The European gas industry may be identified as embracing all upstream, midstream and downstream economic activity in the natural gas market. It is so one of the biggest regional markets with significantly big production, ingestion, technological, competitory market ( International Energy Agency, 2009 ) . First an premise is made, for the intent of this study that Europe is made up of the European members of the Organization for Economic Cooperation and Development ( OECD ) and Non- OECD European countries- EU27 states and Russia. Its size of ingestion and production of natural gas are 36 % and 33 % severally of current universe figures ( International Energy Agency, 2009 ) . Second, it is besides assumed that the range of operations for the gas companies featured in this study is non limited specifically to any one of the three subsectors of the gas industry.
This paper focuses on an outside-in position by trying to detect what makes the market work ( Porter, 1985, 1998 cited in Wit & A ; Meyer, 2004 p. 262 – 267 ) . Besides, a triangulation on academic theories of scheme shall be made ; therefore a Whittington matrix analysis shall be applied with a position to pull outing the alone complexness and pandemonium consequence in industry ; this in bend necessitates the debut of industry analysis tools such as PESTLE, Porter ‘s 5 forces, Ernst & A ; Young ‘s hazard radio detection and ranging and so on. A batch of secondary informations is applied to give pragmatism to the theoretical constructs presented. However, one must observe the restriction in procuring current or bing informations about some European states. However this paper reveals that scenario planning is a necessity to supply a model with which to get by with future projections and secret plan competitory advantage.
HOW DOES THE EUROPEAN GAS INDUSTRY WORK?
Industry Scope & A ; Key Players
Apart from Russia and its energy giants such as Gazprom, the karyon of the industry is majorly characterized by the EU27 states ( Eurogas Annual Report, 2008, p. 28 ) and dominant top companies such as BP ( British Petroleum ) , British Gas ( BG ) Group, Royal Dutch Shell, Total – as evidenced on the FTSE ( Financial Times Stock Exchange ) ( FTSE, 2009 ) . However, there are 100s of other important national and transnational companies and gas associations which are active in the industry. Figure 1 reveals the range of the industry in footings of employment, grapevine substructure and clients ; we therefore find that the UK sub-market has the highest client base and staffing while Germany dominates in footings of grapevine substructure.
Figure 1: Industrial Data on Europe Gas Industry
Beginning: ( Eurogas Annual Report, 2008, p. 32 )
Europe ‘s natural gas production, ingestion, imports and exports are estimated to be 981,117mcm, 1,043,295mcm, 462,673mcm and 389,473mcm severally as at 2008 ( International Energy Agency, 2009 ) . Assuming 100 % grapevine sourcing, at 2008 European norm monetary values ( International Energy Agency, 2009 ) the industry could be estimated to be deserving 230.57, 245.18, 108.66 and 91.529 thousand trillion euro ‘s severally in footings of production grosss, ingestion value, import and export trade severally.
Structured Industry Evolution in a System of Chaos ( Self Organization )
The European gas industry has its alone history of development and is invariably altering ; this gives the direction strategian a alone chance to map that development and program for competitory schemes for the hereafter ( De Wit & A ; Meyer, 2005, p.182 ) . Howevever the hereafter is non every bit predictable as it seems ; as with every other industry the challenge is that there exists a helter-skelter system of entropy which prevents anticipation of longterm future events bing side by side with a patterned order of ego organisation which serves as a usher for future actions ( Levy, 1994 p. 170 ) . In fact, Levy ( 1994, p. 170-172 ) high spots that industries barely achieve steady equilibrium while drastic unexpected alteration is a frequent occurence thereby proposing that guidelines are required to manage the uncertainness and complexness that arise.
Certain factors exist which -when decently identified and understood- provide a model for mapping the complex development and current kineticss of the industry- as observed in figure 2 below ; these internal and external factors are utilised reveal the unique kineticss that characterize the European gas industry.
