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BP has an aspiring story. They almost never existed. After 7 years of drilling and tapped out resources, George Reynolds, an explorer employed by William D‘Arcy, found oil. In 1908, a year later, the Anglo-Persian Oil Company was in business and Mr. D‘Arcy was exceedingly wealthy. The company that almost wasn‘t, now BP, still holds its headquarters in London and has six subsidiaries (Castrol, Wild Bean Café, ARCO, ampm, and ARAL). BP offers a range of products consisting of natural gas, oil, wind, solar, and biofuels. The company is present on five continents in over 100 countries and has franchises worldwide. BP is a publicly traded company and their operations are overseen by a Board of 15 members, including Robert Dudley, CEO. A lot can be said for this team, who is doing more than just keeping BP afloat during the company‘s own financial crisis. As of November 2, 2010, BP reported a $1.785 million profit after losing just over $17 million due to the Gulf oil spill months earlier. Despite the financial drain from the oil spill, BP is only about $3 million short of where it was in November of 2009. The company‘s stock, while having plummeted in the summer of 2010 to a mere $26.75 per share, are now at a healthier $40.06 per share. Despite the challenging economic conditions and the oil spill fiasco, BP is still managing to stay financially stable and restore investor confidence. In this paper, BP will be analyzed on how it measures up to its competition in the energy industry. Its subsidiaries will be briefly mentioned in the Internal Analysis and franchises will only be mentioned where or if they impact corporate numbers. For the External Analysis, this report will solely examine the petroleum business as a source of energy and not on its presence in everyday products such as plastic, tires, asphalt, Vaseline, and nylons, to name a few. The sole focus of this paper will be on BP Global, the oil company and its other forms of energy.
BP‘s mission statement is actually that which their acronym (unofficially) stands for, ―Beyond Petroleum.‖ii
BP has been in the business of providing energy for over 100 years. Their goal is to continue to provide energy but in a new, healthier, eco-friendly way. They want to create a diverse energy mix that is ―secure, stable, and lower in carbon.‖iii
How can BP return to profitability, restore consumer confidence, and find a way to stand out amongst competitors while struggling with the economic crisis and the Gulf oil spill?
1908 – Employed by William D‘Arcy, George Reynolds struck oil. 1909 – Anglo-Persian Oil Company is born. 1912 – BP opens its first service station in Minneapolis, Minnesota. 1
1914 – Anglo-Persian almost goes broke (again). 1917 – British Petroleum, a German company, had their assets seized by London who‘s Public Trustees sold them to Anglo-Persian. These assets consisted of 520 stations, 535 railway container carts, 1102 automotive vehicles, 4 barges, and 650 stallions. 1921 – Had 69 gas pumps in operation. 1925 – Over 6,000 gas pumps. 1935- Company changed its name from Anglo-Persian to Anglo-Iranian. 1941- Iran‘s prime minister closed oil operations to foreign countries. 1942- Oil operations in Iran are re-opened but with new arrangements, under which AngloIranian was given a 40% stake. 1954- Anglo-Iranian changed its name again, this time to The British Petroleum Company. 1965- BP discovered natural gas within the English Channel. 1965 – BP opened the first self-service station in Essex in the UK. 1969- Struck oil in Alaska, the largest reservoir in North America. 1970 – Discovered ―black gold‖ in the North Sea, enough to manufacture 400,000 barrels per day. 1975 – Queen Elizabeth II starts the flow of oil in the pipelines from Forties Field. 1975 – BP was transporting 140 million tonnes from the Middle East, from which it also received 80% of its supply. 1977 – Alaskan pipelines are opened. 1983 – BP transported 500,000 tonnes from the Middle East and only received 10% of its supply here as a result of the Middle Eastern nations taking over the oil on their land. 1987 – BP buys Sohio and turns it into BP America. 1987 – The British government sells it shares of BP and the company turns into a fully privatized business. 1998 – BP merges with Amoco, forming BP Amoco. 2000 - ARCO, Aral, and Castrol are all bought by BP. 2
2000- BP changes its company logo at all of its 28,000 sites to the Helios to represent its new, global brand. 2001 – BP opens the greenest gas station in the world in Essex, England. 2004 – Builds the highest capacity deep water pipeline system in the Gulf of Mexico. 2005 – BP Alternative Energy is formed to create low carbon power. 2006 – BP Biofuels is born. 2010 – Gulf of Mexico oil spill and recovery efforts.
Global and Economic The petroleum industry provides some of the world‘s most necessary services, ranging from refined automotive fuel to raw chemical products, and it‘s the world‘s leading industry in regards to money. As of November 2010, a barrel of oil is selling for $85.27v and at 30 billion barrels being consumed in a yearvi, that‘s over $2.558 trillion! This includes a 4.1% growth in the world economy and further growth of 3.6% is forecasted for 2011.vii Oil is the most vital product in this industry. It is the world‘s primary source of energy consumption, 32% for Europe and Asia combined and 53% for the Middle Eastern countries. Additionally, Southern and Central America account for 44% of usage, Africa for 41%, and North America for 40%.viii According to the quarterly report by OPEC, the worldwide demand for oil is up, as consumption has exceeded this year‘s expectations by.2%. As a result, the 2011 forecast has been revised from 1.9% to 2.0%.ix Despite these changes, it‘s unlikely the supply will be able to meet the demand. This year, the supply fell short by 28.8mb/day and the demand for 2011 is anticipated to increase, so the supply will come up short again (see Appendix A)x. APPENDIX Axi
Supply and demand
in million barrels per day
World demand 85.8 Non-OPEC supply 52.2 OPEC NGLs 4.8 Difference 28.8
World demand 86.9 Non-OPEC supply 52.5 OPEC NGLs 5.2 Difference 29.2
The petroleum business is a very important economic sector, not only for its many uses, but also because it stimulates growth. One of the most important ways it does this is through trade. Trade is crucial to the economy worldwide, as it promotes cash flow, jobs, and provides resources that 3
some places might not otherwise obtain. U.S. imports for propane increased 67.2% and crude oil is 6.3% higher than in 2009, showing some recovery in the economy. Gasoline imports are 4% lower but this is normal before winter approaches; jet fuel imports are down by 50%, showing a hurt airline industry; and fuel oil imports have decreased by 6%. Overall, the U.S. imports of oil products are down 6.1% from 2009 but the country‘s export numbers are up 10.1%.xii Crude oil imports to Japan were up for the year at 1.6% but exports were down 3.3%. China‘s importation of oil peaked at 35.4% in September 2010, as did its exports at 64.7%! India reduced its crude imports by 3.5% and increased its exports by 36.8% as compared to 2009.xiii The same factors affecting trade are also affecting stocks. U.S. crude stocks increased by 7.2mb, their highest level since mid-2009. Behind the increase was the lower utilization rates of US crude oil refinery at 81.8%, 1.3% lower than in October. In turn, refiners are working at their lowest level in almost a year.xiv Crude oil stocks in Europe were down about 1.1%, mostly due to a strike in France that shut down almost all of the country‘s refineries. Japan revisited levels of early 2010, with a low of 89.1mb. The drop in crude oil stock came from the 4.1% decline in oil imports.xv Despite current economic conditions worldwide, as well as problems directly related to this sector, the petroleum industry has not felt much of a negative impact. The industry is thriving, growing, and overcoming unforeseen obstacles in a quite successful manner. They have proven that they can change with the times and often are the leaders in change. Many of the leaders in this industry do not look to settle and just make money off of what they have; instead they look to improve their resources and the world. Natural Environment One of the biggest causes for concern in the oil industry is its environmental impact. The pollution from gas fumes and the damage from oil spills are major causes for concern. Worldwide, people and countries have come together to challenge oil companies to change their ways and the oil companies are doing just that. The petroleum industry is changing to improve the quality of life, to meet consumer‘s needs, and to comply with regulations worldwide. The first problem effecting the environment is the drilling and transportation processes. Chemicals used to drill are harmful to the environment and oil spills are amongst transportation risks. When companies drill for oil, they use a fluid to keep cuttings from the drill away. The fluid consists of mineral oil and diesel liquids, both of which are harmful to the environment.xvi As for the oil spills, they are deadly to anything that lives in the water. They affect the fishing industry, which in turn affects jobs, which in turn affects the economy. Many people are killed or seriously injured in oil spills and some species of wildlife become endangered. The environmental damage also lasts for years. Studies have shown unconventional habits of animals living in areas that were once subjected to an oil spill. Crabs in one area had to learn to dig their burrows around oily layers that still lingered a few inches from the top sand, while ducks and sea otters developed liver problems due to lingering chemicals from crude oil.xvii As if this isn‘t bad enough, the burning of oil also causes health problems, acid rain, and global warming. The gases released from burning oil destroy the atmosphere, creating pollution in the ozone layer. Exposure to this polluted ozone layer can cause mild to severe health problems, such as congestion, chest pains, coughing, bronchitis, emphysema, asthma and heart disease.xviii 4
