Company Study: British Petroleum The study examines BP’s global operating environment through a detailed PESTEL analysis. It then goes on to analyze its competitive environment with the help of Porter’s five forces. A detailed SWOT analysis is then performed to assess BP’s internal strengths and weaknesses, the threats it has to face and the opportunities that lay in front. Finally, it summarizes the analysis in the form of conclusions. Introduction Company Overview British Petroleum (BP) is one of the largest vertically integrated oil and gas companies in the world. Headquartered in London, its operations expand over six continents in about 100 countries. Its principal operations include Refining and Marketing, Gas, Power and renewable, exploration and production of gas and crude oil, construction, manufacturing and transportation. Key focus of refining and mining is on oil supply and trading, as well as, refining and petrochemicals manufacturing and marketing. BP also has a network of subsidiaries engaged in the chemicals, power and renewable energy sectors. The Group operates in the United Kingdom, the Bahamas, Australia, the British Virgin Islands, Canada, the United States of America, France, Germany, the Netherlands, New Zealand, Norway and Spain. (British Petroleum, 2007) Financial Performance The company recorded revenues of $265,906 million during the fiscal year ended December 2005, as compared to $252,168 in 2005. The company’s replacement cost profit was $22,253 million during fiscal year 2006, an increase of 15% over 2005. Net profit rose from $32,682 in 2005 to $35,158 in 2006. Return on average capital employed on a replacement cost basis was 22%, compared with 20% in 2006. (BP Company Reports, 2006) Q1. PESTEL Political
- Political turmoil in Middle East, extremist threats in countries like Saudi Arabia and strikes in Nigeria and recurring geopolitical tensions (Eg. Iran’s dismissal of suggestions that Tehran might suspend uranium enrichment as a way of easing the deadlock with the west over its nuclear ambitions) have made the operational and investment climate very uncertain.
- Governments in countries like UK, Alaska, US and Venezuela (where BP has major operations) have increased tax rates to take advantage of the high price environment. (Jason, 2007) This may lead to higher costs.
- Oil and gas play a major role in the dynamics of economies worldwide which has made governments increased their presence through regulations, observations and support. Environmental regulations are enforced at potentially great cost to companies. (Joanne, 2007)
- BP’s major economic concern is the rise in finance costs and increase in corporate tax expense. Finance costs increased by $102 in 2006 million as compared to 2005. The increase primarily reflects higher interest costs, offset by higher capitalized interest. The increase in corporate tax reflects the impact of the increase in the North Sea tax rate enacted by the UK government in July 2006. (BP, 2006)
- BP’s high exposure to gas prices could affect it adversely as traditionally gas prices have lagged the sector. While prices of crude oil have been very strong, gas prices have remained slightly weaker which could reflect on BP’s share price as well.
- Although world economy is slowing, but prospects for the oil and gas sector as a whole are good. Demand for oil is forecasted to remain firm which gives BP a chance to capitalize on the demand. Although rising demand in some countries may open up new avenues for BP, but BP’s recent new ventures such as the giant Thunderhorse field in the deepwater Gulf of Mexico have had slower than expected start-ups. (BP, 2006)
- The advent of sustained high oil prices presents new and different demands for the development of BP’s business over the long term. High prices also mean that it will be advantageous for BP to sell more rather than purchase.
- With competitors looking to expand and increase their capital investment across the industry, BP is lagging behind for resources. It has limited number of skilled contractors and equipment available. BP has the reserves in place; it just can’t round up the people, rigs, steel, and the rest to develop them as fast as it might like. (Reed, 2007) With capital investment up across the industry, it’s now jockeying with its competitors for the limited numbers of skilled contractors and equipment available. (Reed, 2007)
- In the wake of dwindling oil reserves, technological developments can help BP increase efficiency in existing fields. This provides an opportunity to BP to tackle the issue of low reserves to an extent.
- Social spotlight is on oil companies and there is a clamor for oil companies to behave in a socially responsible manner. Corporate Social responsibility groups have campaigned against activities like exploring and digging places by oil companies. Eg. Shell’s oil exploration and production operations in Nigeria was brought to public’s attention for not only violating environmental laws but also tribal people’s land rights. (National Petroleum News, 2007)
- BP has been accused of violating safety and compliance issues in the explosion at the Texas City refinery in the US (the explosion killed 15 people). It has been accused of having an ‘unsafe culture’ and not being socially responsible.
- Besides the Texas debacle, BP has had other operational and security issues such as leaks and shutdowns in Alaska due to which it has suffered a loss in reputation in terms of safety.
