2011

Beyond Petroleum Pestel

Analysis

Brian Vanhinsbergh-Perez Business

and the Environment
4/4/2011
Contents
1.0 Introduction.....................................................................................................................................2
2.0 BP the company...............................................................................................................................2
2.1 Political Factors Affecting BP Oil Production....................................................................................2
2.1.1 Libya.............................................................................................................................................2
2.1.2 Egypt.............................................................................................................................................3
3.0 Economic Factors Affecting BP Oil Production.................................................................................4
3.1 UK VAT Increases.............................................................................................................................4
3.2 Increasing Oil Prices.........................................................................................................................4
3.3 Reduction in World Oil Consumption..............................................................................................5
3.0 Environmental Factors Affecting BP Oil Production.........................................................................5
4.0 Conclusion.......................................................................................................................................6
5.0 Bibliography.....................................................................................................................................6

Business and The Envirionment 1

 Brian Vanhinsbergh-Perez

Business and the Environment

The External Environment

3 Most Significant PESTEL Factors Affecting BP

1.0 Introduction
This report will investigate the three most prominent external PESTEL factors which
face BP (Beyond Petroleum). The report will provide a detailed look at how these
factors affect the business, and explore the reasons behind them. Finally this report
will make conclusions based on these findings.

2.0 BP the company

BP is one of the world's leading oil companies on the basis of market capitalisation
and proven reserves. Its main businesses are Exploration and Production, Refining
and Marketing, and Chemicals. Exploration and Production's activities include oil and
natural gas exploration and field development and production, together with pipeline
transportation, natural gas processing and gas and power marketing. The activities
of Refining and Marketing include oil supply and trading as well as refining and
marketing. Chemicals activities include petrochemicals manufacturing and
marketing. In addition, the Company has a solar energy business which is one of the
world's largest manufacturers of photovoltaic modules and systems.

‘Multinationals such as Shell and BP experience great complexity, operating

across diverse political, legal and cultural systems’ Boddy (2008)

2.1 Political Factors Affecting BP Oil Production

2.1.1 Libya
Political unrest in countries such as Libya and Egypt in addition to the unstable
environment within the Middle East, have had significant influence on the price of oil.
In 2007 BP invested over $900 in an agreement with Libya to drill over 21,000
square miles of land. Libya produces about 1.8 million barrels of oil a day, and
exports more than 85% of its production. However due to recent events and the
political unrest, the company has had to withdraw its employees from the region,
who had been working on exploring and drilling new oil fields, bringing operations to
a complete standstill.

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On Feb. 21, oil rocketed to a two-year high of more than $105 a barrel in what has
been described as a domino effect of protests and civil unrest seemingly swept from
Tunisia, to Egypt and onto Libya. This is not the first time that protests have reflected
on oil pricing, but it is likely the most significant to date. Approximately 58 per cent of
Libya’s GDP stems from petroleum revenues. These countries are also subject to
threats of terrorism and suicide bombers on a daily basis causing yet more instability
and sensitivity in these regions.

2.1.2 Egypt

Since its peak in 1996 of 922,000 barrels/day, Egypt’s oil output has been in
continuous decline by an alarming 26%. Further concern for the country is this
decline is amplified each year as the rate of depletion in existing wells accelerates.

Egypt’s economy is like many middle-eastern economies dependent on oil

exportation. This is because it relies on the revenue produced by oil exportation to
import sufficient food supplies to feed its starving nation. But as Egypt's post-peak oil
production plummets, so do food subsidies and food prices surge. Egypt are unable
to find buyers for the currency it prints and double-digit inflation is the norm. As food
prices increase worldwide, this increase in price is multiplied in food importing
countries like Egypt with a weak currency..

