Oil Gas Industry Attractiveness
This report presents a brief but comprehensive analysis of the attractiveness of the oil and gas industry from a variety of perspectives.
The first perspective is taking a look at the attractiveness of the Oil and Gas industry having a competitive edge adopting the Porter’s five forces model which buttress on the response on the industry where the which the oil companies are the buyers and the service companies are the sellers of a wide range of goods and services related to drilling wells, building platforms and producing oil and gas. The second is the industry where industry in which oil companies are the buyers and national governments are the sellers of oil and gas licences, with governments competing with one another through their fiscal terms.
An analysis was carried out to determine the degree of attractiveness of both industries in different scenarios namely: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, competitive rivalry.
The second perspective is taking a look at the degree of attractiveness of the four specific industries which are Shell, Sterling Energy, Halliburton and Red spider technology adopting the Boston Consulting group growth share matrix. Which consists of four segments namely; Question mark, dog, Star and Cash cow.
Finally, for the purpose of this report, recommendations were made for changes and limitations to the techniques used and how the industries could improve on the yielding of return of their products.
Porters five forces of competitive Strategy
Analysis of Industry A
The Five competitive forces comprehensively determine the intensity of industry competition and profitability and the strongest force out of the lot control and are important from the point of strategy formulation (Porter 1980). This report will analyse the attractiveness of the industry in which the oil Producing companies are the buyers while the servicing companies are sellers.
Threat of Entry
As new entrants gain assess to an industry, the result usually brings about an increase in the Market share or decrease in price. There is usually a desire to gain market share and substantial resources (Porter 1980). Porter, 1980 also stated that the threat of entry into an industry depends primarily on the Major barriers of entry which are present in collaboration with the reaction from competitors. For the purpose of this report we will consider three barriers in relation to the Buyer (SHELL); Product Differentiation, Capital Requirements and Government policy.
In using Shell as a case study as one of the largest oil producing companies in the world, a new entrant will experience Product differentiation as established companies like Shell already possess an established brand which has resulted to loyalty from its sellers and customers, it result in the new entrant spending more capital to establish this loyalty and brand. Therefore this acts as a barrier for entry into the industry.
In relation to Capital requirement, the new entrant will need to invest substantial capital for the purpose of branding, customer service etc, in order to meet up with the already established companies (Shell) in the industry. Therefore this cats as another barrier in gaining entry into the industry.
Government policy acts as a major barrier for new entrants as governments can stimulate controls to limit the entry of new firms and companies through the use of licensing, royalties, environmental policies.
These barriers also relate to the Servicing companies as a new entrant into the industry will experience the same type of cases.
Bargaining Power of Suppliers
The criteria for a Supplier to have bargaining power is by if the supplier does not have to compete with other substitutes. If the supplier’s product is very important to the buyer’s success, it will attain substantial bargaining power
The bargaining power of suppliers (Halliburton) against buyers (Shell) is low as the suppliers are very dependent on the Buyers in order to attain profitability. As Shell is one of the most successful oil and gas producing companies, it will not be dependent on Halliburton as a supplier as other servicing companies will be competing to do business with Shell in order to attain profitability.
Bargaining Power of Buyers
The power of buyers is increasing everyday in the oil and gas industry. As the Major servicing companies depend on the Producing companies for survival. For the purpose of this report, Shell as a major producing company has substantial or high bargaining power over the market and to an extent determines the price of oil in the industry.
Substitutes of products
Substitutes for the oil industry in general include alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even nuclear energy. When analyzing an energy company it is extremely important to take a close look at the specific area in which the company is operating. The threat of the substitute of products is low for both the oil producing companies and the service Companies offering more obscure or specialized services such as seismic drilling or directional drilling tools are much more likely to withstand the threat of substitutes.
Intensity of Competitive Rivalry
This involves the stiff competition among rivals due to price increase or reduction, better advertising, etc. In relation to the Oil producing companies, the competition or rivalry is relatively low as there are specific companies which are dominating the industry. As competition in an industry is inevitable, it is not as intense in the Oil and gas producing companies and Shell acting as an agent of one of the major companies involved. On the other hand the Servicing companies who act as the suppliers would possess a high level of rivalry as there are numerous servicing companies involved in the industry. This may lead to unfavourable results in the long run and the companies involved may be worse off.
Analysis of Industry B
This report will analyse the attractiveness of the industry in which the Oil producing companies (Shell and Sterling) are the buyers and the national governments are the sellers of oil and gas licences, with governments competing with one another through their fiscal terms.
Threat of Entry
Similarly to the case of Industry A, the threat of entry into the industry is relatively high as the barriers to entry of investors are implausible as the sellers, which are in this case the government, provide barriers such as the imposing of tax, licensing policies, Royalty, etc. to control the entry of new investors.
As Sterling Energy and Red Spider are limited to their production in the U.K there will be a need to increase or expand their level of business. Therefore explore in other countries with different government policies. This may be quite tedious as they have limited reputation in comparison with the major Oil producing and servicing companies (Shell and Halliburton).
Bargaining Power of Suppliers
It goes without saying that the Bargaining power of suppliers in this industry is high because as stated earlier, a supplier attains bargaining power if the supplier does not have to compete with other substitutes and if the supplier’s product is very important to the buyer’s success.
As the Government has no substitute and both the Oil producing and servicing companies are dependent on the government ‘products’.