- Increasing concerns about global warming has led to more stringent environmental regulations. The introduction of Kyoto Protocol in 2005 for reduction of greenhouse gases and a ’clean air interstate rule’ (CAIR), issued by US environmental protection agency (EPA) in 2005 has added to BP’s cost and concerns. (Bruce, 2006)
- Traditionally, BP has had a weak record in environmental matters and a further introduction of these stringent regulations may impose new liabilities or increase operating expenses, either of which could result in a material decline in profitability.
- Other external environmental factors which have added to BP’s woes are Asian Tsunami and hurricanes in the Gulf of Mexico. Both turned out to be major disasters for all oil majors. They buffeted BP’s offshore and onshore facilities, impairing production and distribution. (Cliff, 2006) Its production is still recovering from storm damage at the end of last year.
- Strict corporate governance regulations in response to high profile corporate scandals and failures had made BP adopt IFRS fair value accounting system which analysts believe could batter the revenues of BP the tune of more than $400m. (Jetuah, 2007)
Porter’s Five forces (Analysis of the competitive environment) Competitive Rivalry
- Competitive rivalry is very intense in all the regions. BP competes with ExxonMobil, Royal Dutch Shell, Chevron Texaco, Total and ConocoPhillips in the global market.
- Mergers and acquisitions in the oil and gas sector will add to competition. Energy companies are trying to strengthen their global presence by industrial and financial consolidations. Fierce competition means nature of modern production requires access to markets and raw materials throughout the world and possession of enormous amounts of capital. (Jones, 1998)
Barriers to entry
- Threat of new entrants is very low
- There are high barriers to entry in the oil and gas market with low number of new entrants. This makes the oil and gas market relatively consolidated. Declining reserves, reliance on outside sources, political instability, high competitive rivalry and environmental regulations deter new entrants to a large extent.
- Entering oil and gas sector is very capital intensive, requires specialization and a deep understanding of the industry and its requirements. It requires the ability to manage both the local and global environment in which extraction take place and the ability to keep pace with the change and volatility of markets.(AMEC Annual Report, 2005)
Threat of substitutes
- Threat of substitutes looms large over BP and oil and gas industry in general. Substitutes such as nuclear energy and renewals are gaining ground which coupled with rising energy costs have the potential to reduce demand. Eg. France relies on nuclear sources for much of its energy supply. Canada recently recognized that it no longer had the large natural gas resources once thought, so oil sands producers are considering building coal or nuclear plants as substitute energy sources to replace natural gas. (Hirsch et al., 2005)
- Focus on green marketing, global warming and corporate social responsibility has led to much research on bio-fuels as another substitute. Biofuels are supposed to be significantly less carbon neutral than other forms of renewable energy and it is widely believed that they can help reduce the amount of carbon dioxide released into the atmosphere. There are active developments and research done to try to produce bio-fuels to replace oil and natural gas. ( Zwirn, 2006)
- Buyer power is very low in the oil and gas and associated industries. With the volatile price of oil and gas, most oil companies are not hedged against these price rises. This means that they are finding themselves exposed to spot prices for immediate supply and as a result are facing hefty gas bills. (Chris, 2006)
- BP takes out a fixed price electricity and gas purchase contract when an existing one ends. This helps it to mitigate the immediate risk to an extent but leaves it vulnerable to price risk in subsequent years. As a result, the buyers are at the mercy of external sources. (Chris, 2006)
- Supplier power is relatively high. With oil resources in Europe and US not able to meet global demand, BP and other oil companies have to rely on supplies from Middle-East countries and countries like Algeria and Russia in order to meet existing demand.
- Political instability in some regions mean more reliance on other outside oil producing regions which raises the supplier power even higher.
Q2. SWOT Analysis Strengths
- BP’s vertical integration with both upstream and downstream oil operations gives it operational efficiency related advantages. It helps BP have control over the entire value chain giving it significant competitive advantage in the global oil market.
- BP’s revenue is spread across 100 different regions. Diversified revenue helps in lowering the risk as it is not dependent on any one market.
- Dominant market position and good brand image gives BP a significant bargaining power in the global oil market.
- Declining Crude oil and gas reserves may have an adverse impact on BP’s operating margins. Both crude oil and gas reserves declined by 2.7% and 6.4% respectively between 2003 to 2005. (BP, 2006)
- Competition in downstream operations has made BP lose out on financial performance and capital efficiency. The company’s net income per marketed barrel basis is the lowest as compared to its competitors, reflecting the relatively small refining component within its downstream business. (Data monitor Report, 2006)
- Demand for natural gas driven by demand for LNG and high fuel prices is expected to grow significantly. Global consumption of natural gas is projected to
increase by nearly 70% between 2002 and 2025. (Data monitor Report, 2006)
- Rising demand for refined products and petrochemicals in China and increasing demand for aviation fuel are good market expansion opportunities for BP.
