Would you please help me to label each FACTOR AS POSITIVE, NEUTRAL , OR NEGATIVE

Question

Would you please help me to label each FACTOR AS POSITIVE, NEUTRAL , OR NEGATIVE.

Porter 5 Forces Analysis

Porter’s 5 forces is a framework that is used to understand any particular industry and dynamics of the industry along with various organizations falling under the ambit of that particular industry. Various forces that can impact a business are read into details and a comprehensive framework is made available which can be made use to determine forces that drive an organization in that particular field. This model is the best in ascertaining the competitive scenario of the industry and it’s being used extensively by businesses all over the world.

Porter’s Five Forces framework is one useful strategic tool to evaluate potential opportunities and threats/risks for the oil and gas industry. The five key factors of this model are:

Competitive rivalry

Threat of New Entrants

Threat of Substitutes

Bargaining Power of Buyers

Bargaining Power of Suppliers

Competitive rivalry

The competitiveness of oil and gas industry and especially in the upstream sector of the industry is significantly intensive.

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 segments 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.

Bargaining Power of Buyers in Oil and Gas Industry

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.)

The bargaining power of buyers in oil and gas industry is relatively small due to the nature of this industry. Buyers are interested in the price and the quality of a product. It is known, that global oil benchmarks determine the oil price, the main oil benchmarks are:

Brent Blend

West Texas Intermediate (WTI)

Dubai/Oman

5. Bargaining Power of Suppliers in Oil and Gas Industry

Some big suppliers in the oil and gas industry are fully integrated oil and gas industry (International and National Oil Companies) which are active in the whole value chain of oil and gas sector.

Explanation / Answer

The answers are written in view of already existed oil and gas companies.

Let us summarize the each of porter five forces as positive, neutral or negative:

1.competition rivalry: negative, there exists a huge competiotion as we move up the sector and difficult to sustain.

2. Threat of new entrants : Positive, it is difficult for a new entrant to come into the industry because of huge capital requirement, high intense internal competittion and majorty of oil and gas claims in the prominent leader hands. And finally high economies of scale.

3.Threat of subtitutes: negative, As it gives high R and B budget and the range of usage of substutes like nuclear energy, hydrogen etc are relatively lower. So they dont pose a major threat to the sector.

4.Bargaining power of buyers: Neutral as they influence very little and are more price and quality centric, And most of the industries maintain a standard benchmarks of quality and at reasonable level of price variation compared to other. They dont play hevay influential role.

5.Bargaining power of suppliers: Negative, as some big players are fully integrated industies and have a high price centric value chain with wide spread of active centres across the world. So any issues with them ultimately lead to difficulties with the company and price metrics get affected.

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