Porter’s five forces analysis is used to determine the competitive intensity of a market and its attractiveness. By using this model we can understand the market positioning of a company, the threats from the rivalry, and what the future can hold for that industrial market.
Santos Limited is one of the three major players in the Australian gas industry. In fact, it is the third major listed player of the energy market in Australia. It already has a high market share of 20% of the eastern Australian domestic gas market sector.
The threat of substitutes
According to the Porter model, the threat of substitutes occurs when the products or services offered by another industry can affect the demand of the industry we are discussing (“Porter Five Forces” 2007, p. 1). In our case, the demand and consumption of gas in Australia has been growing steadily since the beginning of the last decade of the past century. In fact, it has doubled since 1990 and has taken a rush development that has benefited both companies and consumers (Willet, 2005, p. 2). It is a fact that Australia is rich in the coil but up until now, the coil industry cannot function as a substitute for the gas industry because of utility and, most important, environmental regulations. If you will have to use a coil for cooking or for heating then you will harm the environment. Australian regulations are very sensitive about environmental issues and coil companies have not tried to rival gas in domestic usage. Thus the threat of rivalry is low at the present moment.
Since the gas industry has been booming the past years, so has the supplying forces. During this time various gas fields have been discovered mainly in the north-western part of Australia and in the surrounding Asia-pacific region. In this respect, Santos Limited is in a comfortable market position. As shown in their 2008 Annual Report, Santos has invested in developing new gas fields in the Bengal gulf area and the neighboring country of Indonesia. These new gas fields have increased their oil and gas production capabilities by 134 mmboe (2008, p. 5). Also, Santos has signed an agreement with PETRONAS, the largest LNG producer in Asia and the third in the worldwide market. This partnership will greatly benefit Santos in the future to retain a strong market share positioning.
As mentioned above, the demand for domestic gas usage has been growing steadily for the last two decades in Australia. The consumption in the Asia-Pacific region has grown above the 10-year average during this last decade. During the past year of 2008, the eastern Australian sector has had a steady growth in demand and price on which Santos has benefited. Indonesia has also been a steady business with incremental growth (“Annual Report”, 2008, p. 6). Thus, the buyer power is in constant increase for the Asia-Pacific region. Santos will have to meet this steadily growing demand in the sector and take appropriate measures to stay ahead of the competition. Since the buyers have increasing demand and the suppliers are many, buyers can easily switch to other companies if Santos does not meet their requests.
Barriers of entry
In pure economic theory, every company should be able to enter the market and take part in the competition for market share (‘Porter Five Forces’, 2007, p. 1). In reality, a pure competition market situation is rarely found. Actually, there are only three major supply companies of natural gas for domestic use in Australia and Santos is one of them. These companies also control the majority of the gas fields not only in Australia but in the region (Willed, 2005, p. 3). It is true that there can be some minor fields to explore especially in eastern Australia, but generally speaking the cost of entrance into the market for new players is actually very high. This turned to be a big barrier for new companies and has benefited the actual ones.
The rivalry has been considered to be the “motor” of the market economy. An industry that has high competition drives profits toward zero (“Porter five forces”, 2007, p. 1). On the contrary, when a market has low rivalry it is considered to be ‘disciplined’. Santos is in a comfortable market positioning. In the 2008 Annual Report, we find that sale revenues for 2008 were 2,761 bln. In comparison with 2007, we have an 11% increase. Santos has performed indisputably well. The net profit after tax maybe shows best this statement. In 2008 it was 1.65 bln, or 359% more than in the previous year.
The Australian gas and oil market has a total of 25 companies registered. Among them, the main competitors for Santos with high potentials are BP Connect, Shell Australia, Woodside Petroleum Australia, West Australian Petroleum Pty Ltd (WAPET), and Esso Australia.
Of them, we can distinguish Woodside Petroleum Australia as being the main rival for Santos. In fact, 2008 revenues for Woodside have been higher than those of Santos, reaching a total of about 3.81 bln. But even the other firms mentioned are to be kept an eye on. They are all affiliates of major world oil and gas companies with a strong worldwide market position. This gives them the possibility to invest for the future in the Australian and Asia-pacific region markets.
‘Porter five forces’ (2007). The QuickMBA website.
Willed, E. (2005). Revolution of a gas market: the Australian experience. New Zealand Gas Industry Reform Conference papers.
The 2008 Annual Report (2008). Santos Limited. Web.