The gases also create acid rain when they combine with water. Acid rain falls into the water and kills the plants and wildlife living in and drinking from it. Buildings are also eroded by the acid, creating costly repairs down the line. Global Warming, however, may be the biggest problem produced from burning oil. Burning oil releases carbon dioxide into the air, which traps heat and causes the planet to become hotter. This can impact the climate, the wildlife, the world‘s entire ecosystem and the way we live.xix Lastly, the remaining untouched forests are at risk as oil industry leaders push for new drilling in vulnerable and once-protected regions. Many threatened and endangered species are at risk of losing their homes to oil drilling. Recreational, cultural, and clean water sites are also in danger of being shut down so that oil companies can move in. Land needed for farming and ranching is being sacrificed for access roads and pipelines and power lines commanded by the oil industry. To try and improve these problems, the petroleum industry, environmentalist, and government agencies have come up with a few ideas. To date, there are six alternatives to using oil in its currently processed and consumed form. The first of these is known as biodiesel, a natural fuel made from vegetable oils and swine blubber.xx Biodiesel by itself or combined with regular diesel can be used to gas up vehicles with diesel engines. This significantly reduces the amount of pollutants put in the air, as well as greenhouse gases.xxi Electricity is another alternative source. It‘s the oil industries biggest competitor. Some companies, however, like BP, are trying to utilize solar energy to create electricity to send to homes and businesses.xxii Instead of being pushed out, they are changing to fit in. Plants also appear to make a good alternative to fuel. Ethanol consists of plant pieces and also contains the same mix that‘s in drinking alcohol. Reduced air pollution and usage by flexible fuel vehicles are just two of its benefits. Hydrogen is a promising fuel substitute. It is easily produced from renewable energy, such as plants, and is safe to use in fuel cell vehicles. Hydrogen burns clean, can be produced domestically, and would operate a vehicle with twice the efficiency of a gasoline powered automobile.xxiii Natural gas is also said to be an alternative fuel source, but it does still come from oil. The reason it is deemed alternative is because it produces less pollutants when compared to a vehicle that uses gasoline as opposed to natural gas. The final alternative is propane, otherwise known as liquid petroleum. It burns cleaner and longer than gasoline or diesel and is currently the most consumed alternative transportation fuel.xxiv If any or all of these alternative methods become successful, the oil industry as we know it will drastically change for the better. Natural fuels won‘t contaminate the water supply or destroy wildlife and they would require land for farming, not drilling. There is still much research to be done and mostly, it‘s a matter of time, but the oil industry has the money and the resources to make it happen. Political and Regulatory Environment The oil industry has a massive impact on people around the world. It offers necessary products that are widely traded and affect the environment. Because of this, the oil industry is heavily regulated and is a big political issue. There are over 500 treaties worldwide that pertain to the 5
petroleum industry. Many of them deal with regulating trade between countries, outlining details such as taxes, storage, transportation, and types of petroleum that can be brought into the country.xxv In recent decades, as global warming and deforestation have become cause for concern, there have been more environmental regulations going into affect. The EPA, which was set up specifically to protect the environment, has had over a dozen laws and federal regulations passed in order to protect the ecosystem from the hazards of the oil industry. The Comprehensive Environmental Response, Compensation, and Liability Act, went into effect in 1980 to ensure that hazardous materials were properly discarded.xxvi The Oil Pollution Act, passed in 1990, was created to help avoid and handle oil spills.xxvii The World Energy Council (WEC), which operates in almost 100 countries,xxviii has also worked to put many rules into place. As of 2009, the council was working on enhancing the current trade laws, reducing or lifting border taxes, and ensuring compliance with the terms in the WTO (World Trade Organization) and GATT (General Agreements on Tariffs and Trade). They are also encouraging governments to invest in more eco-friendly energy solutions.xxix Another organization, the GPA (Global Marine Oil Pollution) focuses on protecting those who suffer from oil damage. In 1969, the Civil Liability Convention (amended in 1992 and enforced in 1996), was created to help individuals that suffered from maritime losses due to oil-carrying vessels.xxx The IOPC Funds (International Oil Pollution Compensation Funds) of 1971 and 1992 are meant to offer compensation for damage done by oil tankers that cause oil spills. In 1990 the International Convention on Oil Pollution Preparedness, Response and Cooperation went underway and was finally passed in 1995.xxxi It compels participants to the OPRC to institute a means of handling contamination occurrences and requires ships, as well as offshore operators, to have emergency contamination plans. A regulation still in progress is the 2001 International Convention on Civil Liability for Bunker Oil Pollution Damage. This law, if passed, is to protect people who are victimized by oil spills and the damage they cause. It calls for ―…adequate, prompt, and effective compensation…‖xxxii Despite these efforts brought forth by the governments throughout the world, the fact remains that oil is a necessity and the consequences of producing it are here to stay. Until alternative energy sources are perfected and available to be consumed by everyone, the ecosystem will continue to pay the price for ―black gold.‖ Technology Technology is playing a huge part in today‘s oil industry. It‘s making it easier to drill for oil, saving time and money; will potentially eliminate off-shore rigs, and is finding new energy sources. A recent technological advancement is the 3-D visualization lab. It‘s like an x-ray of the Earth, enabling scientist to get a better view of where the oil is so that they can drill the wells with more precision. This allows oil companies to produce the oil faster because they aren‘t wasting time, or money, digging a ―misplaced‖ well. They also don‘t have to spend as much time planning,
since there is no fear of missing the targeted well. These new labs also allow companies to monitor their pipelines and drill sites all over the world from one location.xxxiii Another project in the works is the creation of ―robotics.‖ This will allow off-shore drilling to be done completely underwater and will bring an end to drilling platforms. Additionally, technology has provided the oil companies with a way to expand the current oil supply. Substances like oil shale and tar sands, once unable to be produced, are now an increasing alternative. Some scientists are working on producing natural gas from coal, which is still an abundant resource.xxxiv While some companies are expanding the supply with product variations, others are trying to recover more of what already exists. BP, for example, is using a type of technology called LoSal, which increases the amount of oil obtained by lowering the amount of salt in the water that floods the reservoirs. Bright Water is another process used by BP that involves blocking the water‘s path in a reservoir. Both of these processes allow hundreds of thousands of barrels of oil to be recovered.xxxv Demographics Petroleum, in one form or another, is a part of everyone‘s life, regardless of age, race, religion, or gender. It is consumed by everyone, deemed necessary by everyone, and it affects everyone. It is used to heat homes, fuel and maintain automobiles, ships, and aircrafts. In 2008, 52,940,559 cars were manufactured worldwide and the petroleum industry produced enough oil to fuel and maintain every single one of them.xxxvi This does not include commercial vehicles or other modes of transportation, which the oil businesses also managed to fuel. In addition to drilling, refining, and supplying enough oil to meet automobile demands, the petroleum industry also managed to provide 1/5 of its resources to heat homes worldwide.xxxvii Being such a large industry, the oil business needs a lot of employees. This business sector alone generates 105 different types of jobs. In the U.S., over 9million people have jobs because of the petroleum industry.xxxviii Norway employs close to 74,000 people and China has 3million workers in the oil business.xxxix The petroleum market stimulates cash flow by providing necessary products that can be sold and by employing the people who will buy them. On the downside, technological advancements are reducing the number of employees needed in this industry and environmental concerns may be pushing out some sub-markets altogether. This could be counteracted by the creation of new jobs in the alternative energy sector, which seems to be where the future is headed. Socio-Cultural For the most part, oil companies are keeping up with social standards. They are changing to meet people‘s concerns about their health and the environment. Politicians are also bending from consumer pressures and the consequence is that the oil industry is forced to conform. As you have read, the industry largely impacts society and its cultural changes in both a positive and negative manner.
Red Thread of Macro Environment The external environment presents opportunities and threats to the oil industry. Most of the threats can be viewed as opportunities, provided a company has the right resources and a good strategy. The products provided by the oil industry are necessities and people cannot escape them, despite hard economic times. The economy and people‘s wallets have a minimal impact on the petroleum market and therefore pose little threat. On a global scale, oil products are vital to the trading industry and this is unlikely to change. Countries trade because they need something they themselves cannot produce and because it stimulates cash flow worldwide so globally, there is minimal threat to this industry. Demographically, there is no threat because again, regardless of race, religion, age, etc., people still consume petroleum products. The threats to this industry lie in the political, environmental, and socio-cultural realms. Society wants a healthier, greener planet. Environmentalists want to protect wild life and plant trees. To do this, they pressure the politicians to fight the oil companies to change their destructive methods. In turn, the oil companies respond by conforming to society‘s standards via government regulations. This could potentially be a threat because non-compliance could result in financial strain from hefty fines; dismemberment of a company; or the endorsement of substitute products that could endanger the industry altogether. On the flip side, these threats can also be opportunities. The industry, if it wants to survive, has to change. It can change into an industry of alternative energy, which it has the money, time, and power to do. The consumption of petroleum is not going to disappear overnight which means that time is on the industry‘s side. As the oil companies utilize newer technology to slowly research and develop alternatives, people will slowly start to keep up with them.
