BP and the Consolidation of the

Oil Industry
Group 1
Anushree Mundhra 14A Avni Malhotra 17A Chandraket Mall 19A
Ishita Agarwal 23A Neha Rai 36A Swati Verma 53A

BACKGROUND
Prior to Year 1988, BP had core competency in the field of exploration and
production. Also, its strength mainly lied in the organizational and financial
discipline that had contributed to its short term performance. But still, the company
possessed following weaknesses:
1. Inadequate natural gas exposure this impacted the overall results as natural
gas sales were more profitable to than oil sales
2. Poor returns
3. Weak competitive positions in the retail segments in United States and
Europe
4. Insufficient access to growth/emerging markets
5. Narrow portfolio in chemicals
Consequent to mergers and acquisitions in the later five years, the company
developed distinctive capabilities and assets in the areas like refineries, service
stations and petrochemicals plant. The major gains from the inorganic expansion
were:
1. Reduction in the exploration and production costs
2. Increase in Return on fixed assets (Refining and Marketing) from 7.5% in Year
1996 to 21.6% in Year 2000
3. first mover advantage of new opportunities, such as investments in emerging
markets

FUTURE STRATEGY
BP has four strategy options for growth in future:
1. Acquisition
2. Internal growth
3. Divesture
4. Business diversification
In our opinion, the company should follow a mix of internal growth and business
diversification strategy

RATIONALE:
1. Internal growth
 In past years, BP has only focused on cost reduction (through acquisitions).
However, for sustainable growth, company needs to focus upon the
productivity. This is only possible through internal/organic growth.

2. Business diversification
In order to remain relevant in the changing times for energy sector, BP needs
to diversify into fields like Renewable energy segment (Solar, wind), B2B
energy services like consulting.
Advantages of Internal growth strategy:
1. This strategy involves less risk than the external growth
2. Growth can be financed through internal funds
3. This approach allows business to grow at a more sensible rate

CORPORATE LEVEL APPROACH FOR THE CHOSEN STRATEGY:

1. Grow sustainable free cash flow by:
a. Growing oil and gas production (E&P)
b. Controlling cost increases
c. Increase ROCE
d. Maintain capital discipline
2. Using the above free cash flow for building a portfolio that is distinctive but
also fit for the future. A portfolio that builds on the companys strong resource
base (exploration and production) and is capable of delivering sustainable
growth over the long term.

STRATEGY IMPLEMENTATION AT BUSINESS LEVEL:

A. Exploration and Production
I. Investment in a portfolio of large, lower-cost oil and gas fields which
will give high ROCE (return on capital employed)
II. Increased efficiency in management of these assets.
III. Investment in developing technology like geophysical imaging, etc.
IV. Disciplined increase in capital spending

B. Refining and Marketing

I. Develop deep business-to-business customer relationships that can
transform into strategic partnerships
II. Improving margins in marketing through superior focused customer
offers and rigorous cost management

C. Petrochemicals
I. Focusing on core products that are used in manufacturing of a wide
variety of consumer products like plastic bottles, food packaging.
These products should be chosen on the basis of growth
characteristics, group integration value.

D. Renewable energy
I. Participation in clean energy segment like Solar, wind farms.

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