Oil and Gas Industry Porters Five Forces Analysis

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OIL AND GAS INDUSTRY PORTERS FIVE FORCES

ANALYSIS

Threat of new entrants:


According to Porter (2008), new entrants bring fresh capacity and a desire to win market
share. Porter claims that this ambition puts pressure on costs, prices, and the amount of
investment required to compete. As he points out, the threat of entry is determined by two
factors: the height of entry barriers and the attitude of incumbents to newcomers.

The following are the key barriers to entry in the oil and gas business,
Patents are the first step.
Significant financial resources are required.
Scale economies
Government regulations are number four.
Differentiation of products
Cartel predatory tactics
Property rights to resources
Patents for technology and innovation serve as cost-cutting and differentiating drives.
Technical patent obstacles are less of an issue in refining because the technology used in
refinery construction is well-known. In efficient oil and gas markets, such as the United
States, entry obstacles arising from huge capital requirements and economies of scale are also
minimised, and in some cases do not exist.

Threat of substitute products


Major oil and gas firms are looking for alternate sources of energy as prospective substitutes
using advanced technologies. TOTAL, for example, struck a cooperation with Gevo, a US
business that develops transportation biofuels and chemical products, in April 2009.
According to Porter, a substitute poses a strong threat to the industry's products when it offers
an appealing price trade-off or when the buyer's cost of converting to the substitute is low.
The Chinese government, for example, wants biofuels to account for 15% of total
transportation fuel usage by 2020, whilst the European Union has set a target of 20% for the
same time period. China National Petroleum Corporation has already begun to capitalise on
the anticipated growth in demand in China and Europe. If biofuels offer a compelling price-
to-performance ratio, they will become competitive replacements, putting crude oil products
in jeopardy.

Bargaining Power of Suppliers


Oil and gas firms, as suppliers, provide power to receiving countries through international
vertical integration.
To encourage competition and improve supply security for consumers, money might be
poured into the refining industry. PDVSA, for example, controls its refining and marketing
operations in the United States through CITGO Corporation, which it owns 100 percent
through PDV America. Vertical integration lowers risk and increases profit at every stage of
the supply chain, from the wellhead to the gas station. It assists oil businesses in balancing
their operations and safeguarding themselves against market volatility. When the price of
crude oil falls, for example, the refining and marketing margins are projected to improve.

Bargaining Power of Buyers


Oil and gas corporations are looking for international rights to participate in exploration and
production areas. These rights can be obtained by purchasing a portion of another company's
rights or by participating in licencing rounds.
Oil and gas businesses join forces to form a Joint Venture in this highly competitive
industry.
Joint Ventures are founded for three reasons, according to Berg et al. (quoted in Kent 1991):
1. Increase your market share (buyer)
2. Share or reduce risk
3. Gather or disseminate information
Furthermore, oil and gas firms organise Joint Ventures to overcome political and/or legal
obstacles, as well as to meet the needs of the host country. ConocoPhillips, for example,
owns a 50 percent equity stake in a joint venture with Spectra Energy, a North American
natural gas infrastructure firm. Shell and Exxon Mobil's 50:50 joint venture (Infineum)
manufactures and markets high-quality additives for use in fuel, lubricants, and speciality
additives. As Porter says, this raises the buyer's negotiation leverage in comparison to
competitors, resulting in increased buyer power.

Rivalry among existing competitors


According to Porter, a slowdown in production, such as that experienced by oil and gas
companies, combined with diminishing net liquids output and reserves, could heighten
competition in this industry. If rivals have ambitions that go beyond economic performance,
rivalry in any industry becomes severe.
In the oil and gas business, one of the goals of joint ventures is to minimise rivalry by
converting potential competitors into partners. This is especially important in the oil and gas
industry, when there is little to differentiate competitors.

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