Distribution Channels in The Oil and Gas Industry

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]

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 establish.[9]