Oil Refining in China: Environmental, Safety and Health Issues

1. Introduction

The “Oil Refining in China” case is based on an assignment to a strategic planner Ed Chan who was tasked with identifying potential investment opportunities in China’s petroleum refining industry. The case study analysis started with our group identifying 100 issues relevant to the strategist or potential investor. Categories were then developed for labeling the issues in related groups.  These categories included: Employees, Management, Culture, Customers, Competitors, Suppliers, Labor Market, Technological, Social Cultural, Economic Cultural, Legal/ Political, Environmental, International and Others. These were then narrowed down and then Environment, Safety and Health issues were identified for a further deep dive which is well illustrated in this write up. Finally, a Human Resource (HR) strategic plan that should be applied was developed.

2. Issue/Assumptions

1.1 Issue

 This relates to Environmental, Safety and Health Issues identified in the “Oil Refining in China” case study

1.2 Assumptions

i) One assumption is that whatever has happened or is happening in China and the world after the dates indicated in the case will be considered to have already happened is happening right now or it could be assumed to be a prediction of the future.

ii)  The word environment refers to ecological aspects but not the other broad elements of a PESTEL analysis.

2. Situation Analysis- Strategic Issues

2.1 Increasing Global Demand, Clean Fuel Standards and Climate Change

One of the indications for the need to address environmental concerns is highlighted early in the case.  This relates the mention of increasing global demand for transportation oil, with government and International clean standards for fuel becoming stricter. This calls for interventions from all levels from macro policy to the firm.  Failure to address this development would lead to a situation where China would have to import a large portion of its transportation oil requirement. The industry presents investment opportunities in helping China’s oil refining industry to meet the stricter standards for clean fuel and Euro II by 2005 and eventually Euro III by 2008 for domestic transport gasoline and diesel.

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Still, environmental risks would affect China as a country due to higher pollution levels and result in a situation of unsustainable ecosystems in the country, the petroleum refining industry and the companies in the sector. The central government in China that sets environmental discharge standards for air and water also imposes pollution charges; this creates a cost center that need to be managed in order to increase the refining margins and sustainability of refining. 

2.2 More than being a people issue Health, Environment and Safety is a strategic business that impact the bottom-line presenting investment opportunities

Environment has been ranked as the biggest opportunity for business in this century.  In a Harvard Business Review article, Kanter (2011) argued that businesses need to broaden their perspectives on their role in the world to include societal roles such as environmental conservation. China can now play a leading role in the Landmark Paris climate agreement which US Donald Trump expressed intent to withdraw from. China confirming its commitment to the agreement means they will lead the world in conservation efforts and initiatives to reduce greenhouse gas emissions. Recently, China launched its “All for one” tourism program based on sustainable tourism ideals with a conservation perspective. China should also have similar initiatives in petroleum refining that pushes for cleaner transportation fuel and greater environmental protection.

According to the Business Insider, Paul O’Neill of Alcoa the aluminum manufacturing giant chose to focus on one issue-safety as his CEO legacy of transforming the company (Baer, 2014). This did not impress the Wall Street analysts and investors as it suggested higher investment in safety hence higher costs and lower profits. In his inaugural speech as CEO he noted that numerous workers at the company would miss a day of work because of severe work injuries. He also noted that the company safety standards were already better than those of the general American companies at the time. He noted that employees in an environment with hot temperature and equipment that can cause serious injuries. He purposed to reduce injuries Alcoa to zero to making it the company with the safest record in America. As opposed to convectional business focus on revenues he insisted that if one wanted to know how Alcoa was doing, they needed to only look at the workplace safety record figures. 

During his tenure the safety record improved significantly with the impact going beyond workers health to record an impressive all times high profit (Lagase, 2002). By addressing safety issues, the CEO improved workers health. Improving safety records resulted in examination of inefficient manufacturing processes. When these processes were rectified or eliminated it resulted in improvements across board.  Focusing on safety changed the culture of the company resulting into higher performance in profits, health and safety in addition to a greater reputation creating a strong business and investment case for safety enhancement. Later, in a speech to Harvard Business School Students O Neill stated that leaders need to mean it when they say that people are their most important asset.

2.3 Environmental analysis show several ecological issues touching on Oil refining and the whole Oil and Gas value chain

2.3.1 At exploration and drilling- There are concerns about noise pollution (by aerial mapping planes and drilling) and destruction of habitats such as the case in on shore exploration. Abandoned dry wells, staff carrying out such operations, waste disposal, spillages and negative impact on biodiversity are also a concern to communities. New oil refining investments may be explored using only crude from ‘ethical sources’ that significantly address or mitigate damage caused to the environment during exploration and drilling.

2.3.2 In refining and pipelines– There are concerns about air pollution that affect neighboring communities and refinery workers. Emissions to the atmosphere have a negative effect on climate which is a major concern globally. Meeting the set clean standards is also well highlighted in the case as an important matter that presents investment opportunities.

