Barriers to Entry: In the upstream segment, government permission is required to commence operation. Finding, exploration, development and production cost of oil fields are significant, thus barriers are higher.
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'Porter’s Five Forces on Energy Sector Example'
Bargaining power of suppliers: Crude prices are globally determined and are highly susceptible to geopolitical events, economic growth and demand factors, economic policies, and speculative bets. Since domestic availability is only about 20%-25% of the requirement, India is basically a price taker as far as crude is concerned. For the petroleum products, given the surplus capacity in the country the bargaining power is low
Bargaining power of customers: Despite oil prices being on the cheaper side throughout the year, the price of petroleum products has not declined by the same extent due to Government’s interference with regards to hike in excise duties etc. With PSUs controlling most of the market, bargaining power of customers is not very strong. However, this may change as private players gain a higher share in the market.
Competition: In the downstream segment, companies are going for upgradation of refineries and adding capacities which is likely to lead to more competition. With new reforms announced in energy sector, more private players are likely to enter oil and gas sector thus increasing the competition.
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Threat of substitutes: The main alternatives sources to oil and gas for producing energy are nuclear energy, hydrogen, biofuels, and other renewable sources like solar and wind energy. For large scale production, of alternative sources requires a heavy capital investment in R&D and plant property and equipment, so there are slim chances at least till the next 20 years for substitutes.
