Oil Industry Structure Analysis (Porters analysis)

The boundaries of an industry consist of two primary dimensions, the scope of products or services
and the geographic scope.

Threat of new entry

- Inside Europe, risk is
pretty low.
- Outside Europe risk is
high

Supplier power
Buyer power
Many supplier try to export oil Competitive
- Characterized by Decreasing
products directly instead of rivalry
crude. demand in Europe &
- Strong
Decreasing demand in the
- Red
US
ocean
- Buyer Concentration
- Undifferentiated products

Threat of substitution
- Alternative fuels driven by
technology progress
- Strict European legislation

Threat of new entry MODERATE

There are different sources of barriers to entry that limit the threats.
Building a new refinery would have high barriers because of capital requirements and
incumbency advantages independent on size (the most favourable geographic locations
are already taken) but also Restrictive Government policy. There has been no new refinery
built in Europe since the 70s.
Capital requirement is not always an entry barrier because many firms are able to invest
large amounts of money.
There are also exit barriers which increase entry barriers.
Threats of new entrants In Europe:
Not so much interest except the Irans case maybe. Iran is in talks to help build a refinery in
Spain.
Iran in fact plans to invest with local companies in a Spanish refinery that could refine up to 200,000
barrels of oil a day according to the head of the state-run National Iranian Oil Refining and Distribution
Co. Iran believes that this is would be the safest way to increase the exports. Following this new
strategy, the Iranian petroleum ministry wants to invest in refineries abroad, whose crude oil will be
met by Iran.
Entry is not really attractive because High level of expertise and high capital cost and fixed
cost required. Highly capital-intensive assets for low profitability.
High exit barriers as well.
 Threats of new entrants from outside Europe:
New refineries are built in emerging countries such as China India. These refineries are much
more modern and efficient. The production focus on local consumption but might be
exported to Europe. Also US oil might be exported at some point. Refineries from emerging
countries have significant competitive advantages as compared to their European
counterparts. Lower taxes and different types of help from governments.
New refinery construction in Asia has been strong notably in China while Japan and Korea
already have excess capacity. However China has recently slowdown so China may not be a
big concern for the near future for European refiners.
Supplier power HIGH
A supplier group is powerful because it does not depend heavily on the industry for its revenue,
in fact it has other options for selling. There is also no substitute for what the supplier group
provides AND the supplier group has the potential to threat to integrate forward into the
industry. All these are true here.
The large amount of refining capacity being added to Middle East refining capacity represents a
risk for the industry in the short- to medium term. The new refineries from these countries are
significant competitors to European-based refineries for several reasons:
1. They are more modern and can process a largest variety of crude qualities (heavy and sour
crude).
2. They can take advantages from the fact that they can get cheap feedstocks from upstream
business
3. They have lower overall operating cost
4. They enjoy strong support from their governments.
On the other hand, transport costs are still important and play in favour of the local refineries
for the local market. Especially inland refineries.
The Middle East is expected to become a key exporter of oil products (especially middle
distillates) to Europe. But this is not only Middle Eastern countries that are building up domestic
refining capacity. Other countries, such as Russia, promote, through tax incentives, the global
export of oil products instead of crude oils.
Buyer power HIGH
independent wholesale, chemical industry, Army, petrol stations are all customers of
RHG
Europe used to send US excess gasoline but US has less needs for gasoline now.
Decreasing demand in Europe even though this is not a sufficient factor to make the buyers
powerful.
The brand loyalty is not an important factor
The switching costs for the individual buyers are not likely to be very high
Buyer Concentration: Buyers are fewer in number and more concentrated. Producers sales
revenue is dependent on these fewer customers.
Undifferentiated products: have the potential threat of a buyer switching producers. There are
many producers supplying the same type of product, so the buyers have the option of exploring
possibilities.
In addition, If buyers have full information regarding the producers operations and what their
costs truly are, then the buyers will be able to demand lower prices..
In addition, there is a rapidly growing market share of supermarkets. This change the integrated
nature of the downstream part of the value chain. Supermarkets use retail gas stations to attract
customers for their core products. Supermarkets usually discount oil products to near cost price
in order to attract customers,
Threat of substitution MODERATE
 In general, the threat of a substitute is high if It offers an attractive price-performance trade-off
to the industrys product or/and if the buyers cost of switching to the substitute is low. This is
not the case yet.
Environment regulations are a threat though.
Alternative fuels also and these are biofuels (mainly ethanol and biodiesel) and electricity. Until
now they have nor managed to be real threat to oil products but technological improvements
and government support could make them a real threat in the near future.
Growing production of US ethanol so less need to import gasoline from Europe.
EU environmental laws continue to threaten more and more European refineries profitability
General consensus is that the impact of regulatory costs in the EU will become much more
marked over the years. It is estimated that EU laws will generate additional costs of $2.50 to $4
per barrel of oil processed.
Competitive rivalry HIGH
Competition is shaped by the 5 forces.
The intensity of rivalry is greatest if the competitors are numerous or are roughlyequal in size
and power. And if the Industry growth is slow and there are high exit barriers. We have a strong
case of fierce rivalry.
Summary
European Refining Industry is not a highly profitable industry because all five forces are
moderate/strong to strong.
The industry is mature/declining, but it is its industry structure that drives competition and
profitability.
Low investments in European refining capacity because of uncertain and meagre demand
outlook.
Due to the fact that European refineries are not being upgraded, they are losing
competitiveness vis-a-vis overseas refineries in terms of complexity and refining margins (the
ability to produce high-quality and low-sulphur oil products at low costs).
When and if new entrants are diversifying from other markets, which is clearly the case here,
the entrants can leverage existing capabilities and cash flow to shake-up competition.
Star plot of Industry structure dynamics:

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Porter, M. E. (1979). How competitive forces shape strategy (pp. 21-38). Harvard Business Review.