Analysis of British Petroleum

BP has its headquarters in London and is considered among the largest oil and gas companies in the world with operations in more than 80 countries. The company diversifies its operations in the fields of exploration, production, and refining, marketing, selling and distributing energy. One of the most notable occurrences within the line of business for British Petroleum that affected its selling prices and share prices is the Gulf of Mexico Accident that occurred in 2007. Even with the change of executive in the company, the negative effects on these accidents are still affecting current business operations of the company. The company even constituted a committee charged with the task of handling the Gulf of Mexico accident. In its operations, the committee was meant to oversee the management and mitigation of legal and acquisition of a license to operate risks emerging from the Deep-water Horizon accident and oil spill.

The external factors facing British Environment

The external environment facing any company originates from the macro-environment from which the company operates. The external environment is best analyzed using the PESTEL analysis which is a useful tool for identification of the factors. These factors fall into broad categories of political, economic, social, environment, and legal. These external factors are known to influence the operations of business in term allocation and use of resources, and in the production of goods and services. In the creation of their policy, the companies need to reflect on these factors. These external factors are complex, and beyond the control of the company thus their critical analysis is important. This puts the company on high alert to respond to negative impacts that arise from them. The external factors facing the British petroleum that will be considered in this paper include the fluctuation of international prices of oil, environmental sustainability, technological advancements, and litigations.

International oil price fluctuations

Oil, which is the main commodity that BP deals with, is a bulky commodity that is tied to the national economic development and contributes almost 40% of the total consumption of global energy (Yan, 2012). It has been noted that the oil prices in the 21st century have been undergoing a rollercoaster ride. In January 2007, the price was 49.51 dollars /barrel then shifted to 142.95 $/barrel in July 2008, then took a major down hike to less than 40$/barrel in December 2008 (Yan, 2012). It is evident that more forces beyond the laws of supply and demand are at play here. Some of the cause of fluctuation in oil supply includes:

Limited and fixed supply potential of international oil. Oil being a non-renewable source of energy has a limited total amount of the resource. For this reason, even with explorations the viable oil reserves rarely increase substantially. It can also be noted that the capacity of exploration, development, and processing isn’t going on an upward trend fast enough to keep up and maintain the level of oil consumption. The oil production cost has also been labeled as a major factor influencing the supply of oil in the market. Another major factor contributing to the fluctuations in oil prices is the instability in the process of oil production in the oil producing and exporting countries (OPEC). The members of the OPEC have control of over 75% of the global proven oil reserves (Majumdar, 2016). This implies that these countries play an important role in the international oil market. Therefore, any policies, and measure in oil production that this organization adopts and its production strategies would result in upward adjustments in oil prices. A model by Cheng suggests that for every 1% increase in production by the OPEC countries, the oil price drops by 1.23% (Yan, 2012).

From the demand perspective, the following factors are at play in affecting the oil prices: the economic diversification by the OPEC countries has affected the amount of oil supplied to the international market. The OPEC countries have for long relied on the petroleum industry to generate financial revenue. To reduce the extensive reliance on this single source of revenue, the OPEC countries have been channeling resources to other ways of economic diversification to the non-oil sectors. This economic diversification and the adjustment in the economic structure of the OPEC countries created an upsurge in the internal consumption by these nations which affects the demand side in the international oil market (Majumdar, 2016). Another factor influencing the demand side in the international oil market is the dynamics in the crude oil inventories in the world. The petroleum inventories are classified as conventional and unconventional inventory. The conventional inventory refers to the part of the crude oil that can assure the world of normal functioning and operation of the petroleum industry. The unconventional inventory represents the commercial part that is under the control of the Multinational companies. While the conventional inventory accounts for over 80%, its impact is less than that of the unconventional on the international oil price (Yan, 2012).

Another major factor that comes into play in the consideration of the international oil prices is the influence of the dollar exchange rate changes. Since 1974, a transaction in the trade of oil has always been done quoting the US dollars. This implies that any changes in the dollar exchange rate direct affect the stability of the world economy as well as the international oil prices. Quantitative analysis dine by Cheng indicates that in the short run a hike of 1% in the dollar exchange rate cases a decrease of 3.06% in the oil price while in the long run an increase by 1% of dollar exchange rate creates a decrease of international oil price by 1.82% (Yan, 2012).

The fluctuation in the international oil prices as influenced by the above-described factors creates major influences on the levels of revenue for British Petroleum Company. This, in turn, affects all the functions in the chain process of the company due to a reduction in the levels of operating profits and reduced margins.

Environmental sustainability

BP operates in a challenging environment that requires them to meet the ever growing global demand for energy and at the same time address the issues of climate change, environmental and social issues. Sustainability requires the advancements in the abilities of a company while considering social, environmental and economic requirements of the present and the future generations. The success or failure of an organization is considered regarding the sustainability and ethics fundamentals.