Industry Profile No one really knows when oil was first discovered, who discovered it, or when they discovered it. It‘s believed that oil has been here for millions of years due to the natural process of pressurizing marine plant and animal remains by large debris of rocks and minerals.xl Even the name petroleum is derived from the Latin, an ancient language, and Greek words meaning ―oil that comes from rock.xli‖ Despite the fact that there were no cars or heating systems for thousands of years, studies show that oil was a sought after resource because it was used for medicinal purposes, lighting, and other useful functions.xlii As time went on and society progressed, people discovered how to pump oil, create wells, and extract its many forms. Today, the petroleum industry is massive. Throughout the entire world, there are over 40,000 oil fields but less than 1500 of them are accountable for 94% of petroleum used.xliii Siberia and the Middle East are home to the largest oil fields, giving them the advantage of also being the top producers.xliv Of the top ten oil fields, seven of them are in the Middle East, as well as six of the top ten reserve and production companies. (See Appendices A and B)xlv Appendix Axlvi/xlvii Top 10 Largest World Oil Companies by Reserves and Production
Rank Company Worldwide Liquid Worldwide Natural Gas Total Reserves in Oil Equivalent Company Producti on (106
Saudi Aramco National Iranian Oil Company Qatar Petroleum Iraq National Oil Company Petroleos de Venezuela Abu Dhabi National Oil Company Kuwait Petroleum Corporation Nigerian National Petroleum Corporation Libya NOC Sonatrach
Reserves (109 bbl) 260 138
Reserves (1012 ft3) 254 948
Barrels (106 bbl) 303 300 Saudi Aramco National Iranian Oil Company Kuwait Petroleum Corporation Iraq National Oil Company Petroleos de Venezuela Abu Dhabi National Oil Company Petróleos Mexicanos Nigerian National Petroleum Corporation Libya NOC Lukoil
bbl/d) 11.0 4.0
4 5 6
116 99 92
120 171 199
134 129 126
2.7 2.6 2.6
Appendix Bxlviii/xlix Top Ten Oil Fields Greater Than 1 Billion Barrels (160×106 m3)
Field Location Recoverable Oil, Past and Future (Billion Barrels) 75-83 66-72 66-72 35, 18billion recoverable 30-32 30 30 30 26 25-40 Production (Million Barrels/day) 5 1.7
Ghawar Field Burgan Field Mesopotamian Foredeep Basin Cantarell Field Bolivar Coastal Field Safaniya-Khafji Field Esfandiar Field Kashagan Field Azadegan field Sugar Loaf field
Saudi Arabia Kuwait Kuwait Mexico Venezuela Saudi Arabia/Neutral Zone Iran Kazakhstan Iran Brazil
Not yet developed.
These colossal oil fields require extraordinary care when being serviced, a job often contracted to specialty companies. There are over 5000 companies worldwide that either explore, drill, service, or refine petroleum products.l Most of these companies are not owned by oil production companies, though some have been merged or acquired in recent years.
There are almost 200 companies in the production sector of this industry worldwide, but only about 50 of them are large enough to be considered ―supermajors.‖li Supermajors, such as BP, Chevron, Exxon, and Shell, are considered to have the highest amount of sales. They play a large part in the downstream or commercial side of the business. Other companies, those on the upstream or laborious side of the industry, are being measured by the size of their reserves and how much they produce. In recent years, it has become more acceptable to measure the industry as a whole based on reserves rather than dollars. Economic Structure As grandiose as the petroleum industry is, it is not the world‘s only energy source. Electricity is a competitor, depending on how it is created. Electricity created from coal is supportive of the petroleum industry. On the other hand, electricity created from renewable sources such as solar power, water, or wind, do not support the oil industry at all and are true competitors (Appendix C). Appendix Clii Worldwide Energy Sources
As of 2007, renewable energy sources accounted for 18% of the electricity generated throughout the world. This number is anticipated to jump to 23% by 2035, a number that could put coal on the back burner.liii Renewable energy also poses a threat in various petroleum markets. The industrial sector, which accounts for the most energy consumption across the globe, has chosen to include 7% of renewable sources as part of its usage.liv In the transportation sector, about 30% of the world‘s energy is exhausted. Of this 30%, biofuels account for 4.6%.lv Another large market segment is residential and commercial buildings. They are responsible for depleting 20% of the world‘s energy supply. About 3% of the energy depleted is renewable.lvi
Although renewable energy sources are a small part of this industry, future forecasts predict a significant amount of growth. Renewable energy for electricity is projected to grow by 3% a year until 2035. Of that 3% growth, about 1.6% would come from hydroelectric power and another .75% from wind. Nuclear power is anticipated to increase in Asia by 7.7% per year until 2035 and by 4.3% per year in South and Central America. In Europe, nuclear power growth is expected at an annual rate of .8% through 2035. Biomass should see a 27% increase by 2035 and Geothermal a 36% increase (Appendix E)lviii. Appendix Elix
The renewable energy industry today is still fairly new and has a lot of catching up to do before it can be considered a serious competitor against the oil industry. The anticipated growth is significant and rapid for the renewable energy sources but it will take decades before its numbers are anywhere near the numbers that the petroleum sector sees. Though time is an issue, legislation is not. New regulations are constantly going into affect to promote the research and development of renewable energy technology. Just this month, on December 7, 2010, seven of the U.S. Government agencies, including the DOE and the Department of Commerce, introduced the Renewable Energy and Energy Efficiency Export Initiative. This new piece of legislation is an effort to persuade the use of alternative energy and the exporting of energy in a more efficient manner. Over 100 countries already have such policies, which will increase the demand for renewable energy in the future.lx Life Cycle Analysis Oil fields only last about 15 to 30 years, or 5 to 10 if it‘s a deep sea field.lxi This short life span ensures the livelihood of exploration and drilling companies, as they will constantly have to find and dig new wells. They are also ensured business because the demand is greater than the current supply and oil, being a non-renewable product, has a short life once it‘s put on the market for sale. While in the earth, oil appears to have no end to its life span. Oil has been in the earth for millions of years and is not evaporated or absorbed by the earth. It is only depleted when it is burned, which, in the last 150 years, the world has excessively done. The petroleum supply is quickly being exhausted and some forecasts estimate that oil will reach its peak in the next 2 to 3 years.lxii This doesn‘t mean it will be non-existent, just inadequate in meeting the demand. In 2008, partially in part of the economic crisis, oil growth slowed to 1.2%. A year later, production actually declined 2.2%. It‘s not until 2015 that oil growth is expected to regain its pre-recession rates. Overall, the industry is expected to decline 5% by 2035, whereas renewable energy sources are expected to increase rapidly by 2.6% a year.lxiii The petroleum sector is in the mid-to-late maturity phase of its life cycle and is considered a tight oligopoly. The renewable energy sector is in the late introductory/early growth phase but is probably considered more of a loose oligopoly because entry costs are low (in comparison to the petroleum industry), demand is increasing, and there are several smaller firms, all of which are equally competitive. The energy industry, excluding the alternative sector, has been in the maturity stage since about the mid-1990‘s and will probably stay in this phase for decades to come. Although the oil industry is not going to decline anytime soon, the energy sector is preparing for a change. The petroleum companies have the advantage of time and technology, both of which can assist in the research and development of alternative energy sources. The oil industry itself may eventually become extinct, but the companies in it don‘t have to if they change their product and overall market direction. Most of the smaller businesses within the industry are likely to fail, but the supermajors should have the money and resources to keep up with the eco-friendly alternatives.
