COMPETITION AND PROFITABILITY IN THE NIGERIAN DOWNSTREAM OIL SECTOR:A CASE STUDY OF FORTE OIL PLC

ABSTRACT

Purpose:   The  main   purpose   of   this   empirical   work   is   to   identify   (if   any)   the   coherentrelationship between the concepts of competition and profitability of firms in the Nigeriandownstream oil industry, using Forte Oil Plc. (FO) as a case study. And consequently, drawup recommendations on how firms can improve their profitability in the sector.Methodology/Approach:   Case   study   methodology   is   used   to   analyse   the   trends   in   theindustry. Deductive approach was employed using both primary and secondary sources fromthe FO’s annual report, NNPC annual bulletins and related publications from internationallyrecognized bodies to ensure validity.Data   Analysis:   Literature   on   the   industry   and   h-statistics   to   determine   theprevalence/intensity of competition in the industry gives an insight into the true nature ofcompetition. While various profitability measures are used to analyse the performance of FO.The regression analysis tested at 95% reliability, is used to determine the effect of changes innumber of firms and market concentration on the profitability of FO and Spearman rankcoefficient to determine the relationship between concentration and profitability using thecase of FO.Findings: Both Spearman rank coefficient and regression analysis reveal that the increasinglevel of competition in the industry is statistically unrelated with profitability of firms. Theresearch and h-statistics suggests that the industry is a monopolistically competitive market;however, there is a lot of potential for mergers, growth and investment, as well as potentialfor improvement in firms’ profitability through increased efficiency in operations. In essence,the focal concern of firms in the industry should be efficiency in their own operations.Limitations: Limiting factors include the fact that competition is not the only factor thatcould impact a firm’s profitability and all the factors could not be investigated. Also, theunavailability of certain relevant data and the inherent limitations of models selected for thestudy.Originality/Value:   This   research   makes   substantive   contribution   to   the   vast   literatureavailable on competition and profitability by exploring the aforesaid industry. Looking at theeffects of competition on firm’s profitability, this thesis can be useful for both practical andscholarly references.i

TABLE OF CONTENTS

ABSTRACT................................................................................................................................i

ACKNOWLEGEMENT............................................................................................................ii

DEDICATION..........................................................................................................................iii

CHAPTER ONE: INTRODUCTION........................................................................................4

1.1 BACKGROUND...................................................................................................................4

1.2 AIM AND OBJECTIVES OF STUDY..................................................................................5

1.3 RATIONALE OF STUDY....................................................................................................6

1.4 HYPOTHESIS TESTING.....................................................................................................7

1.5 RESEARCH QUESTIONS....................................................................................................7

1.6 RESEARCH METHODS......................................................................................................7

1.7 LIMITATIONS OF STUDY.................................................................................................8

CHAPTER TWO: LITERATURE REVIEW..........................................................................102.1 INTRODUCTION...............................................................................................................10

2.2 THE CONCEPT OF COMPETITION.................................................................................11

2.3 THE CONCEPT OF PROFITABILITY..............................................................................122.4 COMPETITION AND PROFITABILITY...........................................................................132.5 MODEL SPECIFICATIONS...............................................................................................152.5.1 STRUCTURE-CONDUCT-PERFORMANCE (SCP) THEORY................................152.5.2 PORTERS FIVE FORCES..........................................................................................182.5.3 H-STATISTIC.............................................................................................................232.5.4 PEST ANALYSIS.......................................................................................................242.5.5 SWOT ANALYSIS.....................................................................................................272.6 SUMMARY.........................................................................................................................29CHAPTER THREE: CASE STUDYAND RESEARCH METHODS....................................313.1 INTRODUCTION...............................................................................................................313.2 NIGERIAN OIL AND GAS INDUSTRY...........................................................................323.2.1 UPSTREAM OIL AND GAS SECTOR......................................................................323.2.2 MIDSTREAM SECTOR.............................................................................................353.2.3 DOWNSTREAM OIL SECTOR.................................................................................363.3 STRUCTURE OF DOWNSTREAM OIL SECTOR...........................................................383.3.1 COMPETITION IN THE DOWNSTREAM OIL SECTOR........................................393.4 OVERVIEW OF FORTE OIL PLC.....................................................................................413.4.1 HISTORY AND SUBSIDIARIES...............................................................................413.4.2 EXPANSION AND KEY STRATEGIC ASSETS......................................................423.4.3 PERFORMANCE........................................................................................................431

3.5 RESEARCH APPROACH..................................................................................................453.5.1 CASE STUDY METHODOLOGY.............................................................................453.5.2 CASE STUDY METHODOLOGY APPLICATION...................................................463.5.3 RESEARCH METHODS.............................................................................................473.6 DATA COLLECTION AND ANALYSIS..........................................................................483.6.1 DATA COLLECTION................................................................................................493.6.2 DATA ANALYSIS......................................................................................................493.7 CONFIRMING VALIDITY OF RESEARCH FINDINGS.................................................503.8 SUMMARY.........................................................................................................................51CHAPTER FOUR: RESULTS AND DISCUSSION..............................................................534.1 INTRODUCTION...............................................................................................................534.2 INTENSITY OF COMPETITION IN THE SECTOR.........................................................534.2.1 PORTER’S FIVE FORCES ANALYSIS.....................................................................534.2.2 THE HERFINDAHL-HIRSCHMAN INDEX (2001-2010).........................................544.2.3 MARKET CONCENTRATION..................................................................................564.3 PANZAR AND ROSSE’S H-STATISTICS........................................................................604.4 ANALYSIS OF PERFORMANCE...............................................................................614.4.1 PHYSICAL PERFORMANCE OF FORTE OIL PLC.................................................614.4.2 ANALYSIS OF SALES...............................................................................................644.5 ANALYSIS OF PROFITABILITY.....................................................................................654.5.1 OVERALL FINANCIAL PERFORMANCE...............................................................654.5.2 RETURN ON ASSET..................................................................................................674.5.3 RETURN ON CAPITAL.............................................................................................674.6 CONCENTRATION AND PROFITABILITY....................................................................694.7 MARKET CONCENTRATION AND PERFORMANCE..................................................704.7.1 REGRESSION ANALYSIS........................................................................................704.7.2 DATA.........................................................................................................................714.7.3 RESULTS OF REGRESSION ANALYSIS................................................................72CHAPTER FIVE: FINDINGS, CONCLUSION AND FUTURE RECOMMENDATION. . .745.1 SUMMARY OF FINDINGS...............................................................................................745.2 CONCLUSION....................................................................................................................765.3 FUTURE RECOMMENDATION.......................................................................................76REFERENCES.........................................................................................................................79APPENDICES..........................................................................................................................86Appendix 1 List of Abbreviations....................................................................................................86Appendix 2 List of Tables...............................................................................................................87

Appendix 3 List of Figures..............................................................................................................88

Appendix 4 Number of Firms..........................................................................................................892

Appendix 5 Crude Oil Production 2005-2010.................................................................................90

Appendix 6 Crude Oil Export 2005-2010........................................................................................91

Appendix 7 Crude Oil Deliveries 2005-2010..................................................................................92Appendix 8 Petroleum Products Imports 2005-2010.......................................................................92Appendix 9 Petroleum Products Exports 2005-2010.......................................................................933