Figure 2: Drivers of Industry Development
* Highly competitory market
*New scientific progresss, invention employed to increase throughput capacity
*Exploration, transit and bringing costs key to profitableness
*Dominated mostly by ENERGY FTSE 100 but big figure of important houses
*Huge losingss can take to prostration of concern
*Bygones regulation in topographic point
*Profitability is still king
*Buyer power is low
*Increasing demand for clean fuel
*Buyer protection Torahs in topographic point
*Highly globalized supply concatenation
*High degrees of coaction
*Medium easiness of entry in serving
*High barrier to entry on geographic expedition
*Medium easiness of entry on downstream
*Highly capital intensive entry required
Substitutes & A ; Complementors:
*Few clean & A ; low/no sulfur replacements to Gas
*GTL monetary value based on Crude oil monetary values
*Emergent alternate fuels
Adapted from: Wit & A ; Meyer, 2005, p. 187
From figure 2, the pointers depict the degree of complexness and feedback from one factor to the following ; demoing no directional causing. This shows that the development of the industry does non ever commence from a distinguishable get downing point ; instead the interaction of the several factors drives the industry along a apparently unpredictable and dynamic way ( Wit & A ; Meyer, 2005, p. 187 ) . In kernel, past history of the industry may be a weak tool for be aftering for the hereafter. Rather it may be discerned that a acknowledgment of the forms in the development of the gas industry are utile tools for scenario planning ( Buchanan & A ; Huczynski, 2004, p. 46 ) and short term anticipations of ways in which the industry will self organize.
Gas value Chain: An order with fractal forms for competition
Due to the dynamic complexness and self organisation in the European gas industry, the construction of the value concatenation is such that it differs from state to state in item but has evolved to be given towards the model- in figure 3:
Figure 3: Gas Industry Value Chain
Beginning: Adapted from www.gassco.no
In fact, Levy ( 1994, p.172- 174 ) concludes that there are “ forms within forms ” in a his simulation of an international supply concatenation which may assist to understand competitory behavior and steer strategic procedure. Therefore within this context, the industry can be categorized as populated with houses viing along the Upstream, Midstream and Downteam sectors. The upstream sector is focused on the geographic expedition and production of gas ( offshore/ geographic expedition of gas- as in figure 3 ) ; the midstream sector is focused on the transit ( LNG transportation, grapevine, breach terminuss, compaction, decompression and distribution- as in figure 3 ) while the down watercourse sector is focused on gross revenues and selling ( places and businesses- as in figure 3 ) .
COMPETITIVE ENVIRONMENT & A ; STRATEGIC DYNAMICS
3.1 Competitive results and procedures
Whether organized along the line of upstream, midstream or downstream sectors, competition is a world of life for all the houses in the gas industry. In order to win in the competitory infinite directors must foremost make up one’s mind on what results to prosecute and what processes to use as these have deductions for strategic direction in the industry ( Whittington, 2001, p.10 ) . Therefore, competivite scheme in the gas industry is driven by four underlying attacks which are the classical, evolutionary, processualist and systemic.
Harmonizing to Sloan ( 1963, cited in Whittington, 2001, p.11 ) classical political orientation focuses on a strategic purpose of a concern gaining a return on capital ( net income ) and in the event that the return is non satisfactory, the deficit should be corrected or the activity abandoned. There is the impression of the rational economic adult male, controlled and explicitly designed scheme. Directors are able to maximise net incomes by concentrating on longterm planning ( Whittington, 2001, p. 14-15 ) . The evolutionary political orientation focuses more on a natural choice rule ( Alchian, 1950, cited in Whittington, 2001, p.16 ) and environmental tantrum of house development wherein opportunity instead than consider strategic pick is responsible for success ( Alchian, 1979, cited in Whittington, 2001, p.19 ) . Outcomes of net income and efficiency ( Williamson, 1991: 8, cited in Whittington, 2001, p.17 ) are the cardinal to survival and competitory advantage within this attack.
The processual political orientation identifies with the evolutionary deficiency of assurance in controlled and rational scheme procedure as there are bounds on the cognitive ability of people and organisations ( Mintzberg 1987, 1994, cited in Whittington, 2001, p. 21 ) . Outcomes are focused on long term internal competencies and working real-world market imperfectnesss ( Whittington, 2001, p. 25, 26 ) ; therefore competitory advantage is rooted in its distinguishable resources ( Grant 1991b, cited in Whittington, 2001, pp.25 ) . The systemic political orientation of scheme goes a measure further than the processual school by concentrating on the “ societal embeddedness ” of economic activity ( Granovetter 1985, cited in Whittington, 2001, p.26 ) . Whittington therefore ( 2001, p27, 33 ) suggests that societal systems, historical kineticss of states and alterations within these states are really important. This is mostly due to the fact that the singularity of each local state affects industry construction ( Whitley 1991:24, cited in Whittington, 2001, p 27 ) . Competitive advantage therefore exists in the sociological sensitiveness of houses within the industry ( Whittington, 2001, p 36 ) . Mintzberg ( 2002 ) offers his ain reading of the attacks to scheme, nevertheless for the intent of this analysis ; it will be logically consistent to follow the Whittington matrix.