Porter’s Five Forces Barriers to Entry are High: To enter the oil industry, a substantial amount of money is needed. Just to locate oil costs $7.50 per barrel and there are 30 billion barrels produced in a year!lxiv Locating oil also requires a very intelligent employee base, such as geologists, of which there are not many. Special technology, like the ‗sensitive gravity meter,‘ that is able to sniff out oil, is also a requirement. Companies that look for oil also have the cost of lease agreements, which can be tens of thousands of dollars to a few million. Titles, right-of-way access, and legal jurisdiction, if offshore drilling is being done, are all part of overhead costs.lxv Once the oil is found, equipment must be brought in by truck, helicopter, or barge. Sometimes, usually in offshore drilling, rigs have to be built on ships or barges. These rigs can take 2-4 years to build.lxvi Brand new, a rig can cost anywhere from $100million to $400million and used, they are priced at $1.5million to $10million.lxvii After the rigs are set up, drilling can commence. Drilling can cost about $400,000 on land and $4.5million offshore.lxviii Pumping the oil also requires costly equipment. The trucks alone cost over a million dollars each.lxix Shipping is another big expense. To ship 2million barrels cost just over a half a million dollars.lxx Entry to gas station ownership is also difficult. A gas station can be purchased for $80,000 or, if it‘s a franchise, over $3million.lxxi Another barrier is OPEC. The international organization controls most of the world‘s oil production and largely influences the price.lxxii While a company doesn‘t compete with OPEC, it does compete with its member countries, which are well protected and carry a lot of authority within the industry. A new company would have no business alliances and would completely stand alone; it would be one against a hundred. Global politics is a barrier that should be highly considered. Entering the oil industry often means to be prepared for war. Much blood has been shed over oil, the richest of resources, so the governments of the world are highly involved in this industry.lxxiii War affects production, money, and regulations worldwide. Regardless of the sector, the oil industry is difficult to break into. It requires huge amounts of money, advanced technology, special equipment, and workers with very specific skill sets. Companies in the industry have to be well prepared, as the dynamic can quickly change. The barriers to entry are undoubtedly high in this industry. Bargaining Power of Buyers is Low: The oil field owners hold all the power. Oil is a necessary product, a non-renewable resource, and is in high demand and low supply. The projected supply for 2011 is 87.15million barrels of oil per day but the projected demand is 87.78 million barrels a day.lxxiv This allows the oil field companies to charge whatever they want because they know people will pay. Every time the price of gas goes up, whether for a car or a home, consumers still pay. Buyers are also limited in their alternatives.lxxv It is expensive to buy a new car that runs off of biofuels or electricity. Converting gas heat to electricity is costly, as are other ecofriendly alternatives, which have yet to be perfected. There is little to no product or price variant on oil products, leaving the consumer virtually option less. 13
Bargaining Power of Suppliers is High: While there are numerous companies throughout the petroleum industry, there are only a few major competitors. The key companies have the money, resources, networks, technology, and everything else it takes to make it big in this business. They can control the smaller companies and they decide who gets the contracts. The Organization of Petroleum Exporting Countries (OPEC) largely controls the price of oil because its member countries are responsible for 40% of oil production and possess over 2/3‘s of the world‘s petroleum reserves.lxxvi Threat of Substitutes is Moderate: The alternative energy sources to oil consist of biofuels, solar, wind, and water power, hydro powered electricity, nuclear energy, and geothermal. Of these, electricity is the most commonly used and is oil‘s true competitor at this time. The other renewable energy sources have yet to be completely developed or mass marketed. They are generally more expensive to construct and operate than coal and gas plants. These alternative energy sources are available in remote regions, so delivery to outside areas is problematic and costly.lxxvii Still, these resources are able to meet current and long-term demands.lxxviii Future projections anticipate these substitutes to increase significantly over the next few decades. Biomass is estimated to quadruple in production over the next 25 years. Solar energy is likely to see a 50% increase and geothermal is anticipated to triple in the next two and a half decades.lxxix Rivalry Among Competitors is Low to Moderate: As stated earlier, competition outside of the petroleum industry is minimal. Electricity is not a cost effective option and renewable energy sources have yet to capture the masses. Within the oil industry itself, competition is moderately low. As the industry has matured, and may be heading in a new direction, some smaller companies have started to retire via mergers and acquisitions.lxxx (Appendix F) OPEC is another huge reason for low competition. The organization coerces its members to avoid expansion through price wars. It looks to keep competitors out by impressing production quotas on its members.lxxxi Competition in this industry is mostly over land contracts and technology, both key components to succeed in this business. Appendix Flxxxii
Who Has the Power? The power always lies with those that have the money. The oil industry is no different. The companies with the power are the ones who will outlast competitors because they have the ability to purchase their rivals. The companies with little to no debt and with strong industry connections are the ones who will survive. These large, strategically positioned, financially stable companies are the ones who own, manufacture, refine, and market petroleum. They control the industry. Since they provide a necessary commodity, these companies set the price of oil. The price that is set generates significant amounts of revenue, eliminating the need for competitive rates. These prices are highly monitored by OPEC to ensure they meet current supply and demand figures. New entrants are not a concern for fluctuations in price because of the industry‘s high barriers to entry. Industry Attractiveness Today, the petroleum industry is being strongly influenced by the environment. The environment is not creating more oil and it is being rapidly depleted. It is also being protected by stricter regulations worldwide, making it more difficult for oil companies to ignore the damage that they do. At present, the industry attractiveness to new entrants is low. The oil industry peaked decades ago and diminishing resources are forcing the industry to change direction or die out. The environment has become a focal point among politicians and lobbyists. The efforts to extract oil are often more detrimental to the environment than the actual use of oil. The cost of rectifying a damaging situation is in the millions and government fines are quite substantial. For these reasons, oil companies have started to implement eco-friendly changes. Regardless of these efforts, resources are still disappearing and cannot be recreated. Once the oil is gone, so is the industry. Another deterrent for entrants is the startup cost. To enter any sector of the petroleum industry, one must have very deep pockets. The initial expenses range from tens of thousands of dollars to many millions of dollars. Land needs to be purchased, equipment has to be bought, and specialized workers have to be sought out. The cost is so high that in some countries, the oil fields are state owned because no individual can afford to buy or harvest the land. In poor countries where oil is plentiful, the government also had to step in to take the supply back from foreign companies. lxxxiii/lxxxiv This is why OPEC started. It was a means to protect the oil in the Middle East.lxxxv When demand climaxed in 1979, OPEC realized that it would have to reduce production to sustain prices. OPEC cut production in its entirety by one-third between 1980 and 1985. This resulted in a 30% drop of OPEC's production.lxxxvi Although this was initially counterproductive, OPEC figured out how to balance production to meet demand and still be largely profitable. With OPEC controlling most of the world‘s oil and having the ability to determine production, and therefore price, incumbents are deterred. This new barrier to entry is simply too overwhelming to penetrate, making the industry even more unattractive. For BP, this industry is still very attractive, despite recent hardships and regulation changes. BP has already expanded its products to include eco-friendly commodities such as biofuels and solar power. They have also invested money in technology to help improve the way they operate and 15
the products they provide. The company is sincere about its dedication to the environment and its consumer relationship, as is clearly stated on their website; ―BP‘s systems of governance and management are designed to help us conduct our business responsibly. They reflect our support for global standards for safety, human rights and security.‖lxxxvii BP has also been around for over a century so they have a good handle on the market, as well as strong financials.lxxxviii Their performance this year was slightly lower than their competitors, but given the Gulf Oil Spill, that is expected. In 2008, however, BP‘s performance far surpassed that of its competitor, Chevron.lxxxix/xc The dedication BP has to the environment, which is shown by its forward thinking and strategic implementation, is solid proof that the company still finds the petroleum industry attractive and is here for the long haul. Strategic Group Analysis In Porter‘s Five Forces, the oil industry was deemed slightly competitive. The somewhat scattered companies and similar costs demonstrate the competitive nature of this industry. Appendix G shows the connection between owning an oil field and the production of oil. It is apparent that ownership is a factor in producing more oil. Saudi Aramco is a good example of this, as the company possesses over 303(106 bbl/d) in reserves, making them the top producer. On the flip side, Qatar owns roughly 160(106 bbl/d) in reserves but produces less than 1(106 bbl). A company can‘t produce what it doesn‘t own. The data also shows that competition is not fierce. Most of the companies own a similar amount of reserves and therefore, create a similar amount of product. The chart does show a couple of concentrated areas with more competitors, but overall, direct competition is low. The majority of these companies are also located in member countries of OPEC, which means that quotas are put on the amount they are allowed to produce. This promotes healthy, if any, competition. In Appendix H, the relationship among production, operating costs, and sales is portrayed. For the most part, these numbers are within range of one another. This means that these companies are paying similar amounts to find, extract, and refine the oil and are receiving a sales amount that is comparable. It also shows that their production numbers, which are not far apart. If each company has like resources and is paying roughly the same in operating expenses, than competition is minimal. The numbers aren‘t quite equal, but there close enough. These four companies, known as the ―supermajors,‖ are the strategic group to be analyzed.
11 10 9 P8 R O7 D U6 C5 T I4 O 3 N 2 1 0 RESERVES 50 75
OIL FIELD PRODUCTION BASED ON RESERVES
Abu Dhabi National Oil Company IRAN NATIONAL OIL COMPANY
Kuwait Petroleum Corporation
NIGERIAN NATIONAL PETROLEUM CORPORATION PETROLEOS DE VENEZUELA
NATIONAL IRANIAN OIL COMPANY
*Note: Production is in 10 bbl; reserves is in 10 bbl/d.
Comparison of Production, Operating Costs, and Generated
1600 1423.5 1400 1200 1000 839.5 800 600 400 239.272 200 24.318 0 BP 167.402 13.783 Chevron 27.092 ExxonMObil 301.5 176.006 18.914 Royal Dutch Shell Sales Operating Costs Oil Produced 985.5 1131.5
*Note: Sales and operating costs are in billions of dollars; oil produced is in millions of barrels per year.
Key Success Factors To be successful in today‘s petroleum industry, there are certain qualities that a company must encompass. Some of these attributes are (1) financial strength and stability, (2) accessibility to resources, and (3) technology. There are well over a thousand companies within the petroleum industry, but only a handful dominate the business. They have a considerable influence on the industry. Hence, the rest of this discussion will concentrate on these leading companies. They are: BP, Chevron, ExxonMobil, and Royal Dutch Shell (RDS). Financial Strength and Stability This industry requires a lot of money to be successful. In this business, operating expenses alone can run upwards of $20million.xciv This doesn‘t account for payroll, repairs, legal problems, or unexpected predicaments, such as oil spills. Since astronomical amounts of money are required in this business to be successful, this key factor is given a weight of 0.3.
