobrasand entered oil sector in 2007 to reducemining costs and currently holds stake inmore than 20 exploration blocks.
Vedanta has always shown an
appetitefor strategic inorganic growth - acquiringan asset and then scaling it up forbetter returns, tending mostly towardsvertical integration in terms of takingsupply leadership to optimise theperformance of existing assets. Theirfocus is on leveraging the low cost ofproduction, and in a lot of the acquiredassets, infusing them with new energy toincrease production by many multiples.
years and jump in revenue by 100 percent, while in Sesa Goa, the productionhas gone up post acquisition by Vedanta,by 115 per cent and the reserves by 75per cent in three years. Its focus is onorganic and inorganic growth strategy forbulk commodities and base metals.
In Cairn India, Vedanta Resources hasgained exposure to a new sector witha top 20 non OECD E&P organisation.Cairn India brings to the Vedanta stablemore than a decade of credibility withpioneering efforts in the sector in the
sub-continent, landmark discoveries,reputation for technological adaptabilityand innovation, exploration success
records, appetite for growth
and new
avenues of business (midstream) witha measured risk approach, which hasmore often than not borne fruits, projectexecution and delivery skills, and soundcorporate responsibility practices with
In Vedanta Resources, Cairn
India hasa majority shareholder and owner, who
ambitions across various
segments of theoil and gas business, spanning multiplegeographies and helping leverage
international markets.
top global oil and gas entity, offeringunique value added solutions to caterto energy requirements of emergingeconomies across the globe with a deepfootprint in only select markets - and
million tonne plus annual productionbusiness in copper and zinc and morethan 2.6 million tone for aluminum whilemore than doubling its iron ore output inexcess of 50 million tone - underscoresthe growth momentum, which can beachieved despite economic pressures andgeopolitical risks, hence being targetedfor the next couple of years. Stakeholdermanagement, corporate reputation,and the ability to deliver in challengingtimes will be the key to synergising andcreating a natural resources championentity for the future.
Vedanta is not the -
gas, received in inher-
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Securing energy is perhaps themost critical challenge for India inmaintaining its economic growth rate. Itencompasses both physical supply and
(International Energy
Agency) four major
concerns - Availability;; Deliverability;;Affordability and Sustainability.dependence which was about 50% in the
over 75% of its crude oil requirements ––creating serious concerns on the supply
security. Compounding the above
stability of the country with oil importbill rising to approx. USD 100 billion in2010-11.The globalisation of economy inthe recent years has brought newopportunities, more interdependencealong with larger group of risks.International oil market in the currentworld is affected by events ranging frombroad based macroeconomic picture;;
geo-politics;; weather to dynamics offundamentals supply/demand.
After recovering from the
globalrecessions, recent months havewitnessed several events like French
Strike;; Middle East North Africa (MENA)Japanese Earthquake & Sovereign creditcrisis in US & Europe impacting theinternational oil prices.
Oil prices rose to $125/bbl plus in April,however receded subsequently due to
COMMODITY TRENDS
Volatile Oil Markets:Securing the Future
Energy is pivotal to economic growthand as India, country with GDP of over
economy and the fourth largest energyconsumer, marches into the league oftop economies in the world, the need forenergy, to secure the needs of currentas well as future generation, would growexponentially. As compared to US &
22 barrels & 9 barrels of oil a year, anaverage Indian burns close to 1 barrel ayear –– representing the fact that thereis substantial upside for improvement
economy expands.
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the double dip recession fear looming
Reduction in growth
forecast of US,Europe & China (contributing 50% ofwith high unemployment & weakeconomic data is forcing authorities tocome up with more income generatingpolicies and get economies on ameaningful growth trajectory.
Market uncertainty is
evident fromthe wide forecast of oil prices byInternational participant going into nextyear. While most research divisions
crude prices in 2012 due to tight supplydemand fundamentals, Citibank inits latest forecast has predicted $86/year placing importance on the creditevents. Uncertainty & volatility of thismagnitude creates further challengesin ensuring a stable and secure energyatmosphere.
Ensuring supply security
remains anextremely challenging task for theGovernment as dynamicglobal environment
have a pro-founding impact on theeconomy and energy sector. In thissituation, increasing the domesticproduction and reducing the importreliance is an important element forensuring supply security.
which is now accounting for more
crude production, has
contributed
security and bringing
economic
to savings of foreign
exchange and
is now responsible for the delivery
crudeproduction from itsoperated assetsacross thecountry.