The ISO 1400 provides specific requirements and principles that organizations need to follow to when carrying out environmental management. These standards tend to be influential in 140 countries that were engaged in their development. The elements of ISO 1400 include; establishment of environment policy, planning, implementation and operation and monitoring ad corrective action (Wawryk n.d). In abiding by these standards BP needs to follow some predetermined steps thus has no much control over the process.

The operations of BP always make the environment a great stakeholder. The risks posed by oil spills are detrimental to the sea organism and the eco-systems. In thus perspective, the Oil pollution Act of 1990 requires that a natural Resources Damage Assessment ne carried out after each spill. The operations of rigs like the Deepwater Horizon, where the accident on oil spill occurred are governed by federal regulations that require them to have appropriate equipment to handle blowout containment. In the protection of the environment, the Clean Water Act imposes heavy fines for spills resulting from negligence (Heller, 2012). The need to maintain environmental sustainability determines the manner in which BP carries out its operations. BP aims to avoid, reduce, and mitigate environmental impacts. It is for this reason, that BO strategically reviews key environmental issues related to emission of greenhouse gases, air quality, usage of water and other sensitive areas. BP further works to improve its oil spill preparedness and response (BP, 2015).

Technological factors

Technology plays an important role in the attainment of energy requirements. Technological trends are therefore relevant for technical efficiency in the supply and consumption as well as for industrial structures. Technology has an impact on the energy markets as it affects costs and quality of supplying energy services. New technologies have brought into the market new forms of energy including nuclear and solar energy. The needs to be innovative have seen BP maintain technological programs and operate research and development departments. One contribution of improved technology has been the use of 3D seismic for carrying out operations. The 3D seismic is also applicable to the process of addition of new reserves and as well as the increased production from the fields already in use. The development of information technology is helpful to the companies as they adapt the energy services in response to the demand for more sophisticated services. At BP, a focus has been put on the technologies can improve on safety, exploration, production and boost conversion activities. The technological programs in BP are divided into the upstream and downstream programs. The upstream programs deal with exploration, deepwater, giant fields, and gas value chains. The downstream programs put emphasize in the refining process and the conversion of oil and gas into energy efficient final products to be distributed to businesses and consumers.

Legal factors

Some of the legal factors that face the operations of BP include: the taxation regimes and fuel duty (1993) of government act affect the price of oil. The act of Renewable Transport Fuel Obligation (2005) puts pressure to the consumers to start using bio-fuels which will affect the sales in the oil industry. BP needs to be alert in the EU emissions trading scheme about the level of carbon emission. All these laws and statutes affect the manner in which the company operates its pricing and the product demand (Harrel, 2016).

The oil spill in the Gulf of Mexico created many civil, criminal probing and cases against BP and its stakeholders. The majority of these cases were class-actions filed in Texas and Florida.  The local business owners’ main filings for claims, demanding compensation for the business lost. The response cost to the oil spill were more than US$2.5$ which included claims paid and the federal costs. More legal disputes arose regarding insurance coverage dispute. BP never had any external insurance installed to cover such accidents. More proceeding and derivative suits by shareholders were also underway and accused the BP directors of breaching their fiduciary obligations thereby exposing the company to civil and criminal liability. In this connection, it is evident that legal factors at times are beyond the control of the organization (Aryee, 2013).

Porters’ five forces

These describe the various forces which influence the performance of an industry.

Threat of new entrants

The presence of strong competition in the oil industry creates a strong threat for new entrants joining the industry. New entrants are appealed by the low pricing and strong competition. The presence of new entrants creates adjustments to the supply side. On the other hand, oil being a non-renewable source of energy means that the deposits are not likely to increase with the entrants of new members. This will increase the level of competition in control over the oil fields. The new entrants are attracted into the industry by the prospects of high levels of profits. Presence of barriers and retaliation by existing firms reduces the threat of entry (Mel, et al. 2016)

New entrants are likely to affect the international oil prices in the international market. The increase in a number of suppliers increased the oil being supplied in the market making the price of oil to increase. It should also be noted the new entrants would cause more rivalry in the control of the oil fields and deposits. The high threat increases the competitors. This affects the existing firms’ performance through profitability, market share and efficiency (Mel, et al. 2016)

The legal factors are influenced by the market share of the existing players in a given industry. Some companies are known to enjoy monopoly is some areas. The duration of operation determines the market share based on the economies of scale and specific area of operation. Where the area of operation allows the firm to expand, it will then move to capture more market share over time.

Technology has undergone evolution over time. The current required technology for operation in the oil industry is critical for its performance. Technology has been known to reduce the capital for investment, economies of scale and on the reduction of costs of exploration while ensuring the delivering of quality oil products. The level of technology accessible to a firm will determine its ability to enter into the oil industry as technology enables innovation which in turn affects profit levels and the market share.