So why is this theoretical analysis relevant? Different motivations guide the schemes, actions and behavior of firms- which in bend shape the European gas industry ( Wit & A ; Meyer, 2004, p. 259 ) . Therefore, within the context of each single state, the behavior of the houses could differ from the other ; some UK gas companies may see success otherwise from the manner its Norse or Russian opposite numbers do. However, within the context of the European Union, most of the biggest gas companies are run on the Anglo-saxon ( Whittington, 2001, p. 31 ) political orientation of accent on return on capital, profitableness and majorly classical influence. However, this may non be a strictly classical political orientation as it is wholly possible within a systemic context for some companies to reflect the ideological propensities of the states from which they have emerged. Therefore one may propose that behavior of the larger houses within the European gas industry is focused on more rational planning, profit-centric motivations while some may every bit concentrate on other pluralistic aims in order to accomplish what they have each defined as success. It will so be logical to take a cursory position at the political, economic, societal, environmental and legal factors ( PESTLE ) – every bit good as internal forces which impede or accelerate success in the industry.
3.2 PESTLE & A ; Porter ‘s Five-Forces
A combination of political, economic, societal, technological, environmental and legal ( PESTLE ) factors the Porter ‘s five-forces ( Porter, 2008 ) may unite to farther set up the degree of complexness in the industry ( Whittington, 2001, p 28 ) . With the transition of clip the system of course self-organizes ; as Porter ( 1990, cited in Levy, 1994 p. 170 ) puts it, “ the development of industries is dynamic… .. ; capablenesss acquired during old competitory episodes shape the context for future competitory conflicts ” such that houses adapt to the environmental factors while seting their procedures to seek and set up as much control over the five-forces which affect the profitableness and endurance of the houses within the industry. Some houses will discontinue to be while the houses which are able to spot strategic jussive moods originating from this complexness will go on to be and perchance thrive ; an illustration of this is the development of scenario analysis by Royal Dutch/ Shell ( Buchanan & A ; Huczynski, 2004 ) . A graphical representation of the dynamic interaction between these curious factors and the five forces which influence the gas industry is given below in figure 4.
Figure 4: PESTLE & A ; PORTER ‘S FIVE Forces
Industry Competitors- FTE 100 companies, few national oil companies, perpendicular and horizontal integrating, few really big operators, big figure of houses, overcapacity in refinement
Environmental: Force majeure, impact appraisal, planetary heating and C footmark. Strong forces
Legal: Regulative gaining control, regulation of jurisprudence, regulative conformity on C emanations. Strong forces
Adapted from: ( Porter, 2008 ) and ( Buchanan & A ; Huczynski, 2004, p. 44 )
The above diagram captures a snapshot of the forces that define the gas industry. For illustration figure 5 below shows the lifting tendency of demand for gas in OECD states as indicated in the Porter ‘s five forces supra.
Figure 5: Energy Consumption Trends- OECD
Beginning: ( IEA- Natural Gas Outlook, 2008, p. 75 )
Besides, as is contained in the industry rivals subdivision of figure 4 we find that amalgamations and acquisitions are a tendency in the industry ; figures 6 and 7 illustrate this fact.
Figure 6: Number of amalgamations & A ; acquisitions -Europe
Beginning: ( Leveque & A ; Monturus, 2008 )
Figure 7: Value of M & A ; A Deals- Europe
Beginning: ( Leveque & A ; Monturus, 2008 )
Carbon footmark ( ( Reinecke, Sohn, & A ; StroBenreuther, p. 2008 ) appears besides to be a serious issue which has its legal effects and costs on concern within the industry. An scrutiny of more informations will reenforce the position that the European gas industry is invariably being shaped by the complex interactions between the internal porter ‘s five forces and external stamp factors.
4. Mentality FOR THE INDUSTRY
4.1 Market Tendencies
In order to further underscore the importance of the information in the porter ‘s 5 forces and PESTLE analysis tools in subdivision 3.2 it is necessary to portion tendency informations on the gas industry to cast visible radiation on existent parametric quantities which shape scheme and by deduction, the gas industry ‘s development.