The ―supermajors,‖ despite recent economic adversity, have all managed to remain profitable. While the numbers on income statements and balance sheets for all four companies decreased from 2008 to 2009, none of them have suffered significant losses and the economic crisis that has affected so many others, has barely put a dent in these companies. BP has withstood the hardest of financial difficulties, suffering from both the economic crisis and the Gulf of Mexico oil spill. BP‘s profit declined by nearly $5million and their debt has increased by just over a million dollars since 2008.xcv By summer of 2010, while Chevron and Exxon were enjoying huge profits from increased prices on barrels of oil, BP was suffering a $15billion loss because of the Gulf oil spill.xcvi Despite these hardships, BP still managed to report profits of $1.785million in November of this year, just 4 short months after taking a $15billion hit.xcvii Accessibility to Resources Without access to oil, these companies would not exist in this industry. Access to the oil is vital. For this reason, a weight of .5 is bestowed upon this aspect of success. Each one of these companies maintains a healthy relationship with land owners and oil field managers. The companies also own or have an interest in refineries throughout the world. Almost all of the relationships are joint ventures. The Tengizchevroil (TCO) joint venture has been led by Chevron and is focused on the development of the Tengiz and Korolev fields. Chevron is also a partner in the Australian company, North West Shelf Venture, where they operate the largest oil field in the country. Additionally, Chevron is present within Thailand, Africa, Latin America, Canada, and quite impressively, Saudi Arabia.xcviii ExxonMobil also has a strong presence across the globe, especially in Kuwait. This is an interesting relationship because it is one of strategy. At present, Exxon does not access any of Kuwait‘s resources. Instead, it offers training to the citizens (perhaps future employees) so that they can learn how to operate the oil equipment.xcix Shell has joint ventures with fellow oil industrialists in Europe, Asia/MiddleEast/Russia, Australia/Oceania, Africa, and of course, the Americas. They have quite a lot of access to resources, as they extract oil in a variety of ways and also develop alternative energy sources.c BP has several joint ventures with different companies in Africa. It also has been recognized as a leader in Liquefied Natural Gas (LNG) within China. As a reward, China helped BP to extend its network into areas of the Middle East. With resources in Australia, BP is developing ecofriendly solar power. Additionally, BP has joint ventures and oil resources within Europe and the Americas.ci Technology Technology is fairly important to being successful in this industry and can be granted a weight of 0.2. It offers many benefits to the companies in the oil industry. Although costly, it can be costeffective in the long run. There is equipment that can sniff out oil so that companies don‘t have to waste their time or money drilling for nothing. New drilling fluid has been created to avoid damage to the environment and the water supply, a costly problem to remedy.cii
BP has been investing in deep-water technology for over 15 years. As a result, the company has re-engineered their entire production system. They now have floating structures, better monitoring devices, and enhanced underwater or at-water communications.ciii Chevron has used technology to develop something they call, Techron. It‘s a gasoline additive that reduces emissions, helps an engine to run cleaner and to enhance performance.civ ExxonMobile has used technology to develop its own locating tools. The company has created the R3M, a device that makes it easier to locate oil and gas in remote areas, such as in deep water. So far, this new technology is working quite well, as it has been used in Canada, the Gulf, Africa, and Latin America.cv Shell has some very interesting technology. They have found a way to convert any material that contains carbon, into a liquid. This device is called Anything-to-Liquid (XTL).cvi Appendix I
Success Factor Weight Financial Strength and Stability Access to Resources Technology Total BP Chevron ExxonMobil Shell
.3 .5 .2 1
4 5 4 4.5
4 5 4 4.5
5 5 4 4.8
5 5 5 5
Although the total scores are quite close, Shell is the clear leader of the strategic group. Its performance is a perfect 5 out of 5. Shell achieved this score because it has better financial records than BP or Chevron, showing its success in this factor. Like its competitors, Shell has a very full list of well-rounded resources, showing how prominent the company is in the industry. Additionally, Shell led its competitors in the technology factor. All of the companies had similar technological developments, as well as some unique ones, but Shell seemed to stand out the most. Its corporate website offers quite an array of the company‘s technological achievements, which again, are quite impressive. Profit Pool Analysis Appendix J
NAICS 211111 211112 424710
Value Chain Activity Extraction Recovery Transportation and Storage Refining Distribution and Marketing
2009 Revenue $1.863 trillion $434.86 billion $281.38 billion $255.8 billion $153.48 billion $2.558 trillion
% of Revenue 72.83% 0.17% 11% 10% 6% 100%
Profits $76.42 billion $36.09 billion $23.35 billion $65.82 billion $10.62 billion $212.3billion
Profit Margin 36% 17% 11% 31% 5%
Profit Pool Analysis 80 70 60 50 40 30 20 10 0
Extraction Transportation and Storage
Distribution and Marketing
Share of Industry Revenue
Locating the oil is clearly the first step in the value chain. This activity generates no income but does have high expenses. It involves searching for oil using technology that helps estimate the volume, contour, and texture of the oil or natural gas that is below the surface. The location procedure also includes drilling, which commences only after the land, climate, and other environmental factors have been studied. There are roughly 400 companies in this industry sector, including the four ―supermajors.‖cvii Extraction is the next activity in the value chain. It is part of the upstream activities, as are all of the other value chain activities, with the exception of distribution and marketing. It generates 72.8% of the income and has a sizeable profit margin at 36%.cviii In addition to being the most profitable activity, it is also the most guarded. The amount of money and required technology are both barriers, but they are not the most challenging to overcome. Time, while also an obstacle, is also not the most difficult. The greatest barrier to entry in this activity is accessibility. The world‘s oil fields are largely owned by OPEC members, which means they are owned by a state and are private.cix This makes access for public companies extremely limited. In order for them to access the oil, public companies, like BP and Shell, have to have good standing relationships with OPEC members, something that is very complicated to achieve. At $434.86billion and 17% profit margin, recovery is number three on the value chain.cx The recovery process is quite important, as it significantly increases the amount of oil being produced. It also increases the amount of supply on hand to meet market demand. The process requires the use of very high-end technology, making it expensive. As a result, recovery is usually done when an oil well has peaked.
A global concern, refining brings in $255.8billion and accounts for a profit margin of 31%.cxi It is the fourth part of the value chain. The refining process is the most regulated within the oil industry. It has a huge affect on the health of the environment. Refining is problematic to the ground water supply, the ozone layer, and affects global warming. The air pollutants released in the refining process are also a cause for concern, as they contain cancer-causing chemicals.cxii Making up 11% of revenue and profit margin, transportation and storage are the fifth activities within the value chain.cxiii This is part of the outbound logistics and allows public companies like Exxon and Shell to gain more control over their business relationships. The larger public companies usually own gas stations, to which they distribute the oil. Any overstock is put on tankers and stored.cxiv The final value chain activity is distribution and marketing. The revenue for this sector is $153.48, with a 5% profit margin.cxv This activity has the lowest profit margin and generates the least amount of income. This is why the large oil companies have set up franchises as opposed to owning the gas stations themselves. They can generate more income from distribution to gas stations than they can from owning them. The franchisee buys the gas, pays for the overhead of running the gas station, and the big oil companies get all the profit. Studying the profit pools for the oil industry has shown the importance of each sector, with extraction being the most opportunistic but also the most protected. To break the barriers of entry for this sector, money, technology, and access, the previously discussed KSF‘s, are demanded. Porter Competitor Analysis BP cxvi
Goals To become more environmentally friendly and raise consumer confidence. They want to create a diverse energy mix that is secure, stable, and lower in carbon. Continue to provide energy but in a new, healthier, ecofriendly way.
Develop and replenish projects that offer sizeable profits. Evaluate assets that are not seen as part of long term value and sell them.
Taking action to reduce global greenhouse gas (GHG) emissions. Use of local resources to secure supplies.
Working to obtain more energy out of each unit used in operations. Introducing new products/services to help customers become more energy efficient. Continued technical ingenuity, project management and operational excellence.
Increased emphasis on technological development.
Continue to monitor the financial and credit markets, the level of worldwide economic activity and affects to the company from price movements in crude oil and natural gas. Ability to bring new oil and natural gas resources to the
They are committed to succeed. They also have the capacity to innovate.
Map undersea oil fields, drill horizontally
Channel skills more effectively, efficiently, and
Financial resources to fund expansion efforts and R&D.
Improving energy efficiency in BP‘s business procedures. Endorsing natural gas as part of tomorrow‘s energy. Investing in BP‘s low-carbon businesses.
Grow profitability in core upstream areas. Differentiate performance through technology. Invest in profitable renewable energy and find energy efficient solutions.
No because the world has increasing energy demands and growing technical challenges which BP‘s considers its challenge. Demand will increase thus unconventional fossil fuels such as oil sands; coal bed methane and natural gas produced from shale formations as well as renewable energy such as wind, biofuels and solar power will be areas that BP will look to expand into. Lower profits due to Deep Water Horizon payouts. Need to improve their image since the Gulf Oil Spill.
No because they want to increase profits and expand their production areas.
beneath arctic oceans, and efficiently ship less harmful natural gas. Expand economic energy sources by creating new technologies that will change the type of energy supplied and deliver it efficiently. Improve efficiency. Mitigate emissions by improving their efficiency, expand emissions-reducing technology, and develop advanced technologies for future use. No because they recognize that there are energy challenges in the future.
economically. Focus on delivering new projects and creating new technologies. Need to manage expenses adequately to avoid cost efficiency from deteriorating and the unit costs from increasing. Due to the competition with state run oil/gas companies they need to make business decisions in order to maintain their competitive position.
No because they need to contain their costs and improve competitiveness.
Expansion by locating new oil fields. Work towards being the primary producer in the Caspian Region. Invest in diverse energy resources to meet higher demand.
Making enormous investments to provide solutions to help meet future energy demands. Pursuing practical, broad-based solutions.
Improving energy efficiency in their business procedures. Assisting consumers in managing their energy needs. Continuing technological R&D that will potentially increase efficiency and lower emissions in oil and gas manufacturing. Future hydrocarbon production depends on the delivery of large and complex projects. Overextending corporate and productive resources
They are not as financially stable as the other competitors. Not enough access to oil reserves to meet production goal.
Lack of technology to expand Arctic operations. Unsure of future direction regarding alternative energy and increased demand.