Competition rivalry

The competitiveness of oil and gas industry, more so in the upstream zone of the industry, is quite intense. The upstream sector has three different types of players. The big IOCs represent the private Integrated Oil and Gas companies. On this category, BP is position four after Sinopec, Royal Dutch, and Exxon Mobil regarding revenue and position five in terms market share, with Exxon Mobil, Chevron, Shell, and Total taking the first four positions respectively. The other category includes the companies dealing with the exploration and production of oil and gas in the upstream. The last category is the category of companies with more that 90% of the proven oil and gas reserves.

Threats of substitutes

The major alternative sources of oil and gas for producing energy include nuclear power, coal, hydrogen, biofuels and renewable sources of energy such as geothermal, wind and solar energy. These alternatives can replace a high amount t of hydrocarbons in the global energy mix as per performance, quality, and price. For this to happen, there is need to carry out extensive research and development which requires huge amounts of investments.

Bargaining power of the buyer

The main buyers of oil and gas products include refineries; other oil companies nationally and internationally, distributors and countries. The buyers in this sense have relatively small bargaining power as a result of the nature of the industry. The buyers’ major concern is price and quality of the product. The buyers bargaining power may be facilitated by the legal factors were they have the power to make claims through the court system.

Bargaining power of British Petroleum as a supplier

Suppliers can be said to possess high bargaining power where they operate in a well-organized market with limited substitutes and where the cost of switching from one supplier to the other is high. BP being the highest supplier of oil and gas possess strong bargaining power. BP takes advantage of its technological knowledge and competence to increase its bargaining power. It also focuses on lowering production costs as it has no control over the international oil prices.

Ranking of the external factor

The factors discussed above can be ranked in the following manner about potential impacts to British Petroleum. (From the factor with least effects to one with the greatest impact)

i.    Environmental sustainability (least)

ii.    Technological factors

iii.    Legal factors (litigations)

iv.    Price fluctuations (greatest)

The rationale used to rank this is regarding financial implications to the organization. The factor on environmental sustainability does not come at great financial costs. BP has managed to keep in control the environmental and social impact in different stages within the operation’s life cycle. BP continuously reviews the management of material issued not limited to climate change, water quality, stakeholder engagement and human rights. This is just an additional to the already planned for operation there has less impact on the company’s financial position. Technological factors pose more impacts to the BP financial statement. The company maintains a technological strategy that involves technological programs, advanced material research, research on climate science, energy, and natural resource. The company has made huge capital investments to develop advanced seismic imaging, well technologies, advanced oil recovery, unconventional reservoirs technologies, and facilities technology. All these are geared towards helping the world’s energy needs. The legal factors come at a great cost, especially where litigations are involved. Following the Deepwater Horizon Oil Spill, BP paid a pre-tax charge of US$ 40.9 billion which included the US $ 17.7 billion of costs. The organization further maintained an account with $20 for dealing with claims that would emerge. BP further made commitments to fund a 10-year research program to study the impacts of the oil spill worth $500million. While these litigations that emerge had direct cost impacts requiring making financial payment other indirect factors were also experienced (Houdet & Germaneau, 2011). The market price of the company’s shares was greatly reduced. Price fluctuations pose the greatest impact to the company as it is directly linked to the levels of revenue which influence other operations and determine the operating profits.

Future implications

While the oil industry seeks innovative ways to match the supply and demand levels, they need to consider the risk levels of these measures. Risk management is required in the new areas that the industry is exploring more specifically to address the sensitivity of the ecosystems. Continued over-exploitation of the oil reserves may lead to depletion of other resources such water while increasing the level of greenhouse gas emissions.9 there will need to come,u with technologies that have fewer water requirements and creates fewer earthquake risks.  The increased global volatility increases the operating risks. The global economy poses great risks to the oil prices. 

References 

Aryee, A. (2013). Risk of Offshore Oil Drilling: Causes and Consequences of British Petroleum Oil Rig Explosion. Aquatic Science and Technology, Vol.1, No. 1.

British Petroleum (BP). (2015). Sustainability Report.

Harrel, L. (2016). British Petroleum (BP): A Critical Analysis of its Corporate and International Strategies. Internatioanl Journal of Research in IT and Management, Volume 6, Issue 3.

Heller, N. (2012). Leadership in Crisis: An Exploration of the British Petroleum Case. International Journal of Business and Social Science, Vol. 3 No.18.

Houdet, J., & Germaneau, C. (2011). The Financial Impacts of BP’s Response To The Deepwater Horizon Oil Spill. Synergz.

Majumdar, R. (2016). The Oil Mighty: The Economic Impact of Oil Price Fluctuations. Global Economic Outlook.

Mel, B., Katuse, P., & Namada, J. (2016). Infleunce of Threat of New Entrants on Perfomance of Oil industry in South Sudan. International Journal of Novel Research in Marketing Management and Economics, 157-164.

Wawryk, A. (n.d.). International Environemental Standards in the Oil Industry.

Yan, L. (2012). Analysis of the International Oil Price Fluctuations and Its Influencing Factors. American Journal of Industrial and Business Management , 39-46.