Figure 8: EU27 monthly ingestion of natural gas
Beginning: ( Eurostat Energy Statistics, cited in Stiphout, 2010 )
Figure 9: Monetary values of competitory fuels [ left axis ] V gas monetary values [ right axis ]
Beginning: ( Platts & lt ; Brent, caol, NBP & gt ; , BAFA & lt ; DE Border & gt ; , cited in Stiphout, 2010 )
Figure 8 reveals the monthly tendency in ingestion forms of gas ; demoing that historically, monetary values peak at the winter periods and slack at the summer period. Besides, figure 9 reveals that in footings of pricing there is alot of instability ; this may even do hold in investings in new undertakings ( Ernst & A ; Young, 2009, p. 3 ) . Within the upstream sector, m & A ; a activity dropped by 22 % from 2008 to 2009 while the value of the amalgamations increased by 33 % within the same period ; besides, the was important over capacity and really thin borders experienced in the refinement sector while marketing borders were more robust ( Ernst & A ; Young, 2009, p. 5 – 6 ) .
Expected Tendencies in the hereafter
The chief driver of gas ingestion is it ‘s derived demand for power coevals ( IEA- World Energy Outlook, 2009, p. 4 ) . Scenario planning could be used to map the possible tendencies of this demand and other parameters- which may steer scheme making- as concerns can non avoid doing determinations about the hereafter ( Ringland, 1998 ) . In order to accomplish this, projection informations on future ingestion, production, industry hazards and other relevant prosodies will turn out utile ( IEA- Energy Outlook, 2010, p1 ) .
Figure 10: Energy ingestion by Fuel, 1980 -2035 ( Quadrillion British thermal unit )
Beginning: ( IEA- Energy Outlook, 2010 p. 6 )
Figure 11: Energy production by Fuel, 1980 -2035 ( Quadrillion British thermal unit )
Beginning: ( IEA- Energy Outlook, 2010, p. 9 )
Figures 10 and 11 suggest that the natural gas industry is set to go on on a growing way boulder clay 2035 ; nevertheless as the Ernst & A ; Young hazard radio detection and ranging ( 2009, p. 4 ) – as seen in figure 12- suggests several at hand challenges must be considered in order to suitably set scheme for successful outcomes. As such, the growing figures may be sensitised to make alternate schemes for state of affairss in which there are changing impacts of conformity, fiscal, operational and strategic hazards. Scenario planning will therefore let us to concentrate on the “ what if ” situations- supplying a model within which it is all right to acknowledge that one does non cognize what the hereafter might convey ( Ringland, 1998 p. 190 ) . With the industry hazards outlined below, it is therefore possible to imagine different possible scenarios for the European Gas industry. For illustration, it is wholly possible that supply dazes can change the production landscape everlastingly. Therefore, it is left to the strategian to conceive of several possibilities.
Figure 12: Top 10 Business hazards for Oil & A ; Gas
Beginning: ( Ernst and Young, 2009, p4 )
With industry kineticss such as the foregoing in head, Porter ( 1985, 1998 cited in Wit & A ; Meyer, 2004 p. 262 – 267 ) suggests that houses within an industry should concentrate attempts on cost leading, distinction, cost focal point or differentian focal point within a niche as trailing more than one may take to the houses being “ stuck in the center ” ; this manner, competitory advantage can be achieved based on application of these generic schemes.
5. SUMMARY AND CONCLUSION
This industry analysis has focused on a theory-based but clear attack to analyzing the structural kineticss behind the development and current development of European gas industry in footings of its value concatenation and competitory range among other factors. From the Whittington matrix attack to scheme theory and an grasp of pandemonium and complexness, the paper has been able to do a data-supported passage to the existent figures that constitute the industry with a position to set uping the competitory environment, bing and future tendencies. However data-gathering has been a challenge based on the wide definition of Europe and particularly the deficiency of informations beginnings from states such as Russia and some former Soviet Union states.
In decision, based on the analysis employed in this paper, the strategian within the European gas industry will better appreciate the complex and unpredictable internal and external environment and the demand to place forms within the industry. Once this is internalized the strategian will recognize that all this information provides the necessary background for scenario planning in order to chart alternate paths to prolong competitory advantage.