- Varun GujaralCommercial and New Business
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In recent days, the markets havesignalled concern about the economy.
and lagging economic indicators,consumers, investors and businessesare searching for some bright spot inthe market. Many believe that the oiland gas industry, which has consistently
shown strength during this lengthyeconomic downturn, has the potential
The industry, while shows promise,is faced with its own challenges anduncertainty. In addition to the existingchallenges relating to global energysecurity, long term sustainability and theuncertainty surrounding the investmentframework, the oil and gas industrywill face ““new”” challenges. Futureenergy demand is expected to growsubstantially and the sector is in need ofmassive investment –– not just capital.
In order to meet the demand, theindustry will explore, develop andproduce oil and gas in increasingly
severe conditions. The ability to planand execute large-scale, complexdevelopment projects requires a highlyyet professionals with the required skill-set are a scarce commodity.Over the last few decades, average ageof workforce in Indian upstream oil andWhether one believes it is the resultof normally occurring competition,attrition, aging or restructuring, onetheme permeates the current discussionaround human capital: how to develop,
deploy, and connect employees through
This issue has become particularly
workforce, combined with a diminishingpipeline of new and experienced talent.To guard against corporate brain drain,
companies need to formulate effectivestrategies to attract and engage theto help lift the economy if the right
energy policies are in place.generation is not all. It is
also about managing existing talent and developingthe periodic table of talent.
International Oil Companies (IOCs) arefacing a real challenge that may have animpact on expansion and growth plans,a challenge that requires commitment,cooperation, investment and newapproaches in developing, managing andretaining the talent pool.
There are many issues that call for an
their strategies in the face of slowingNOCs and IOCs avoid ranging back andforth between skill shortage and skill
and IOCs joining forces, learning lessons
The challenge facing NOCs and IOCssustainable long-term solutions tomanage workforce demographics, bothin boom and bust times.Partnership between NOCs and IOCscan contribute to addressing the
Collective collaboration and coordinatedcooperation between government,academic and industry on the variousissues related to curricula, employment
and social policies, and programmeterm than isolated initiatives.
environment operational challenges willto develop skilled personnel, managecosts and develop new technology. Thissituation creates new challenges and newuncertainty, but also new opportunitiesfor cooperation and partnership betweenNOCs, IOCs and services companies,to share risks, technology advances andinvest in R&D.
requires commitment,cooperation, investment
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Quantifying Social InvestmentsIFC Financial ValuationTool and Cairn IndiaDiscovering the past to create a better
business for extractive
industry includingoil and gas. It is this dichotomy ofsynergising the past with the future,by adhering to regulatory frameworks,balancing investor expectationsand striving to create value for allstakeholders, dealing with the sentimentswhich surround ““national resource””,all this while operating in the most remoteof regions across countries with state ofthe art technology.
Gaining the trust, cooperation
andpartnerships of communities in thesefrontier regions often becomes a businessnecessity to ensure uninterruptedoperations and business activities. Sincethe riches of the subsurface are oftenfound in the poorest and most remote ofregions, organisations invest a sizeable
portion in distributing the fruits ofhydrocarbon development to the residentcommunities, trying again to balance thisneed for developing energy resourceswith the pace of development of thelocal communities.
of community engagement initiativesis not often appreciated or understoodby companies. Oil and gas is a sectorwhich offers a myriad range of activities,all seemingly disconnected but boundaround a common product –– the crude oilor the gas!
The range of activities range
from the
or oil services company
person on the rig
of summer, to a community
engagementor social responsibility specialist
implementing programmes in remoteregions, to the oil trader surrounded
attendant –– seemingly
diverse personsunited by the same product. The sameparadoxes are also prevalent in costs.While most are aware of the almostperpetual windfall gains in the oilbusiness, one overlooks the risk capitaldeployed during exploration time runninginto hundreds of thousands of dollars perday in remote onshore or offshore areas!
Fraught with such inherentcontradictions, it is imperative to havea strategic approach for designing andimplementing community developmentprogrammes in order to ensure that theydeliver the desired results of communitysupport, mitigate risks, and help in theunhindered growth of business.
