Site Loader

The threat of new
entrants, which refers to the force of new potential competitors, in the oil
and gas industry is extremely low due to high start up costs, oil price
volatility, high operating costs, high amount of government policies and
regulations and the not existing access to distribution channels.

The first thing worth
mentioning are the huge capital requirements for fixed upfront investments of
developing oil fields or the construction of production facilities. Example for
these huge investments are the Libra oil field in Brazil which costs of
development are estimated with 174 bn. USD and the development of the arctic
field in Russia from Gazprom which estimated costs are 41 bn. USD, from example
due to construction of 355 miles of railroad and an even longer oil pipeline.
With such high startup costs only, a few companies even attempt to position
itself in this market.1.2

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Beyond the huge
capital requirements, the oil price is one major factor for the assessment if
an investment is worth. Especially unconventional extraction methods can lead
to higher costs. This doesn’t mean that oil projects are instantly cancelled
due to an unexpected collapse of the oil price. These projects, mostly can’t be
quickly interrupted and then restarted again when the oil price starts to hike.
Before the company decides to start a project, they forecast the oil price to
assess the feasibility of it and if they start they must bear the risk of the
oi price volatility.3 The oil price decline in June 2014 from 110 USD per
barrel to 55 USD per barrel in the end of 2014 happened due to the growth in
supply, especially from shale, lower demand from Asia and OPEC couldn’t cut the
output of oil to regulate the price.4 This events threaten the profitability and even the
survival of oil and gas companies which need minimum prices to finance their
planned expenditures.5.6 This could lead to that companies shift from being
big distributors of capital to companies which have to do a lot of refinancing.
For example, Rosneft had to repay almost 30 bn in loans by the end of 2015.7 That’s why oil companies again must invest in
expensive oil exploration projects which could explore oil at low costs, to
minimize the risk of falling oil prices.

In addition to
that a potential entrant could have disadvantages from different government
policies that favors national companies. Most of the time oil and gas are state
owned resources and the government prefers to give national companies access to
raw materials or they allow exploitation of oil fields just with a partnership
with a national company. In addition, the regulation limit where, how and when
extraction is possible. So, this risk of government policies increases when
companies are working abroad. To lower this risk a company should prefer
projects in countries with stable political systems. Especially in unstable
political systems, the condition of a projects in the beginning may change over
time, as the government may change their perspective, after the capital is
invested. Therefore, a company who wants to entrant in the oil and gas industry
and wants to reduce this risk should careful analyze the government policies
and building sustainable relationships with its international oil and gas associates.8

Lastly only big oil companies possess access to
distribution channels like oil pipelines, gas stations and distribution stores.
For example, TOTAL has established over 1.000 gas stations in Germany to
distribute their oil products. To built up such distribution channels is costly
and require time to establish9

Post Author: admin

x

Hi!
I'm Russell!

Would you like to get a custom essay? How about receiving a customized one?

Check it out