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The Global Oil and Gas

Industry 2010
- Andrew Inkpen Group 7 :
Rajagopalan Iyer
Kumari Priyanka
Jayant Khurana
Priya Shukla
Siddhanth Chaganti

1.Describe the structure of the oil and gas industry.


The Structure of Oil and Gas industry can be best explained by answering three important
questions on types of organizations as mentioned in the article i.e. who they are, what
they do and what they want as follows:
1. Integrated Oil Companies
They are involved in exploration, refining, marketing, retail and they also buy and sell oil
and gas to and from other firms.
Example: ONGC.
2. National Oil Companies
Companies fully or in the majority owned by a national government.
Examples: Pertamina (Indonesia), PDVSA (Venezuela).
3. Independents
Non-government owned companies that focus on either the upstream or downstream.
Examples: Encana and Talisman (Canada), Woodside (Australia).
4. Other firms (oilfield service firms)
Help oil and gas producers to find, develop, produce and manage oil and gas reservoirs.
They do not seek ownership rights to oil and gas reserves.
Examples: Schlumberger, Halliburton, Baker Hughes.

2. What is the basis for competitive advantage?


The basis for competitive advantage are oil/gas resources and technology because
exploration and production have to be done in the countries with resources and
countries have advantage in holding the resource while relationship between the
resource holding countries and foreign exploration or distribution companies are also
important.
Technology is also a basis because some countries have a lot of oil but cannot utilize
it due to lack of technology and they have to import from other countries.
As per our interpretation of the articles, basis of competitive advantage, and
consequently value, differ between the upstream and downstream sectors of the oil
and gas industry.
Competitive advantage in the upstream petroleum industry is driven mainly by the
production cost and the ability to sustain rates of production.
Cost of commercialization and reserve life are other basis for competitive advantage
in case of upstream sector in oil and gas industry.
In the downstream, as opposed to the upstream, there is a far greater scope for
product differentiation and product innovation, and therefore the functional area of
marketing contributes to the overall process of value creation.
Competitive advantage in downstream sector is measured by the value that has been
added to the hydrocarbon input and hence we calculate key performance indicators
such as refining margin.

3. What are the main factors that impact the structure and
competitive dynamics?
1. Cyclic nature of oil and gas industries i.e. In the 1990s, crude oil prices fell steadily,
and in the new millennium the first few years saw steadily rising prices.
2. The resource curse for countries rich in natural resources but significant lack of
investment leading to imports. Examples: Indonesia, Iran, Mexico.
3. Large lifecycle of petroleum products and huge capital investments.
4. Increased foreign holdings by National Oil Companies.
5. Stableness of oil and gas export governments since unstableness leads to price
fluctuations.
6. Size of Oil and Gas company i.e. bigger the size of the company, more it is
competitive.

4. Why many of the largest competitors in the industry are


vertically
integrated?
The largest competitors in the industry
are vertically
integrated due to following reasons:
a. Transaction costs.
Vertical integration reduces the buying and selling costs incurred when different companies own
two stages of production. Thus, a company that produces oil and gas as well as finished
products can operate with little or no sales force, advertising, sales promotion, or market
research.
b. Supply assurance.
Vertical integration becomes essential to assure a supply of critical materials like oil and gas.
During the crisis of 19731974, with little warning, some companies found their supplies sharply
reduced and prices doubling or tripling.
c.

Improved coordination.

It allows reduction in costs through improved coordination of production and inventory


scheduling between stages. A company vertically integrated can schedule production more
efficiently when it has firm commitments from a downstream major or distribution company
than when it deals with independent customers.
d. Technological capabilities.
They participate in many of the production and distribution activities in which change can occur.
e. Higher entry barriers.

5. What will this industry look like in five years? In 10 years?


1. The oil and gas industry will no longer rely on its monopoly of the transport
market and more products will be imported. Governments will be less able to rely on
major international companies to secure supplies.
2. The role of OPEC will change.
The international oil market will continue to be dominated by economies, but short-term
demand will be balanced not only by OPECs regulation of its members production when
prices are weak, but by the response of producers of non-conventional oil.
3. There will be more gas, but uncertainty over where and when.
New perceptions about the potential supply of conventional and unconventional gas
(such as shale gas)at relatively low cost are creating the possibility of unexpected
expansion of gas markets in most parts of the world.
4. Technology and collaboration will be the keys to upstream reserves growth.
5. Financing future investment will not be a question of quantity but of quality:
matching
opportunities and risks with sources of funds.
6. The oil security problem will move to Asia.