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the absence of any standardisedmeasurement matrix entails that theimpact of the social, environmentaland community investments cannot beinvestment for social initiatives also posed
Not being able to maximise the fullpotential/impact of the investmentNot being able to compare the
investmentsNot being able to advocate,communicate, support and justify theinvestmentsNot being able to prioritiseinvestment options
initiativesAwareness about such investmentswithin organisation and cross-functional collaboration
Tinto are the organisations with whomIFC collaborated extensively to come
up with the Sustainability Planning andFinancial Valuation Tool. The model waspiloted on a couple of projects like theSMS programme initiated for farmersin partnership with Reuters along
tangibly measured in business language.longest heated and
insulated pipelinein the world) and the mobile
health vanprogramme in Rajasthan.various problems like:-““Through this tool
companies can develop metrics to guide their communityinvestments and translate communityprogram outcomes into company value,in terms that are understood by themarket –– risk reduction, productivitygains, savings, return on investment,and enhanced reputation. An additionalincentive is that high-performingenvironmental and social programsare increasingly seen as a proxy foreffective business management.According to Multilateral InvestmentGuarantee Agency (MIGA), a World Bankpolitical risk insurer, they would reduceinsurance premiums for an operation that
demonstrates rigorous risk management.””Cairn along with Newmont and Rio –– Excerpt from IFC article
on ValuingReturns on Sustainability Investments.
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in the organisation but also contributions
etc. to wholly participate in theimplementation of the tool.
The two basic concepts
comprising thetool are direct value creation and indirect
investments through community riskmitigation which involved steering clearof risks which could result in delay ofconstruction, production postponement,planning, legal action, etc.
The process involves rigorousstakeholder analysis, traditional
The tool has been designed in a way tosupplement the traditional discounted
cost of manpower, etc.) while the latterthe quality of social
investments simulation (algorithms which utiliserepeated random samplings to computeresults) to arrive at a net value accruedto the company.
with Reuters involved providing crop
1616
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advisory and marketing informationthrough the mobile phone for 10,000farmers along the Cairn India pipelinein Gujarat. This programme not onlyhelped maintain a continued relationshipwith the farmers but ensured that thecommunication was two way.
mobile phones inform the organisationabout breaches in pipeline securitywith pilferage, leakage, sabotage orother maintenance issues. So while theSMS programme helped increase theincome of farmers through the priceadvisory, the farmers were also able toact as the pipeline reporting contact forthe company. So both the modes ofvalue creation and value protection was
security personnel.
cases of pipeline security were reportedby farmers, thus preventing sabotage,leak, and damage to the pipeline,
cost of $2 million for the company.The second project studied was onewhich involved access to preventive andcurative healthcare –– the mobile health
17
van. The van operated and traveledto 64 villages in and around the Cairnproject area in Rajasthan. The FV tool wasable to calculate and ascertain that this
the company as the
alternative to settingup 15 clinics to provide similar services to
the concerned population.The farmers could also through theirAnother key saving was in
terms ofmandays for workers from the village.With the van servicing the local villagepopulace, loss of manhours/days due toillness of village workers were minimisedand made negligible.
The same FV tool could be
appliedholistically to quantify the returns ofvarious other CSR programmes and
provide a direction to implement futureit also helped the company by providingan effective replacement for pipelinemanagement support and
commitment,an attitude for cross-functional support
management, etc.) and
developingrequisite expertise like value drive
Stakeholder
Analysis1
RiskQuantification
5
Traditional
InvestmentAnalysis (MPV)
2
Quality
of
Sustainability
Investment
6
+
+
+
+
Value Protection(Indirect
benefit)3
Monte Carlo
Simulation7
Value Creation
(Cost benefit
analysis)4
Net Value toCompany From
Sustainability
Investments
+
=
Source: IFC Article
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People, Process, EnvironmentOil & Gas is considered to be an unsafe
at various stages can be a threat to thehealth and wellbeing of not just peopleworking on site, but also the communities
Good governance is the only
way onecan ensure an economic climate whichis favourable not only to investments,but also well being and sustainabilityof people and environment that wecome in contact with. We, at Cairn, arecommitted to protecting the health,safety and wellbeing of people workingon our sites, people who come in contactwith our operations and the health andsustainability of environment that weoperate in. ‘‘
Our Corporate ResponsibilityManagement System (CRMS) lays downdetailed guidelines and procedures thatsupport the delivery of our commitment
values and our approach to business.