If competitors attempt to move in on BP‘s operation by playing on their weaknesses that resulted from the Gulf Oil Spill.
If the company lost its contracts in the Caspian region.
If their name/image was slandered because they have worked for decades to rebuild consumer confidence and business relationships lost as a result of Exxon Valdez.
through numerous projects. If they lost out on a technological advancement/patent due to corporate espionage.
Red Thread of Competitor Analysis The oil industry is not highly competitive, but there are blockades in certain operational sectors. These blockades are overcome through strategic planning, strong finances, good management, and negotiations. Companies in this industry compete for contracts that will allow them to access the oil. Obtaining a contract has more to do with a company‘s finances than it does with competition. Still, contracts are competed over because the more land contracts a company has, the more oil they can produce, and the more money they will make. Developing more advanced technology is also a competitive issue because better technology means more oil from reserves, the ability to discover new oil fields, and eco-friendly alternatives. It would be good strategic planning for a company to seize these opportunities, as it could increase market share and help to secure a future in this industry, whether it‘s in oil or eco-friendly alternatives.
Leadership and Culture
Just over a century ago, Mr. William D‘arcy of England had the good fortune to find oil in Persia and create the petroleum company known today as BP. Through many early struggles, BP survived and grew strong enough to acquire other companies within the industry. Today, the company has over 80,000 employees, 18.3billion barrels of proven oil reserves, 22,400 service stations, is active in 30 countries, has ownership in 16 refineries, and produces 2.3million barrels of oil per day!cxx In addition to BP‘s success, the company also has 5 successful subsidiaries. Arco, acquired in 2002, is located on the west coast of the U.S. The gas station is renowned for low prices and cleaner fuel.cxxi Castrol, the most recently acquired member of the BP family, is a recognized name everywhere. They are present in 150 countries and are best known for their motor oil and vehicle lubricants.cxxii Aral is a fuel company in Germany that has been around since the 1920‘s. They also expanded into the fast food chain and are recognized as a ―Superbrand.‖cxxiii In 1978, BP opened ampm, a convenience store comparable to 7-11 or WaWa, on the U.S.‘ west coast. Arco is home to over 900 of the ―High Voltage Java‖ offering convenience stores.cxxiv Wild Bean Café is BP‘s gas station convenience store. The café offers fresh food, affordable prices, and can be found on four continents.cxxv
Behind this over-achieving, highly profitable company, stands an exceptional team of nine managing executives. Leading this team is Robert Dudley, CEO who started with Amoco in 1979 and stayed on when they merged with BP in 1998. Working closely with Mr. Dudley is CFO, Dr. Byron Grote who joined BP 22 years ago (Appendix L). The two CO‘s are also joined by a board composed of 14 members, two of which are also on the executive management team. The board represents shareholders and their interest in the company. It is also responsible for overseeing the company‘s operations, enforcing accountability among executives, strategic consideration, and the utilization of skills. A list of corporate governance principles was created to ensure the company behaves accordingly.cxxvi In addition to this list, BP has its own corporate values and code of conduct. The company‘s values are to be progressive, accountable, inventive and performance driven. The code of conduct is guided by these values. BP has demonstrated how important their values are and have lived by them. In the Gulf Oil Spill, BP took complete responsibility and proved how driven they were by responding quickly and dedicating all of their time and resources to rectifying this unfortunate occurrence. BP has shown progress and innovation in their technological advancements and in their research towards alternative energy sources so that they can expand their products beyond petroleum.cxxvii Appendix Lcxxviii
Robert Dudley CEO
Andy Hopwood Executive VP E&P Strategy and Integration
Bernard Looney Executive VP Development
Bob Fryar Executive VP E&P Production
Mark Bly Executive VP Safety and Operational Risk Byron Grote CFO
Iain Conn Chief Executive Refining and Marketing
Mike Daly Executive VP Exploration
Lamar McKay Chairman and President BP America, Inc
Steve Westwall Executive VP Strategy and Integration
Rupert Bondy Group General Counsel
Sally Bott Group HR Director
Organizational Structure BP performs 9 different functions so that they have a presence in every sector of the oil industry. The upstream activities, which include research, discovery, development, technology, and production, are all performed by the BP Exploration and Production business. BP Refining and Marketing oversees the company‘s downstream activities. It consists of 16 companies, some of which are partly owned. BP Refining and Marketing is organized into two primary business categories: fuel value chains (FVCs) and international businesses (IBs). The FVCs are responsible for refining, logistics, marketing and supply and trading within a specific region. This allows BP to enhance operational processes from crude oil purchases to end-sales via material resources. The IB division manufactures supplies and markets the end-products, such as lubricants, petrochemicals, aviation fuels and liquefied petroleum gas.cxxix BP‘s other subsectors include the BP Alternative Energy business and Shipping (Appendix M). Based on the way BP has set up its business, it can be considered to have an M-form organizational structure. It is multi-divisional, which enables each part of the business to conform to changes in the external environment and still focus on the company‘s overall strategy. By breaking the company into smaller subdivisions, it is easier to prioritize tasks and 25
focus on details, while still maintaining strong communications and reliance throughout the company. BP‘s executive management group is responsible for daily operations. The team consists of Presidents and Executive Vice-Presidents for the overall company as well as its subdivisions. This allows company goals and strategies to be enforced so that future performance can meet expectations. The M-Form works well for BP because it allows the company to operate worldwide, gaining access to a greater market share. It enables the subdivisions to advance at their own pace, benefitting BP in its entirety. The company‘s vertically integrated operations allow for lower expenses, greater control over business functions, and enhanced future projections. Appendix Mcxxx
Carl-Henric Svanberg Chairman of the Board, BP
BP Exploration and Production
BP Refining and Marketing
BP Alternative Energy
Fuel Value Chains
Value Chain Analysis BP‘s value chain is strong because of its support activities. The primary activities include Exploration, Extraction, Refinement, Distribution, and Sales & Marketing. These activities working together create strength for BP. The support activities of organizational infrastructure, human resources, technology development, and procurement help the company overcome its challenges and reinforce the objectives of the primary activities.
Exploration Extraction Refinement Distribution Sales & Marketing Service
Primary Activities Inbound Logistics This part of the value chain is the most important for BP‘s success. It consists of gaining access to the oil, a strategy implemented by forming alliances with OPEC members, since they own 2/3 of the world‘s oil fields. BP typically forms these relationships as joint ventures, in which BP offers training, technical knowledge, and managerial support.cxxxi Once BP develops these strategic relationships, it can begin to explore, extract, and refine the oil. Its company reports for 2009 show that they have 18.3billion barrels of proven oil reservescxxxii compared to Chevron‘s 33.02billion.cxxxiii ExxonMobil follows with 23.3billioncxxxiv in proven reserves and Shell has the least amount of reserves at 14.1 billion barrels.cxxxv While BP ranks third among its competitors, it is working hard to develop new technological advancements that will give the company a better position in its peer group. For this reason, inbound logistics is neutral for BP. They are not at the top of their game but they have a unique strategy and are committed to their future direction. Operations Extraction and refinement are BP‘s primary activities at this point of the value chain. Their extraction numbers per day are the lowest of the 4 ―supermajors‖ at 944,000barrels for 2009. ExxonMobil ranks number one in barrels extracted per day at 3.9million, while Chevron is second at 2.7million, and Shell generates 1.1million barrels.cxxxvi Secondary activities in the extraction process are technological developments and efficiency of human resource management. Although BP suffered this year in losing a lot of oil due to the Gulf Oil Spill, their technological developments should be able to bring them back to their number two rank, or even number one. Their knowledge of thickening the oil with microorganisms not only helps to extract more oil but it also provides an environmentally friendly alternative to drilling fluids by lubricating the rock surfaces. BP‘s technological capabilities are shared with the human resources team, who searches for people qualified to work in such specialized areas. One way the team does this is by working with and training the people of local communities in which BP has a presence. This guarantees future employees with the specific knowledge base that BP‘s operations require. An increasing number of these trainees are even filling senior positions in BP‘s corporate environment around the world, allowing BP to give back to the community as opposed to just taking from it. This strategy of using the local area promotes security in access to resources as well as company loyalty.cxxxvii
In 2009, BP reportedly refined 2.3million barrels of oil a day, a half million more than Chevron but still less than Shell‘s 3million barrels and ExxonMobil‘s astounding 5.3million barrels.cxxxviii While BP‘s numbers may again appear discouraging, the amount of oil they refine is quite impressive considering they only have ownership in/of 16 refineries. ExxonMobil has 46 refineries, almost three times the amount of BP, yet the amount of barrels they produce per day are only twice as much as BP. Shell has 35 refineries and BP is a distant second to them. Chevron only has 14 refineries but at 1.8.million barrels a day, they are direct competition for BP. cxxxix Overall, BP‘s operations could use some improvement but the company is making the most of its resources. ExxonMobil is a strong competitor in this segment of the value chain but BP‘s future looks promising, especially with the support provided by the secondary activities, technological development and human resource management. Ambition and commitment keep BP neutral, despite their oil losses in the Gulf and a smaller presence in the refinery sector. Outbound Logistics The primary activity here is distribution. BP distributes its products either through pipelines, which are far from demanding areas, or by tankers that can carry 300,000 tonnes or more of crude oil.cxl The oil is distributed twice. The first time it is transported, it goes to the refinery where it is made into products such as fuel, motor oil, and gas. When this is completed, the petroleum, in its new form, is shipped for the second time to a wholesale dealer, franchisee, or company owned gas station. In 2009, BP distributed 839.5million barrels of oil, while ExxonMobil distributed 1.9billion barrels. That same year, Shell distributed 1.1billion barrels and Chevron 657million barrels.cxli Although ExxonMobil is distributing more, BP is using its technological development, a secondary activity of the value chain, to improve its shipping methods. BP‘s tankers are painted with a special orange and grey coating which controls temperature, allowing the cargo to produce less methane, a greenhouse gas that causes much environmental concern.cxlii The company is very focused on its environmental footprint and is constantly looking to improve and be a leader in this part of the industry. These objectives are enforced by the strength of the organizational infrastructure that is present in this area of BP‘s value chain. BP is neutral in this area of the value chain because it is strategically operational but without a competitive edge. Sales & Marketing ―For the motoring enthusiast, the environmentally conscious driver, the airline executive, the shipping administrator, the mechanic, the hungry, the bored and those who are simply out of fuel – we‘ve got something for you.cxliii BP markets its products to every market niche possible, changing to meet new eco-friendly demands. For vehicles of all types, it offers cleaner gasoline, biofuels, Liquefied Petroleum Gas (LPG), and Compressed Natural Gas (CNG). Egypt was so impressed by BP‘s auto products that it gave them a 40% stake in their first natural gas vehicles company.cxliv Unfortunately, BP‘s competitors are offering the same, or a similar, line of products, leaving the company in another neutral position of the value chain. In 2009, BP‘s sales amounted to $239billion. Chevron generated $167.4billion, Shell $278.2billion, and of course ExxonMobil led with $301.5billion. These numbers are close in range, suggesting fairly equal competition and a neutral playing field. 28
