EOG Resources is an American Energy company engaged in hydrocarbon exploration based in Houston, Texas, United States. The company was founded in 1999 after becoming independent from ENRON. It has a presence in North America, China and Trinidad and Tobago. The majority portion of its production is produced from its reserves in The United States. It works together with its subsidiaries, explores for, develops, produces, markets crude oil and natural gas and natural gas liquids. It is ranked 29th place in S&P Top 250 Global Energy Company (S&P Global Platts, 2021). Porter’s five forces model is a valuable tool to identify threats and opportunities faced by EOG Resources in the oil and gas industry in the world.
Competitive Rivalry in The Market
America produces a significant chunk of global crude oil production. In 2020 America produces 15% of the world crude oil compared to 13% of Russia and 12% of Saudi Arabia (EIA, 2020). EOG Resources is of the biggest oil producers in the US. It faces intense competition from local competitors, including Chevron, ExxonMobil, and ConocoPhillps. In the fiscal year 2020, EOG Resources reported annual revenue of $ $17.380 billion and a net income of $2.734 Billion (Fortune, 2020). EOG produced around 467,500 BPD of oil and natural gas in 2017, behind ExxonMobil and Chevron. Considering the global conglomerate in petrochemical, oil and gas exploration, and the energy sector, there is intense competition.
Threat of Substitutes
The demand for reducing carbon emission to stop climate change has damaged the earth’s ecosystem. The oil and gas industry is under pressure due to climate change activists. According to the Paris Climate Agreement, oil and gas industry producers must cut their production by 35% to meet the emission targets (Smart Energy, 2019). Energy production, transportation and industry depend on it. The world is searching for its substitute for some time now. In electricity production, viable solutions are becoming popular day by day. Wind energy is leading as a renewable energy source for some time behind solar energy. In the last decade, wind energy has grown by around 20 % in the last decade (Solaun & Cerdá, 2020). The developing countries are moving toward renewable resources for energy production. In the next decade, significant change will occur. The threat level against the industry is high.
The Threat of New Entrants
The oil industry is highly regulated in the world. There is too much restraint to start a company in the oil and gas sector. The oil governing bodies and government sets the rules. OPEC is the governing body that controls the majority of oil exports in the world. US use to control the Crude Oil export and price until the formation of OPEC in the 1970s. According to (Amarcher & Sweeney, 1976), OPEC’s success in influencing oil prices demonstrates the power such cartels have on primary commodities. Although OPEC does not set oil prices, its decisions play a significant part in pricing because the OPEC countries produce 40% of the world’s oil supply. The oil and gas explorations need huge capital investment, and its sunk investment cost makes it harder for the startup to compete with established companies. The decline in the demand for fuel is not favorable for new entrants. According to the analyst world, it reaches peak demand for oil before the pandemic and will not increase any further. Considering the facts mentioned above, the threat of new entrants remains low
Bargaining Power of Buyers
EOG Resources is the producer of oil and gas. It requires a complex network of companies to distribute its product and utilize. It includes oil refineries for processing, pipeline companies and marketing companies for the distribution of the products. They depend on their services otherwise they will be unable to deliver the products. Influential buyers can reduce prices, demand better quality or more service (thereby increasing costs) and play industry participants off against each other at the expense of industry profitability (Porter, 2008). Oil and gas industry mid-stream service provider act as a bridge between customer and producer of the product. In this case, the buyer plays an essential role in the industry. It holds a significant bargaining power.
Bargaining Power of Suppliers
The petrochemical industry is very manipulative. It is heavily dependent on the geopolitical situation of the region. The majority of the industry runner are vertically integrated. They control everything from exploration, transportation to retail. Vertical integration is a way to control the market and exert the power of the supplier. The primary supplier of the industry is equipment suppliers and human resources. The oil production equipment directly links with the quality of the product, and malfunction in it can cost losses of millions of Dollars (Hokroh, 2014). The equipment can be a tricky business due to the complexity of engineering and high risk. The market is concentrated, so the supplier can only market its product to limited companies. The overall bargaining power is low to medium.
References
Amarcher R. C. and Sweeney, R. J. (1976) International commodity cartels and the threat of new entry: implications of ocean mineral resources. Available at: Kyklos 29(2):292-309
EIA. (2020) Oil and petroleum products explained. Available at https://www.eia.gov/energyexplained/oil-and-petroleum-products/where-our-oil-comes-from.php
Fortune 500 Global. (2020). EOG Resources. Available at: https://fortune.com/company/eog-resources/fortune500/
Hokroh, A. M. (2014) An Analysis of the Oil and Gas Industry’s Competitiveness Using Porter’s Five Forces Framework. Available at: Global Journal of Commerce and Management Perspective GJCMP, Vol.3 (2):76-82
OPEC. (2019). Data/Graphs. Available at: https://www.opec.org/opec_web/en/data_graphs/330.htm
S&P Global Platts. (2021). Top 250 global energy companies. Available at: https://www.spglobal.com/platts/top250/company-rank/29
Smart Energy (2019) https://www.smart-energy.com/industry-sectors/policy-regulation/oil-and-gas-majors-must-cut-production-by-a-third-or-paris-agreement-fails/
Solaun, K., & Cerdá, E. (2020). Impacts of climate change on wind energy power–Four wind farms in Spain. Renewable energy, 145, 1306-1316.