Respect: for people, communities, theenvironment, the rule oflaw and human rights;;Relationships: we believe
that buildingstrong, open and lasting relationshipswith our stakeholders is not merelya social responsibility but is vital toachieving our business goals;; andResponsibility: We recognise
ourresponsibility to ensure our actions donot harm people, the environment orsociety.While we follow the highest
level ofinternational codes and standards in our
upgrade them.
The nature of the work involves someinherent risks and facing challengingenvironments. We strive to make surethat everyone associated with our workgoes back home in the evening exactly
the way he/she arrives at the work in themorning. Our goal is to create a healthy,supportive working environment that canhelp reduce absenteeism due to fatalities.
comprehensive one, wherein all theprocess and procedures, to effectively
laid down. This system ensures thatthe policies are implemented acrossvarious activities through design,implementation, operations, monitoringand reporting as it is based on the
implementation in progress
for theRajasthan operations.We take precautions to avoid
accidents orpollution incidents, and all our operationshave rigorous procedures, equipmentand emergency teams in place to
training is mandatory for all visitors to thesite to ensure their safety.
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Companies are increasingly becomingcautious about the issues concerningenvironmental protecting, including air,land and water quality.Most of it is due to the heavy
regulationsand compliances. These regulationscontinue to evolve. For example, the
(EPA) greenhouse gas reporting rule was
and production sector on November 8,2010 and requires companies to reporttheir 2011 greenhouse gas emissionsbeginning in March 2012.We at Cairn have been committed tominimising the impact of our businesson the environment. We introducedstringent measures, from initial impactassessments to waste management, and,in the event of any unplanned incident,have put in place comprehensiveemergency response and oil spillcontingency plans.
Our approach to each new projectincludes undertaking PreliminaryEnvironmental Impact Assessments(PEIAs), Environmental ImpactAssessments (EIAs) and Social ImpactAssessments (SIAs), to minimise anypotential impacts of its activities
recognition from time to time. Thisyear, the Rajasthan operations won ninesafety awards in the 24th Mine SafetyAwards organised under the aegis of theDGMS, Rajasthan.
Environment
According to the ‘‘Ernst & Young
the climate debate will continue tocomplicate the strategic decision-making of oil and gas companies across
the industry.””Today, climate change and
sustainabilityissues are a key component of corporateagenda. The stakeholders are asmuch interested and passionate aboutthese issues as they are about the
compensation.
SETY
EN
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Oil and Gas Companies:Socially ConnectedSocial networking is booming. Facebookhas become the most visited website on
Internet population visit social networkingor blogging sites.
Social networking is
facilitating businessand personal relationships, withindividual sectors now starting to cottonon to the potential of information sharingvia these channels.
Gartner predicts that by 2014, socialnetworking services will replace e-mailas the primary vehicle for interpersonal
communications, including knowledgeand information management for 20percent of business users.
AccordingtoastudybyMicrosoftandAccenture,nearly75%ofoilandgasprofessionalsseevalueinusingsocialmediaandcollaborationtoolsat
technologyatacorporatelevel.Thestudywhichsurveyed275professionalswithininternational,nationalandindependentoilandgasandrelatedcompanies,foundthatsocialmediaandcollaboration
communications,
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thesametime,halfofthosesurveyedsaidtheircompaniesprohibitorrestricttheuseofmanyofthesepubliclyavailabletools,suchasphoto-sharingandsocialnetworkingsites.networking sites, such as www.energy-networks.net, www.oilandgascommunity.com, www.hsee.co.uk and www.oilpals.com. These are facilitating knowledgeand information management.
Energy is a highly regulated
industry,and its companies are required to makeinformation available to their work forces
manner. Cloud computing, publicinstant messaging systems and internalsocial networks allow for more cross-
changing face of technology.
technologyadoptionisprimarilyacompanies that are using
social media tools for other purposes. ChesapeakeEnergy has successfully implemented
stream that posts current
job openings,interacts with followers and offers
career advice to nearly 2000 people.On the other hand, the oil and gasindustry itself boasts of various socialopportunity to communicate
via socialnetworks to media, Gulf Coast residentsand businesses affected by the spill,concerned citizens, and employees.
industry from social media is most likelythe increased productivity, thanks toimproved collaboration and knowledge-sharing between workers. Theseelements are important for drivingrevenue, cutting costs and contributingto the health and safety of workers (Oil
and Gas Collaboration Survey 2009)barriers while keeping up with the ind
ustry.