Porter's Five Forces Analysis For Indian Oil & Gas Industry: Bargaining Power of Buyers

Porter’s Five Forces Analysis for Indian Oil & Gas Industry
By-
Aditya Jain
IIM Ranchi
MBA’23
Bargaining Power of Buyers :
 The purchasers are the people who buy fuel, oil, and other petroleum products are
included in the Oil & Gas Industry.
 Because prices are set by sellers like OPEC and other countries/bodies, purchasers
have minimal bargaining power.
 The dynamic pricing system is used in India, where gasoline tariffs are updated every
day. The excise duty levied by the federal government and the value added tax
levied by the states make up a significant portion of the price that the end consumer
of gasoline must pay.
 Apart from taxes, the central government controls gasoline prices through base and
cap prices set by PPAC (Petroleum Planning and Analysis Cell), at which dealers and
OMCs trade with one another.
 Most of the natural gas generated in the nation does not have a market determined
price, meaning that it is not set by sellers and buyers depending on market demand
and supply factors.
 Instead, every 6 months, a formula is employed to determine the price of gasoline.
According to the calculation, the local price of gas is the weighted average of four
worldwide benchmarks: Henry Hub in the United States, Alberta gas in Canada, NBP
in the United Kingdom, and Russian gas.
 The local price is based on the previous year's pricing for these foreign benchmarks,
and it begins with a quarter's delay. It is valid for a period of six months.
 Hence, much of the pricing is determined by the international forces and
government intervention is high in the Oil & Gas industry in India. So, the bargaining
power is very low.
Bargaining Power of Suppliers :
 Businesses and firms that extract oil and gas from oil fields are oil industry providers.
They extract crudes such as Brent, West Texas Intermediate (WTI), Dubai and Oman
Sour, OPEC basket Crude, etc.
 Indian Basket (IB), also known as Indian Crude Basket, is weighted average of Dubai
and Oman (sour) and the Brent Crude (sweet) crude oil prices. It is used as an
indicator of the price of crude imports in India and Government of India watches the
index when examining domestic price issues
 Iraq has been India’s top supplier for the past few years. Indian refiners have been
attempting to broaden their supply source in order to minimise their reliance on
West Asia, which continues to constitute for the majority of their output. West Asian
nations accounted for 64% of India's imports, while the two continents of America
contributed for 18%.
 Since almost 85% of the crude is being imported from other countries, and due to
the switching costs being fairly high, the bargaining power of the suppliers is high in
the Indian Oil and Gas Industry.
Rivalry among Existing Competitors:
 The Indian economy has been gradually developing, and as a result, demand for
petroleum products has increased. Naturally, the country's petroleum business will
expand. However, rivalry is mostly restricted to public sector. LNG import in the
country accounted for about one-fourth of total gas demand, which is estimated to
double over the next five years.
 There are 23 crude oil refineries in India, of which 18 were state-owned, 3 were
privately owned and 2 were joint ventures.
 Reliance has the largest share with around 30%. Major oil refineries are controlled by
state-owned companies
 Overcapacity exists but is utilized for exports hence India is a net exporter of
petroleum products though it imports most of its crude.
 Since the base prices are set by PPAC, we can say that competitive rivalry is low in
Indian Oil and Gas Sector
Threat of Substitutes Products:
 In the past, the oil industry's price elasticity of demand has been inelastic. As a
result, regardless of whether the oil price rises, it would continuously be in great
need due to its numerous applications and role as a key provider of power.
 Nevertheless, because of its high cost and severe environmental effect,
replacements have been discovered and are being developed.
 Hence threat of substitute is substantial and is continuously increasing.
 For example, Electric cars are growing more mainstream, Green hydrogen, solar
energy, geothermal energy, and wind energy are all renewable energy sources that
might potentially displace petroleum in the coming years.
 Although switching costs from petroleum to renewable sources are high, the world is
pushing for more environment friendly fuels.
 Increased focus of major economies of the world only increases the threat of
substitute products and hence we can say that threat of substitute is fairly high in
the long term.
Threat of New Entrants :
 Because substantial capital is needed and there are several legal restrictions, the
threat of new entrants is minimal.
 In India, prior experience are necessary to participate in retail fuel advertising. More
than 90% of confirmed oil and gas reserves are held by national oil companies. The
major IOCs, or Integrated Oil and Gas Companies, can readily compete with new
rivals owing to economies of scale and the volatility of oil and gas prices.
 A well established distribution system is required. In the Oil and Gas Industry, putting
up a distribution or retail outlet is quite capital intensive.
 Setting up of a whole refinery and piping distribution system requires intensive
capital and time. Hence, it is quite evident that the threat of new entrants in the
Indian Oil and Gas industry is quite low.

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Porter’s Five Forces Analysis for Indian Oil & Gas Industry

Bargaining Power of Buyers :

Bargaining Power of Suppliers :

Rivalry among Existing Competitors:

Threat of Substitutes Products:

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