BP has invested in Egypt for over 44 years and has contributed to almost half of the
country’s Oil and Gas production, and is the country’s largest foreign investor. The
unrest in Egypt in early 2011 is a significant concern to BP since the country controls
the Suez Canal, which effectively is the world’s largest gateway for oil transit, and as
the food riots gradually take the shape of a revolution, the future of the Canal is
uncertain.

Nearly 3 million barrels of oil transit daily through the Suez Canal, as much as
Canada's daily output, making it one of the world's most important oil routes. The
tankers ferrying this oil are coming from Saudi Arabia, Kuwait, Iraq and neighbouring
producers and are for the most part headed to US and to a lesser extent Western
Europe which also relies on the North Sea and Russia for its oil supply.

If the country continues to be de-stabilised due to war or political unrest, the security
of the Suez Canal trade route would be threatened and subsequently all ships
bearing oil from the region would be forced to navigate around the African continent
which would increase logistical costs to BP in the transit of oil from the Middle East
to Europe. This would have a negative impact on the demand for oil, as this would
decrease as prices increase, causing loss of revenue to BP and other companies
dependent on the Suez Canal trade route.

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 ‘The price of Brent crude oil has passed $100 a barrel for the first time since
October 2008 on concerns about the political unrest in Egypt.

The price of Brent rose $1.66 to $101.08 before falling back to $100.01.

Oil prices had risen earlier in the day on fears that protests could lead to the
closure of the Suez Canal and disrupt oil supplies’.

3.0 Economic Factors Affecting BP Oil Production

Although the political factors surrounding the events in the Middle East and Libya are
having a major effect on BP and other major oil producers, a closer look at the
economic pressures facing BP will cause concern for the long term future of world oil
consumption. These pressures can be attributed to VAT increases in the UK,
increasing Oil Prices, reduction in world oil consumption

3.1 UK VAT Increases

The increase in VAT in the UK became effective in January 2011, and has affected
the price of products derived from the refining of crude oil. These amongst others
include plastics, paint, detergents, gasoline, and diesel fuel.

‘Economic factors such as wage levels, inflation and interest rates affect an
organisation’s costs. Increasing competition, and the search for cost
advantages drive globalisation’. Boddy (2008)

The profit margins for companies such as BP can be affected as sales decline due to
the decrease in demand of these derivatives as a result of the 2.5% increase on VAT.
Consumers and manufacturers may not be able to order the same amounts of the
products derived from the refining of crude oil due to affordability.

3.2 Increasing Oil Prices

The Brent Crude index has shown significant rises in the cost of oil over the last few
years, which is largely being proportioned to a series of world events such as the
political unrest in Egypt, Iraq, Tunisia and most recently Libya the world’s sixth
largest oil producer. All of which BP have had significant investment in the refining of
oil within those countries. The political unrest in Egypt saw the price rise to $101.08
per barrel and finally to $105 per barrel following the unrest in Libya. These events
affect the price of oil for two reasons. Operations within those countries are either
reduced or suspended which then causes an element of panic buying. As detailed
earlier in this report the geographical significance of Egypt and the Suez Canal
particularly heightens this consumer fear as it disrupts the perceptions of the
availability of oil.

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3.3 Reduction in World Oil Consumption

Oil Prices may be increasing, however statistically world oil consumption is

decreasing. Up until 2007 they had risen, however since then data provided by BP’s
energy review 2009 shows it to be in decline in every area with exception to Asian
Pacific Grouping. This was the first decline since 1982, which would support the
evidence that similarly to the recent decline it could have been consequential to
global recessions. Although it is also possible that greener attitudes and a heavier
commitment by global political leaders to reduce carbon emissions and a move
towards hydro power or solar power could also have been a factor. BP profits were
unsurprisingly lower than the previous year by 25%. If we continue to head into a
double dip recession it is likely that this would further harm BP’s profit margins as oil
consumption continues to decline.

3.0 Environmental Factors Affecting BP Oil Production

As an oil company, BP is directly linked with the use of fossil fuels linked with major
environmental challenges on a global scale. With its major - and controversial -
rebranding and commitment to becoming a sustainable energy company rather than
simply an oil company - it has inspired and impressed some, and irritated others.

