Oil & Gas Industry

Porter’s Five Forces Analysis

Coined by Michael Porter, a Professor of Strategy at Harvard Business School; he stated
that a company’s profitability in an industry is determined by five-industry level forces.
They are:
Bargaining Power of Buyers in Oil and Gas Industry:
While there are plenty of oil companies in the world, much of the O&G business is
dominated by a small handful of powerful companies. The large amounts of capital
investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. There
isn't a lot of cut-throat competition between them, but they do have significant power
over smaller drilling and support companies. For big players, the power remains low. So,
all in all, we can say, the power is medium.
The buyers in the case of oil industry include the people purchasing, fuel, petrol and
other derivatives from the petroleum sector. The price of fuel and petroleum products is
in control of the oil producers, leaving little bargaining power to the consumers. A
change in the oil prices necessitates altering the price of petrol and fuel globally. An
increase in the price structure of crude oil results in an increase in the price of gasoline
on a global scale, affecting the consumers at an international scale. The consumer have
to pay the price the oil suppliers are charging, having no authority to influence them to
lower the prices. Therefore, it can be seen that the buyers in the oil industry have low
bargaining power, while the producers maintain a great deal of control on pricing
decisions.

The main buyers of oil and gas products are:

 Refineries
 National Oil Companies
 International Oil and Gas companies
 Distribution companies
 Traders
 Countries (USA, China, Japan, countries of the EU, etc.)

Bargaining Power of Suppliers in Oil and Gas Industry:

While there are plenty of oil companies in the world, much of the O&G business is
dominated by a small handful of powerful companies. The large amounts of capital
investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. There
isn't a lot of cut-throat competition between them, but they do have significant power
over smaller drilling and support companies. For big players, the power remains low. So,
all in all, we can say, the power is medium.

The suppliers of the oil industry have moderate bargaining power. The suppliers in the
oil industry are companies who are extracting the natural resource of oil from the oil
fields. These companies hold a significant amount of power on the industry dynamics. In
addition, the contracts which are formed with the governments of the region where the
oil is being extracted influences the bargaining power of the oil suppliers. The
government can exert some influence on the corporate decisions. However, the oil
based economies are dependent on the operations of these corporations so they can
only exert control to some extent.
Threat of New Entrants in Oil and Gas Industry:

The factors that affect the newest companies to enter oil and gas business, especially
the upstream segment are:

 Huge capital required

 National Oil Companies control more than 90% of the proven oil and gas reserves
 Increase of the internal competition within the industry
 The big oil and gas companies can increase their R&D spending which will give
them a boost regarding innovation and improve existing technologies. This
strategy will give them a competitive advantage over new oil and gas companies
which now enter the industry. Also, to mention that this whole strategy of the big
IOCs can force the new competitors to spend more money
 The big IOCs or as we call it Integrated Oil and Gas Companies which can easy
compete with new competitors due to economics of scale
 Oil and Gas prices volatility
 Oil and Gas Reserves are usually located in war zones or geographical areas with
geopolitical conflicts or political instability
 National and international law restrictions which can affect the new entrance of a
company in the oil and gas business

Threats of Substitutes in Oil and Gas Industry:

The main alternatives sources to oil and gas for producing energy which used for
electricity, transportation, heating, etc. are:

 Nuclear Energy
  Coal
 Hydrogen
 Biofuels and other renewables sources such as solar and wind energy

These alternative sources of energy can replace a high amount of hydrocarbons use in
the global energy mix according to their performance, quality and price of course. This
strategy requires a big amount of investments in R&D and producing procedures, so the
possibility for substitutes to dominate the global energy mix until 2040 is very small.

Competitive rivalry

 Competitive rivalry is low in the industry as just one-two players operate in

Upstream, Midstream and Downstream segments.
 Although a few private operators have entered the industry in the last couple of
years, they do not pose any major threat as of now.