Bargaining Power of Buyers
In this context, the buyers are the oil producing companies who have little no bargaining power in the industry as they are subjected to policies monitored and controlled by the government. Therefore Shell and Sterling have little or no bargaining power of the industry.
Threat of Substitutes
In this industry, there is no threat of substitute concerning the Suppliers involved. In relation to the Buyers involved, there is a low threat of substitutes as the oil producing companies
This involves the threat of another industry entering the market will be low from the oil producing companies
Boston Consulting Group growth Share Matrix
It is a technique adapted to measure a firm’s position or place in the Market. In other words these tools enable the company to prioritise and determine which product should be invested in or not.
As seen in Fig. the Boston consulting group growth share Matrix is divided into four sections namely:
These are products which possess the tendency to grow fast and as a result have a lot of capital invested in them but produce less return.
These possess both a low market growth and return on investment (Market share). They also do not consume capital on investment.
These are products which have a high amount of capital invested in them and also generate returns as a result of their high market share.
They are called the leaders of the market as they generate more returns than the cash invested in them. That is their market share is greater than market growth rate.
Analysis of Oil and Gas Industries
This report will analyse the degree of attractiveness of the below named industries adopting the Bolton Consulting Group growth Share Matrix:
Red Spider Technology
Shell is one of the most successful Oil and Gas producing companies in the world. They produce about 2% of the amount of oil available in the world. They deal with the upstream and downstream of oil. So it can be seen that they are no strangers to the game. However as seen in Fig 2 they actively possess a high market share and a high growth rate. Shell is involved in the production of four main products. The Exploration and Production sector acts as the main source of revenue. Therefore this report will categorise the production and exploration sector into the Cash cow section as it is the revenue which is gotten from this product that is distributed to the investment of the other products.
Another product is the mining of oil sands which can be categorised into the Star segment as a substantial amount of cash has been invested in the product and also received a substantial amount of returns because of the high market share compared to other companies. If Shell can maintain its high market share, it will be transformed into the Cash cow.
Chemicals production is another product which shell is involved in. Shell chemicals compasses of a multibillion dollar turnover and the companies which make up this segment are many of the world’s largest petrochemical operations. This places the product in the Star section.
Gas and Power will be placed in the Question mark segment as this product needs to be analysed to establish if it is essential to continue production or not.
Sterling Energy is a small UK based oil exploration and producing company. It was founded in October 2002 and has grown from year to year. However they had a net loss of $202.5 million in 2009 and repaid a debt of $122.9million and was debt free at the end of 2009 (www.sterlingenergyuk.com). As seen in the figure below, it can be deduced that sterling energy, which has a large amount of cash invested in oil production and exploration but is not getting any productive return.
This report will categorise Sterling energy’s degree of attractiveness as Question Mark. This is so because the company has the tendency to grow in the Oil producing industry and become a Star. They need to be analysed carefully in order not to fall to the ‘Dog’ category as stated earlier.
Halliburton, which was founded in 1919, is one of the largest and most successful oil servicing companies in the Industry. It mainly services the upstream oil and gas industry (www.halliburton.com). Going through Figure 4 below it can be seen that Halliburton have a large amount of cash amount of cash invested in their services but get even a larger amount of returns due to their high market share and low market growth rate.
Halliburton offers different product and services. Some of which are Drilling and Evaluation, Landmark completion of production. Completion of production in the third quarter of 2009 moved up 69million more than the previous quarter as a result of higher demand. It can therefore be labelled a Cash cow as their returns are more than their initial capital investment as a result of their high market share and a low market growth rate. This means they generate more cash than they consume or earn more than they invest. Cash cows are termed the leaders in a market. Therefore the return which is deduced from Completion and Production will be used to invest in both Drilling and Evaluation and Landmark.
Landmark Technology is a new type of technology which has been successful in the crossing of boarders. This type of product discovered by Halliburton puts it in a Star position.
Red Spider Technology
Red Spider Technology is another Oil servicing company based in the UK. It is based in Aberdeen. They supply the oil industry with downstream products and services. The company reportedly made a 150% revenue growth in its first half of 2009, breaking the £1million mark in its monthly revenue (www.redspiders.com).
A major product of Red spider Technology is eRED (Electronic remote Equalising device. This is a computer controlled ball valve capable of controlling flow through the tube either by remote control or autonomously.
This report will analyse the attractiveness of eRED as Star. This is so because Red spider technology in comparison with most reputable companies in the industry is investing large amount of cash into its products and is producing a substantial amount of returns.
Conclusion and Recommendation
Based on the research and findings of the report, it can be postulated that the level of attractiveness of the industries have been identified in relation to Porters five and Boston consulting group matrix.
However based on some research, some limitations to the Porters five forces of competitive advantage were discovered. A major limitation to this theory was the omission to point out that the competitive advantage of the oil and gas industry is also subject to Macro forces. For e.g. Economic, political and financial, etc (Barko et al 2004). In other words the tool failed touch on the “big picture”. It only focuses on the revenue and profit aspect of competitive advantage.
Having stated this, it is not far from the truth to say that the degree of attractiveness was determined for the products of the different industries.
This report will recommend that Shell which falls on the star section of the matrix, should maintain its large market share which will eventually result in Shell becoming a cash cow. This report will also recommend Sterling energy to analyse their products and improve to meet the cash cow segment.