In 2000 BP undertook a £100 million rebranding initiative, in an attempt to improve

its greener attitude to move away from oil, towards a more environmentally focused
future. However despite a new company emblem and a significant financial
investment the company still faces continuous controversy in wake of a series of
global disasters. In recent years the company has experienced oil spills in Alaska in
2005 and most significantly the largest oil spill recorded in the Gulf of Mexico in
2010. The latter of which significantly saw share prices plummet in the immediate
aftermath of the disaster.

In addition to severe financial penalties imposed by international law, this has also
consequently caused the US government to implement an immediate moratorium on
new deep water drilling for the foreseeable future in the region, and a suspension of
drilling off the coast of Alaska.

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The aftermath resulted in a High Court judge granting permission for Greenpeace to
bring a case arguing that it was unlawful for the UK government to grant new
licences in the wake of BP’s Gulf of Mexico oil spill.

The most significant environmental impact facing BP is the impact on climate change
caused by the use of oil by BP’s customers. Scientific evidence has raised serious
questions over if the human race can afford to burn all the hydrocarbons whose
existence we have so heavily relied on in oil refinery.

The results of the above can result in a tarnished corporate image, and the challenge
of which BP’s profits are continuously affected. As the share prices show a damaged
reputation will affect its image and therefore its profits.

4.0 Conclusion

This report has established the importance of the three most prominent external
pestel factors facing BP. The importance of these to BP are that in order to
overcome them they must be aware of the issues and challenges facing them.
Although other legal and technological factors are significant external factors facing
the business, the international globalisation of the company and the complexities of
international politics and world events in addition to environmenally tarnished
reputation cause greater concern to the external factors facing BP. Despite BP's
rhetoric about social responsibility, profits seem to count most. They might invest in
solar energy and admit  that  global warming should be prevented, but they will do 
all they can to ensure they can go on drilling for fossil  fuels and expanding their
markets for them. This report concludes that BP’s focus should be on re-establishing
its green image and international reputation.

5.0 Bibliography

Boddy, D, (2008), Management an Introduction 4th Edition, Essex: Pearson

Education Limited

http://seekingalpha.com/article/254295-libyan-unrest-could-affect-bp-oil-
production[Accessed 19 March 2011]

http://www.bbc.co.uk/news/business-12328745[Accessed 19 March 2011]

http://www.bbc.co.uk/news/business-12328745[Accessed 22 March 2011]

http://www.bbc.co.uk/news/business-12176898[Accessed 22 March 2011]

http://www.natural-environment.com/blog/2008/03/06/uses-of-crude-oil/[Accessed25
March 2011]

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http://seekingalpha.com/article/254295-libyan-unrest-could-affect-bp-oil-
production[Accessed 28 March 2011]

http://www.suite101.com/content/bp-goes-from-beyond-petroleum-to-big-polluter-in-csr-
setback-a235924[Accessed 29 March 2011]

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8346145/BP-Gulf-of-
Mexico-spill-Greenpeace-can-bring-case-against-UK-deepwater-oil-drilling.html[Accessed 1
April 2011]

http://shareprices.com/detail?
chart_time_period=2_year&movingaveragetype=&chart_comparison_tickers=e.g.+RBS
%2C+BARC&tidm=BP.&startyear=2011&startmonth=01&startday=07&endyear=2011&endm
onth=02&endday=07&frequency=daily[Accessed 1 April 2011]

http://www.cnbc.com/id/37553167/BP_s_Corporate_Image_Moves_Pro_and_Con

http://www.sourcewatch.org/index.php?title=BP[Accessed 1 April 2011]

http://www.thesun.co.uk/sol/homepage/news/3498975/Petrol-prices-rising-
again.html[Accessed 3 April 2011]

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