Service The oil industry is all about production, not service. The only relationship to service would be at a gas station. Companies like BP supply the gas to the station which in turn services it to the customer but beyond that, service is not a factor in this industry. Support Activities Organizational Infrastructure As stated earlier, BP‘s infrastructure consists of four subdivisions: Upstream, Downstream, Alternative Energy, and Shipping. These sections of the company have the ability to work independently, allowing them to grow at their own pace, or they can rely on each other for support, enhancing performance and improving results. BP‘s vertically integrated operations allow for lower expenses, greater control over business functions, and enhanced future projections. Human Resource Management BP‘s HR Management team is responsible for finding, hiring, training, and retaining employees with highly specialized skill sets and top educations. To retain only the best, the HR team offers a competitive rewards package and a salary that is performance-based. BP leads the industry in bonus rates for their top performers. Additionally, BP‘s employees can receive extra time off depending on the scheduling demands of their specific job function. These benefits are good motivational tools, promoting loyalty and increasing performance. The company‘s strong Human Resources Management team allows BP to reach its goal of meeting future energy demands, giving the entire company a more competitive edge. Technology Development BP‘s technology focuses heavily on the environment. Examples of the company‘s technological developments have been mentioned throughout this paper, which support the company‘s objective to lead the energy market in the future, a strategy that differs from its competitors, who are focused on finding more oil now. While BP has also developed technologies to locate and find more oil now, it‘s not the company‘s primary focus; rather it is a means of keeping its current competitive position. BP, through its technological developments, has found a way to lower its costs by 40%, provide a 65% reduction in greenhouse gas emissions, a 75% reduction in liquid waste volume and a 40% reduction in solid waste in its production facilities, significantly reducing the company‘s carbon footprint.cxlv Procurement The economic crisis and the Gulf oil spill in the middle of 2010 have both impacted BP financially. In previous years, it ranked first or second in most activities but as is apparent within this analysis, its numbers have suffered. Despite it‘s almost $17billion loss in 2010‘s second quarter, BP still managed to profit four months later in the year‘s third quarter at $1.8billion.cxlvi This proves the financial strength and stability of the company. It‘s clean up efforts in the Gulf were also sufficient enough to restore consumer and investor confidence. The company‘s shares started off at a high of $62.38 per share and sharply declined from May to July to a mere $26.75 a share because of the Gulf oil spill. By August, the stock began to slowly climb back up and as of mid-December, is at a healthier rate of $43.56 per share.cxlvii 29
Resources/Capabilities/Core Competency Resources BP has tangible and intangible resources. Its finances, buildings, and equipment are all tangible resources, while its intellectual capital, concentrated on human knowledge and crossorganizational relationships, is an intangible one. In the year 2009, after spending $23.2billion on production and manufacturing expenses, another $1.1billion on exploration, and $14billion for distribution and administrative activities, BP still managed to generate a $16.5billion profit.cxlviii The company‘s equipment accounts for a large amount of their resources. They have $27.1billion worth of equipment to develop technology, locate, drill, extract, refine, and produce the oil.cxlix BP‘s additional tangible resources include 16 refineries, owned in part or in full, 22,400 service stations, 40,000km of pipelines, and 192 ships, 115 of which are on-timecharters.cl It also has corporate offices, drilling platforms, and production plants throughout 100 countries, giving the company a strong sense of presence in the global market. BP‘s intangible resources have no monetary value but are a vital part to the organization. The employees in the oil industry require special skill sets to operate the large and complicated equipment, to develop new technologies, and to know how and where to find oil. The type of employees a company like BP needs are hard to find, as they are a rare breed and are also recruited by competing oil companies. BP is aware of this and that is why it trains people from the local communities it works in, providing on the job knowledge and firsthand experience. They are creating opportunities in a specialty and competitively desired job market. Its HR team does a good job of recruiting the best employees for a job so the new trainees are getting a valuable education that ensures BP‘s future success as they instill company loyalty. While each employee has a different job and a different specialty, they all work together to develop new processes and products that will help create new ideas and strategies so that the company can have a competitive advantage. Capabilities BP‘s technological developments are an important capability throughout the value chain. It allows the company to increase profits, enhance output, implement change to meet future demands, and reduce production time. BP‘s inbound logistics use the technology to increase their oil supply, create different products to meet changing needs, and to locate new oil fields. Operations and outbound logistics use the technology to find eco-friendly ways of extracting/drilling and distributing the oil. BP‘s technology, along with its financial resources, also allows the company to expand. The company has the capability to expand their product base as well as their production locations. In the last 2 years alone, BP has expanded its oil fields and deep-water facilities because of technological achievements. In 2009, BP discovered a new oil field, the Tiber, which has been the deepest oil and gas well ever drilled. In 2008, BP opened the world‘s largest semisubmersible facility, Thunder Horse, helping the company to achieve over 100% of reserve replacement.cli Core Competence As defined by C.K. Prahalad and Gary Hamel in, ―The Core Competence of the Corporation‖ core competence is not based on price or performance and it should do three things. Core 30
competence should provide a company with access to a market, create a product that is beneficial to the end-user, and should be hard to imitate. A company needs to implement its ideas, not just conjure them up. Most importantly, a company must also be able to work across the different organizational levels and be able to integrate its production abilities with its technology.clii Based on this description, BP‘s core competence is in its technology. Technology is a requirement for the oil industry. It is needed to find oil and create the equipment to extract and manufacture it. In recent years, technology is also needed to find more environmentally friendly production and distribution methods. BP no longer sees technology as a requirement but as a means to achieving its goals. The company has invested a lot of time, money, and resources in this part of its business and it is clear upon combing through its website that this is the division of the company that it is most dedicated to. It is also apparent that BP‘s focus on technology is centered around the company‘s strategy to lead the market in eco-friendly alternatives. Through its technology, BP is creating more efficient products, meeting energy demand, and investing in lower carbon alternatives. The company even has its own University Science Programmes in which scientists and engineers come together to understand, develop, and research energy products.cliii It is evident throughout this analysis how important technology is to BP‘s organization. Technology is present within the value chain activities, as a competitive tool, across organizational boundaries, in intellectual capital, and as a main part of the company‘s strategic plans. The company‘s $587million investment on technological research and development in just one year, 3% of 2009‘s profits, shows just how important this function is to the existence and growth of the company.cliv Financial Analysisclv/clvi The companies within the oil industry closely review their growth based on sales, their operating margin, ROIC, and EPS. It is important for an oil company to know its growth rate because it determines if the company has money to expand and is an indicator of the company‘s financial health. The operating margin is significant because it measures profitability. ROIC, or return on invested capital, is a financial tool that could be used to indicate poor management and EPS is a measure used by investors. Chevron, quite surprisingly, has the highest average sales growth rate over the 5 year period, 2005-2009. Its 130.06% sales growth outdoes ExxonMobil‘s 68.43%, Shell‘s 65.81%, and Bp‘s 23.22%. Chevron‘s growth is attributed to phenomenal numbers over 200% in 2005, but it‘s rapidly declined since then. Had these numbers been based on an annual basis as opposed to a five year average, the numbers would have shown a truer comparison. The average operating margins over 2005-2009 were much closer in range. ExxonMobil has an operating margin of 14.62 and Chevron is a close second at 12.2%. Shell had an operating margin of 10.39 and BP came in last again at 9.81. Average ROIC from 2005-2009 was 28.9 for ExxonMobil and 20.87 for Chevron. Shell and BP were a fraction of a percent apart at 18.26 and 18.08. The average EPS growth for 2010 was
8.38 for Chevron, 5.65 for ExxonMobil, and -1.6 for BP. Shell‘s information for this category was not reported. These numbers do not paint BP in the greatest light, as it has been the bottom performer among its competitors in every category. Still, the numbers do show growth, profitability, and efficient management. The negative EPS is reflective of the sharp drop in stock prices due to the Gulf oil spill early in the year. Appendix N
Direct Competitor Comparison BP Market Cap: Employees: Qtrly Rev Growth (yoy): Revenue (ttm): Gross Margin (ttm): EBITDA (ttm): Operating Margin (ttm): Net Income (ttm): EPS (ttm): P/E (ttm): PEG (5 yr expected): P/S (ttm): 136.02B 80,300 6.60% 288.80B 4.43% -1.08B -4.59% -4.99B -1.6 N/A 1.57 0.47 CVX 177.84B 64,000 7.50% 185.82B 32.51% 36.54B 12.78% 16.80B 8.38 10.55 0.5 0.94 XOM 364.88B 102,700 16.10% 329.81B 32.31% 51.58B 11.49% 27.26B 5.65 12.81 1.02 1.1 RDS N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Industry 26.00B 29.80K 8.40% 17.67B 32.12% 2.73B 9.17% N/A 2.17 16.31 1.68 1.42
Appendix N, which is based on real-time data, represents the current standings of the competitors as compared to the industry average for December 2010. BP‘s overall performance has significantly suffered this year because of the monetary repercussions of the Gulf oil spill. The company generated $288.8billion in revenue but only shows a profit margin of 4.43%, showing that its expenses were quite high. Expected price-to-earnings-to-growth (PEG) is higher than its competitors, which is expected as they should regain more momentum once the impact of the Gulf oil spill has passed. BP is still a ―supermajor‖ and though it ranks lowest among the top four competitors, it still number 4 in the entire oil industry. The company is profitable; it has the resources to increase profits, and is a financially strong company despite losses due to the economy, the Gulf oil spill, and mismanagement of that specific event. BP is not highly liquid, as most of its money is tied up in equipment, plants, and property, as well as the oil. It is in a position that it can and should implement strategic improvements so that it can continue to be successful and avoid future setbacks. Red Thread of Internal Analysis BP has leveraged strengths throughout the value chain so that it can be a top competitor in the petroleum industry. The overall company has implemented a low cost strategy, supported by technological operations. BP‘s core competence is in its technological developments, which provide the company with a competitive edge. This competitive advantage is cultivated by BP‘s 32
finances and their HR management team, which hires good employees and trains them to be great employees. On the flip side, BP does have weaknesses that it needs to be aware of and improve on. The company needs to implement better management to oversee operations so that accidents like the Gulf oil spill do not recur. It should also focus on regaining investor confidence and rebuilding its image so it can obtain venture capital in the future.