- By 2010, the European oil and gas market if forecasted to grow by 5.7% by market value and 8% by market volume. (Datamonitor Report, 2006)
- Political risks and instability in major oil producing regions such as Middle-East, and Nigeria may pose BP with significant concerns.
- Renewed emphasis on Global warming may affect BP’s operations leading to new government regulations and subsequent cost increases.
- Market Reports have predicted fall in oil prices from later half of 2007 which may have an impact on BP’s top line growth.
- There a strong and growing demand for oil and gas in Europe but very few reserves to cater to that demand.
The results were arrived by doing an in depth study from secondary sources. Qualitative secondary information from a variety of sources were gathered like BP Case Studies, BP Web page , Reference books , Journals , Online journals, Newspaper and Magazine Articles , Taped interviews , Business news channel views , Research Agency (e.g Mintel) databases . Quantitative data from BP Company Reports and other oil majors are collected and analyzed to compare and contrast the effect the competitive and external have had on their performance. Conclusions were only reached after case studies of other oil majors like Exxon-Mobil, Chevron-Texaco were analyzed. BP’s performance and internal strengths were analyzed in both absolute and relative terms. Objectives After analyzing BP’s micro and macro environment, a set of objectives for BP can be formulated.
- BP has to make sure that it is fully protected against price rises as the near future can some volatility in oil prices. The objective should be to guard itself against price volatility. Although, strong demand and escalating prices have resulted in the growth of oil and gas market, political instability in regions with large reserves and damage to production by natural disasters were largely responsible for rise in prices. Price are expected to stabilize moving forward leading to a slowdown in the pace of market expansion which might present a challenge to BP.
- With the renewed focus on global warming and energy efficient fuel, BP’s key objective should be to explore other energy efficient fuel and show some corporate responsibility as an organization.
- In relation to pricing, Porter’s analysis highlighted the importance of effective risk management practices for BP. In order to reduce exposure, BP needs effective management of underlying energy price risk. Appropriate measures can ensure avoidance of much of the pain caused by increasingly volatile markets.
- In the wake of rising terrorist activity in some of the major areas where BP has its operations, one of the objectives should be to have a Disaster management plan.
- One of the other objectives should be to concentrate on its downstream business where it is losing out to competitors.
References AMEC Annual Report (2005) https://www.amec.com/annualreport2005/natural_resources.html Date accessed 09/08/2007 BP (2006) Annual Reports, https://bp.com, Date accessed 12/05/2007 BP to Invest $500 Million in Energy Research Center. (2007) Government Procurement, Apr2007, Vol. 15 Issue 2, p12-12, 1/3p Bruce, P (2006) Getting Easier to be Green., Waste Age, Vol. 37 Issue 9, p74-75, 2p; Chris, B (2006) Why risk it?, Utility Week, 13565532, 1/13/2006, Vol. 24, Issue 19 Cliff, S (2006) BP’s revamped emergency plan. By: Saran, Cliff. Computer Weekly, 10/31/2006, p60-60, 1/2p, 1c Hirsch et al. (2005) Peaking of world oil production: impacts, mitigation & risk management, https://www.powerswitch.org.uk/portal/images/stories/papers/thehirschreport.pdf, Date accessed 10/08/2007 Jason, B (2007)The Kremlin’s Big Squeeze., Business Week Online, 4/20/2007, p14-14, 1p Jones, S (1998) British Petroleum acquiring US oil producer Amoco, https://www.wsws.org/news/1998/aug1998/bpam-a13.shtml, Date accessed 10/08/2007 Jetuah, D (2007) IFRS fair value demands batter oil giant BP, https://www.accountancyage.com/accountancyage/news/2172167/ifrs-fair-value-demands-batter Date accessed 12/05/2007 Date accessed 10/08/2007 Joanna, F (2007)BP Considers Building Hydrocracker Unit for Nerefco Refinery. Global Refining & Fuels Report, 4/25/2007, Vol. 11 Issue 9, p23-23, 1p; National Petroleum News (2007) Major Oil takes a slight dip. National Petroleum News, Vol. 99 Issue 3, p6-7 Mandil, C (2003) 4th International Oil Summit, The Oil Market: Competition between oil and other energy sources Oil and Gas in Europe: Industry Profile (2006) DataMonitor Report https://web.ebscohost.com/bsi/pdf?vid=5&hid=21&sid=a1e2de9c-20b6-479a-ad65-93ee0c7d1bcf%40sessionmgr8 Date accessed 10/08/2007 Reed, S (2007) BP takes it slow and steady; Business Week https://www.businessweek.com/globalbiz/content/feb2007/gb20070206_166806.htm Date accessed Date accessed 10/08/2007 Zwirn, E (2006) DuPont and BP drive future fuels. (cover story) Chemical Market Reporter, 6/26/2006, Vol. 269 Issue 25, p5-5, 1/2p;
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