2.3.4 In distribution, retailing and commercial use– Clean standards are implied on possible water and environmental pollution, industrial waste and transportation fuel fumes. Consumers are also developing a taste for cleaner fuel.

2.3.5 Crude Oil to Chemical Disruptive Technology

The use of crude oil to chemical (COTC) technology presents an investment opportunity in reducing carbon emissions while increasing margins as explained in the technology section.

2.4 Extracts from Porters 5 forces show there are environmental pressures on Petroleum Refining

*Color code suggest competitive pressure based on traffic lights coding with red denoting high pressure and yellow moderate calling for strategy attention

• We see low threat of entry given the increasing unattractive nature of refining. New entrants are likely to partner with existing players using merger or acquisition approach to bridge the gap.
• Competitive rivalry is likely especially for staff with expertise on clean and COTC technologies. The search for innovations to gain first mover advantage is also likely to increase rivalry hence the moderate to high threat score.
•  Supplier power is limited given that oil is a traded commodity. Still, higher corporate reputation on conservation and ‘green’ aspect may incline staff retention and attraction to some players who are thought leaders in ‘green practices ‘than to those who are not. Sustainable practices may increase power of potential employees to choose one company over the other.
• Buyer power- Environmental standards and activists may mean that buyers especially at the finished product level downstream may be inclined to buy from companies or sources with higher conservation and ‘green’ reputation. Buyer preferences downstream may favor those perceived to have higher clean standards and may affect Chinese national and international retail brands in fuel distribution and hence put pressure on refineries.
• Threat of substitution- efforts to develop alternative to hydro carbons especially electric vehicles and green energy for industries and domestic use might intensify. This may further reduce prices and demand leading to a succession crisis as it usually happens during low oil price environment (Jones, 2015). Increasing adoption of electric cars and decline in sales of cars with ICE is another indicator of substitution. Adoption of COTC technology will mitigate against this threat.

3.0 Recommended HR Plans

3.1 Strategic Themes, Issues and Objectives

The matrix below presents key strategic themes, related issues and the corresponding objectives in relation to the previous analysis:

3.2 Initiatives and Timelines

The following section presents the initiatives and time lines related to different strategic themes which are derived from the analysis in section 2 and objectives that follow:

3.2.1 Theme 1: Diffuse Regulatory Pressures by assessing then filling skills or competency gaps, Adopt COTC and Carry out a Hazards and Operability study  CHAZOP) and Use of Internet of Things (IOT) to monitor pollution or product quality compliance levels

The issues here are to do with clean standards, climate change and punitive pollution charges. The objectives related to meeting and exceeding the standards and reducing the charges respectfully. The recommended initiatives include continuous improvement tom meet China government standards annually and WTO’s Euro II and III one year in advance by 2004 and 2007 respectively.  This will call for immediate skills and competence gap assessment coupled with training and recruitment to fill the gaps.

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The clean standards can be addressed through the same initiative as well as appointment or job description adaptation to allocate responsibilities for reducing pollution charges and annual monitoring of the same. Adoption of COTC technology should take place within three years with business model shift to petrochemicals bias in five years. A HAZOP study should be carried out especially at the roll out of COTC to identify potential hazards and operational risks to personnel in the engineering designs. Use Internet of Things (IOT), to monitor pollution levels in water, air and quality compliance of end product is also recommended.

3.2.2 Theme 2: Address shifting demand and trends by building staff capacity and recruitment of new staff, public -private-academia partnerships to develop relevant content and trainings, succession planning and using new technologies in HR

The issue here is the changing demand and trends in a standard tightening environment. Standards are partly addressed under theme one. Additionally, capacity building and recruitment needed to match demand with relevant skills especially on the COTC technology to fit capabilities needed for the new business model biased to petrochemicals in the mid and long-term.

There is need for partnerships with government, industry, institution of higher and vocational learning to develop a pipeline of talent for the future with relevant content to match the changing business model within the next 3 to 10 years. 

A succession plan should be in place within a year and regular reviews to address the growth needs, top talent to be sourced from outside immediately should include those experience with COTC and clean technology.

To increase staff productivity and safety through the use of new technologies in HR, various initiatives will be implemented. This includes use of biometrics such as fingerprints and face recognition systems to address security and access controls especially for staff with relevant safety knowledge within the next one year. Use of Artificial Intelligence in production especially in injury prone processes, machine learning and algorithm based staff appraisals in the second year. Employee mobility and technology solutions should also be used to scale up capacity while controlling the staff headcount on a continuous basis. Use of Internet of Things (IOT), can be used to monitor pollution levels, employees’ health vitals and fitness for early disease detection, prevention and balanced living from the second year.