Strengths S1 Strong brand S2 Technological developments within the company can save time and money and meet eco-friendly demands S3 Land agreements that allow the company to locate, drill and extract the oil, helping the company to expand and grow brand S4 Financial stability S5 Largest producer of oil and gas in the U.S. S6 Merger with Amoco in 1998 gave the company a 50% stake in the leading solar power company and they expanded their market into fabrics by taking over Amoco‘s Fabric and Fibers business, founded on the discovery of a new chemical, PTA S7 Use local suppliers to minimize costs and to form strong relationships with vendors S8 Improving operational efficiency can offset decline in profits Opportunities O1 New products are environmentally friendly and can capitalize on new regulations O2 Technological developments within the industry can help find new resources and tap into excess supply that was once left as waste because it was inaccessible O3 Creating more environmentally friendly products can capture more market share O4 Investing in sustainability can capture more market share O5 Expanding into Egypt provides access to growing market demand for gas supply O6 Response to Gulf oil spill strengthens brand image because it demonstrates concern for economic well-being and the willingness to improve its practices to avoid future recurrences. Weakness W1 Job functions are contracted to other companies in which BP has no control over management or performance W2 Margins have been steadily declining W3 Potential weakness in operational oversight structure (a possible cause of the Gulf Oil Spill) W4 Poor brand image as a result of the Gulf oil spill W5 No ownership of oil fields W6 Diminished competitive advantage due to lost profits and supply as a result of the Gulf oil spill
Threats T1 Margins crimped by bargaining power of suppliers and OPEC‘s control of the industry T2 Operations are focused in the Middle East and Africa, where there is political instability T3 Having to conform to new regulations that protect the environment within a given time span T4 Development of better technology that could create an advantage among competitors T5 Deforestation for exploration and production can create backlash as being not eco-friendly T6 War could affect supply and pricing T7 Decrease in oil demand as alternative energy sources become more popular and better developed
Strengths / Opportunities S2/O1, O2, O3: CG Technological advancements can allow the company to be more aggressive in creating new eco-friendly products, enhancing market share. Weaknesses / Opportunities W2/O3, O4: HI More market share will increase profits, and therefore margins.
S3,S7/O5: RD/HI The land contracts and use of local suppliers can ensure accessibility and expansion of market share through promotional growth of local communities.
W4/O6: CG Demonstrating concern and accepting responsibility supports commitment to improve, dedication to do the right thing, and empathy towards people, all of which can rebuild brand image. Weaknesses / Threats W2/T1: RD Focus on improving margins by better negotiation of future contracts. W5/T2,T6: SA/JV Take position of being an asset in foreign territory; create strategic alliances or joint ventures.
Strengths / Threats S2/T4,T7: CG Focusing on technological developments allows rapid advancement to meet new market demands, ensuring better solutions faster and a competitive advantage. S3, S7/T2,T6: RD Boosting local economies and ability to develop product offers leverage during instability by taking the position of an asset and an ally.
General Strategic Orientation BP is operating from a position of strength within the oil industry because of its financial stability, technological advancements, expansion into greater market share, and conforming to meet eco-friendly demands. The oil industry poses threats to BP because they lack control over the supply, pricing, and political regulations that can impact the company and its products. Therefore, BP should pursue a diversification strategy to expand their products to include the alternative energy market in which they would have more control over access, supply, price, and product variant. This could also ease political pressures and environmental concerns. General Strategic Orientation
GRAND STRATEGY CLUSTERS (ATTRACTIVENESS) BP is operating from an improving competitive position due to its technological advancements and ability to redirect operations towards areas of future opportunities. The oil market is in the slow growth stage of the industry life cycle which means that BP should practice a related diversification strategy to expand into the alternative energy market in preparation for the future. The petroleum industry, being in slow growth, means that BP has to be innovative and find a new product, a way to manufacture it, and stay ahead of the competition. Grand Strategy Clusters: Attractiveness
GRAND STRATEGY SELECTION MATRIX (INVESTMENT) BP is operating from a position of strength, both internally and externally. The reason for this is because BP is trying to survive and grow at the same time. Oil resources are being depleted. To obtain more time, BP has developed technology to extract more resources. They also have the ability to tap resources that were once inaccessible, such as oil fields in the Arctic. Additionally, they are seeking to develop more relationships with companies or countries that may have untapped resources. This can also lead to creating a greater economic scope by increasing market share. Internally, BP is trying to advance its technology and restructure itself to focus on the future and the alternative energy market. As BP develops and grows into this market on the inside, becoming prepared for future changes and demands, it must maintain focus on the external environment so that it remains a strong competitor. The company also needs to ensure access to enough resources to last until it is ready to merge into the new future energy market. 35
Grand Strategy Selection Matrix: Investment
Strategic Recommendations BP‘s strategy needs to be one of related diversification because it needs to apply its internal skills to new alternative products in order to keep up with future expectations. It needs to create new economies of scope. This will allow them to build healthy and vital relationships and access untapped, inaccessible, and unused resources. At the same time, BP needs to implement a strategy of concentrated growth. The company should work toward maximizing its strengths while taking advantage of the company‘s immense internal resources. BP can redirect internal resources (such as technology) to pursue concentric expansion and continue to develop markets, particularly deep-water environments where a great deal of oil remains trapped. For the company to engage in a strategic reorientation based on a black swan event such as the Gulf Oil Spill would be premature. The Gulf Oil Spill has highlighted the need for superior risk management and technology use but should by no means become the basis of the company‘s entire strategy going forward. BP has a century of solid success behind it and should make only the incremental and conservative strategic changes recommended here in order to keep up its record of achievement. MANAGERIAL IMPLICATIONS BP needs to be on the cutting edge of technological innovation so that their competitors don‘t gain an advantage that could hinder the company. A growing demand for eco-friendly products means that the company can obtain some economies of scale but they need to be prepared ahead 36
of time for the projected growth. If they do not prepare their inbound and outbound logistics, operations, and marketing & sales, they won‘t be able to handle the alternative energy demand and will ultimately fail to maintain their competitive edge and market share. Competitive Implications Although financially stable, BP‘s largely reduced supply, increased expenses, and weaker balance sheets make them a target to other major competitors. It‘s possible BP will be threatened with an M&A or bankruptcy, depending on how much more they are fined and how close in range their projected clean up costs are to the actual expenses of the Gulf oil spill. Their damaged brand image could cause them contracts or business relationships to competitors who are more vigilant of their operations. On the upside, BP is a contributor to local economies and creates a job market for the local populations in some very remote and underdeveloped regions. For this reason, they have developed loyalty within their business relationships.
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