Free Essay About Oil And Gas Industry

Business

This paper is aimed at analyzing the global energy industry with a focus on oil and gas segment using a Porter Five Forces framework. The oil and gas industry has many subsegments and a variety of products, but some level of generalization can be applied to describe the market within this framework.

Diagram of Porter’s Five Forces for the Industry

Barriers to Entry
The oil and gas industry is very attractive in terms of profitability (Aubert & Frigstad, 2007), but the barriers to entry are high. The major global oil and gas market players are mostly integrated international companies that benefit from economies of scale. To enter this capital intensive industry, very high up-front investments and advanced technical knowledge are required for developing new oil fields or setting up facilities for production, amounting up to billions of dollars (Talevski & de Lima, 2009.) Other entry barriers are the following: governmental regulatory environemnt, asset specificity due to mineral rights acquisition necessity, the need for qualified labor with industry-specific skills, and also high level of risk due to physical hazard (Faulkner, 2011.) Patents on technologies drive differentiation in the industry as well as cost reduction, and act as entry barriers, but in refining, where technology is widely familiar, the impact of technology patent barriers is less than in other subsegments. The threat of entry of new competitors is relatively low, but it’s necessary to mention that in this industry the companies can operate at a specific part of the supply chain not covering the other chains (Datamonitor, 2010.)

Intensity of Rivalry

As many of oil and gas companies are large multinational businesses carrying out a wide range of activities including extraction, refining, manufacturing and marketing of petroleum products, power generation, etc., the level of concentration at the market is high. There was a number of large mergers in the oil and gas industry globally within the past two decades (for example, selling the BP shares by the UK government; BP acquisitions of such companies as US Standard Oil Company or Amoco), which resulted in higher market concentration ratio (Mahajan, 2006.)
So, situation in the oil and gas industry is characterized with the high level of competitive rivalry between existing players (for example, Exxon Mobil, Shell, British Petroleu lacking differentiation. The exit barriers in the industry are high. The growth rate of the industry is relatively low – according to BP Energy Outlook 2035, the global energy demand is expected to increase by 1.5% a year by 2035 (BP, 2014.)

Supplier Power

For the large vertically integrated market players, such as BP or Shell, all processes and materials flow of the value chain, from raw materials to customer, are covered by the company (De Raad, 2014.). But, in addition to that “internal supplies”, oil and gas giants have a complex and diverse chain of suppliers. Countries rich with natural resources like oil and gas can be considered as resource suppliers for the industry. The powerful suppliers can affect the industry landscape through increasing prices, limiting output or integrating efforts. In the 1970s, embargos by the oil producing countries pushed oil prices upwards; it’s an obvious evidence of suppliers’ power (Talevski & de Lima, 2009.) Also, oil and gas industry needs specific equipment and services from the providers like Baker Hughes, Haliburton, Shlumberger, etc. These supplying companies are large and diversified with great bargaining power over the market (Datamonitor, 2010.) Prices for specialized equipment define the necessary volume of investment in drilling, exploration and production. But as the energy companies are also large and consolidated, and represent substantial buyers for those suppliers, it diminishes the bargaining power of supplier. So, talking about resource suppliers – oil-rich-countries, it can be seen that the suppliers’ power in this industry is rather high, the same situation is in specific equipment, in engineering, R&D and technology area, but in materials and service areas, with smaller and less consolidated suppliers, the power of suppliers are relatively less.

Buyer Power

As most of the oil and gas manufacturers producers also are integrated downstream through owning gas and petrol stations (Hokroh, 2014), we mean by buyers the final B2C and B2B consumers. Large institutional buyers (for example, chemical companies) with high volumes of purchases, can impact the oil and gas companies’ revenues (Datamonitor, 2010). But in general, the market of buyers, especially B2C buyers, is highly fragmented (Aubert & Frigstad, 2007,) so, their bargaining power is limited to medium level. However, in this area the brand loyalty is not very high; the customers can easily switch from one supplier to another.

Threat of Substitutes

According to the BP Energy Outlook 2035, within the next two decades the share of oil in energy consumption will decline slightly; “its position as the leading fuel briefly challenged by coal” (BP, 2014.) The share of gas is increasing. Challenged by growing renewable energy sources such as biofuels, still the fossil fuels are expected to remain the dominant energy sources with the share of 81% (BP, 2014.) So, traditional sources of energy are currently irreplaceable in the majority of industry sectors as well as in transportation. Of course, there’s a remarkable shift in the governments’ policy towards renewable and “green” energy; but the production costs for renewables are quite high as compared with petroleum products (Talevski & de Lima, 2009.). Many oil and gas giants are investing in research and development in the domain of alternative energy sources; so, to some extent, they control the trend towards “green energy”. So, the threat of substitutes can be considered as medium.

Conclusion

Oil and gas industry is dominated by large multinational companies with diversified structure. The competitive rivalry within the industry is rather high, because of “majority of companies are in the race to replace their drying oil resources” (Talevski & de Lima, 2009.) As the fossil energy sources are depleting gradually, it becomes more difficult to exploit existing or new fields, and it requires higher amounts of investments as well as sophisticated equipment and technologies. That’s why the entry barriers in the industry are high, and there’s a negative trend in the projected profitability.
The dominating companies at this highly concentrated market control almost all the parts of the value chain, so some subdivisions can act as internal suppliers and buyers for others. But there’s still a diverse network of external suppliers. In some areas, such as complex specialized equipment, technology, raw materials, the bargaining power of suppliers is substantial, while in others (such as services) is relatively lower. The buyers’ market is made up with a large number of consumers with low brand loyalty and higher price sensitivity.
The traditional sources of energy at current level of technologies are dominating and will remain prevalent in the nearest future, but the shift to renewables and “green energy” shouldn’t be underestimated. The oil and gas giants try to control the trend, supporting and funding innovation in the energy sector.

Works cited

BP, 2014. BP Energy Outlook 2035. Web. Accessed 16 January, 2015. Retrieved from http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/Energy_Outlook_2035_booklet.pdf
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Aubert, A.E. & Frigstad, A.K., 2007. Strategic analysis of Statoil’s international competitiveness. Retrieved from http://brage.bibsys.no/xmlui/bitstream/handle/11250/169137/Aubert%20og%20Frigstad%202007.pdf?sequence=1
BP SWOT & Five Forces Analysis Following Implications of It. Retrieved from https://sadikn.wordpress.com/2013/12/11/bp-swot-five-forces-analysis-following-implications-of-isit/
SWOT and Porter Five Forces Analysis of Royal Dutch Shell. Retrieved from http://writepass.com/journal/2013/01/swot-and-porter-five-forces-analysis-of-royal-dutch-shell-plc/
Mahajan, S., 2006. Concentration ratios for businesses by industry in 2004. Economic Trends 635 October 2006