3.2.3 Theme 3: Institutionalize the second bottom line through heightened targeted Alcoa type safety culture program, Benchmarking for best practice, launching a new leadership development program and Innovating new Impact driving culture change ways. This will also result into improved commercial performance (bottm-line one).

The theme here is aimed at institutionalizing sustainable practices by ensuring that the business is key and not just commercially driven. The first bottom line relating to profit is addressed well through initiatives that increase staff productivity in theme two and the move to and shift to COTC technology in theme one with most of other initiatives suggested also being supportive. The second bottom line relates to societal impact in addition to financial impact that exists in any modern businesses. As demonstrated earlier in the Alcoa example, it is possible to achieve the latter through the earlier.  The initiative here is to replicate the Alcoa model of “Harnessing the power of changing one habit” in China Oil Refining where higher margins will be achieved by addressing safety issues with safety numbers being monitored monthly and annually, these will form the basis of addressing progress in a way that result into improved processes that also improves commercial performance.

Benchmarking is also recommended on a continuous basis with China’s own ‘All for One” tourism initiative being one source and trend setting or Innovating by breaking new grounds on these aspects. Collaboration will be needed between finance, technical, human resource and corporate affairs departments. Apart from providing a financial report at the year end, sustainability reporting should also be required as a way of documenting the social impact.  A leadership development program to nurture new authentic leaders who mean it when they say people are their most important asset with a 2, 5 and 10-year outlook should be implemented. Culture programs as suggested in theme 5 initiatives will also supportive of the second bottom-line

3.2.4 Theme 4: Use employee driven environmental initiatives to mitigate negative impacts of oil and gas, environmental friendly work place designs and become thought leaders on conservation

The theme and the objective to lead the conversation debate are well addressed by the initiative on social impact and sustainability reporting. HR should also use employees driven by environmental awareness and protection initiatives where employees are given time off to participate in environment based causes of choice, say, one day a year with corresponding time reporting, with annual environmental corporate social responsibility signature events supporting the one internal and one external. New hires should also be screened for environmental consciousness from next year.

Designing workplaces in ways that reduces carbon print, avoiding waste and use of biodegradable water drinking packs would also be useful. Employee’s participation in environmental conferences, presenting relevant papers in oil and gas conferences, supporting relevant National Geographic documentaries and writing opinion columns should drive thought leadership in conservation.

3.2.5 Theme 5: Use ethical employer branding and recruitment, reputation building and succession planning to address identified competitive threat risks. Plastic waste management initiatives should help manage reputation risks from COTC.

This is on competitive forces (which is well addressed by the initiatives under themes 1 to 4 and especially theme 3 on Alcoa culture initiatives). Additionally, strengthening brand and reputation building capabilities by hiring experts with ethical branding and reputation building skills is also recommended within the next 3 years. This is based on the literature suggesting that competitive advantage can be built through continuous HRM practices that utilize innovation, reputation and relationships (Peteraf, 2010).  Reputation including employer of choice rating should be tracked annually using an index based research among employees and stakeholders including talent market. Initiative to recycle and reduce plastic waste should be launched in line with the use of COTC technology that increases plastics in the market. Succession planning should be institutionalized and reviewed annually or on need basis to address transition crisis that may emerge from substitution driven oil price drops risk.

Conclusions

From the analysis carried out it can be concluded that Environment, Safety and Health Issues present compelling investment opportunities in China’s petroleum refining industry. The investment would lead to greater environmental consciousness in the whole petroleum value chain and a more sustainable business practices that mitigate on the negative environmental impact of oil refining while addressing increasing demand. It will also set new trends by the shift to COTC technology that will also support the growing demand for plastics in China. New initiatives will be needed to address the growing need to address plastic waste.

Five themes were identified with applicable HR strategy plans well outlined. These were coping with regulatory pressure, addressing shifting demand and trends, developing double bottom lines of reporting and monitoring progress, mitigating negative environmental impacts and facing competitive forces. These have been addressed through proposed HR and multidisciplinary initiatives highlighted.

References

• Baer D. (2014), How Changing One Habit Quintuple Alcoa’s Income, Business Insider, April 9, 2014
• https://www.businessinsider.com/how-changing-one-habit-quintupled-alcoas-income-2014-4?IR=T
• Jones v (2015), Succession Planning Critical For Longevity of Oil Gas Companies
• https://www.rigzone.com/news/oil_gas/a/139492/succession_planning_critical_for_longevity_of_oil_gas_companies/?all=hg2
• Largase M (2002); Paul O’Neill Values into Action, Havard Business Knowledgde Series, HBS Knowledge, 11^th April 2002
• https://hbswk.hbs.edu/archive/paul-o-neill-values-into-action
• Peteraf, M. (2010). The Cornerstones of Competitive Advantage: A Resource-Based View. Strategic Management Journal, 14, 179-191.