12/6/2019 International

Business CW 2
Global Business Model Analysis and Meta Level
Changes

H00216288

BP and Energy Transition

Word Count: 2656

Oreilly, Lacey
Introduction

As climate change becomes a central feature of Global alarm, consumers have put greater
interest on lessoning the use of fossil-based energy sources due to ties to climate change. This
awareness has forced a shift towards renewable sources as more than just alternatives and
to the idea of long-term replacements. This change is known as ‘Energy Transition’ and has
become a centre of focus for large energy companies due to stakeholders placing greater
pressure on these companies (Raval, 2019). Considered one of the largest oil and gas
companies in the world BP as a leader, has been forced to consider this shift when making
changes to the business model under which it operates. A business model is used to describe
‘the system of interdependent activities performed by a focal firm and its partners and the
mechanisms that link these activities to each other’ (Amit and Zott, 2015). This report focuses
on assessing the current business model and strategy in relation to climate change as a meta
level trend. It directly looks at the risks associated with practices in relation to the trend
identified and the threats associated with energy transition. A critical evaluating will provide
evidence of BP’s attempts to reduce the risk associate with energy transition in relation to
climate change and how it can also create opportunities for further evolution of the company.

Business Model

Bp are a truly global company with access to much of the worlds energy system, operating
across several continents and 78 countries worldwide. The company works by finding and
producing oil and gas both on and off shore, then transport energy around the world (BP
global, 2019). BP offers a diverse business portfolio with a growing focus on building
renewable businesses. The corporation’s trading capabilities and geographic reach let it
benefit from stable access to modern resources and developing markets. Focus is placed on
meeting the demands by society for increased energy while also facing the second challenge
or simultaneously reducing global emissions through a framework of ‘reduce, improve,
create.’ (BP global, 2019) The business currently concentrates its efforts on the role it plays in
society by trying to achieve the dual challenges of increasing the supply of energy while
simultaneously seeking way in which to lower the business carbon footprint by delivering
energy through new and better means (BP, 2019). The business is keen to emphasis that it

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can not meet this challenge alone and thus acknowledges the need to collaborate with other
organisations and stakeholders to achieve an improved global outcome.

BP declares its value position by claiming it is designing the business plan and strategic
management in a way that allows the business to be ‘fit for the future’ (BP,2019). This involves
placing the dual challenge at the forefront of the businesses action and can be seen through
the way it has a competitive downstream low carbon operation that has the flexibility to adapt
in response to the continuously changing climate change meta trend. This can be shown
through the company’s business model found on the company’s website and depicted in
figure 1. From the model it looks as if it is made of six key components, but these can be put
into four segments which are used to create value. These segments are named as Upstream,
Downstream, Alternative energy and BP Ventures.

Figure 1 – source (BP, 2019)

Following the different stages of the business model allows the company to create value by
monitoring and adapting its operations to meets sustainability goals all while analysing the
costs associated. The Upstream segment oversees the businesses oil and gas exploration, its
development and production procedures (BP, 2019). It follows a three-part strategy to meet
this segments growth enabled by its focus on quality execution which allows BP to benchmark
itself against competitors which forces it to be more competitive and achieve higher results.
It wants to keep a focus on investment in its oil and gas basements, as natural gas produces

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much less greenhouse gas emissions. BP is a leader in tackling the challenge of Methane and
its oil assets complement its gas portfolio as it can produce oil at a high margin or lower cost,
leaving the business flexible to pricing environments. This segment focuses in a return led
growth as the business is reluctant to have any costs and lose out in returns and value.

The Downstream segment focuses on global marketing and manufacturing operations. It is

the product and service led section of BP and composes of three businesses, Fuels, Lubricants
and Petrochemicals. Its strategy for this area is to meet consumers’ needs by running safe and
reliable operations across the company’s businesses, supported by leading technology and
brands. It puts clear focus on delivering underlying earnings growth and the advancement in
competitive businesses that allow for cost profit growth such as the $7.6 million in the year
of 2018. (BP, 2019). The business model even at this stage has a focus on investing in
alternative energy sources as it markets and trades in natural gas. The company has invested
in renewables over the years and focuses on biofuels, biopower, wind energy and solar power
currently. They do this by not only growing existing businesses but by developing new
businesses and partnerships that create competitive value in a fast passed and changing
energy sector. This is linked to the final segment the BP Ventures which allows it to make
investments that transform its core businesses in the other segments. It leverages its
investments across a wide portfolio of relevant technological business that can aid in BP’s
transition to a low carbon company.

Its business plan highlights the ways it will reach its goal of achieving a 15% share of the global
energy mix by 2040 with its investments in renewable energy. However, the plan does not
successfully outline how it will be sufficient in reducing the problem of climate change. Its
claims that renewable energy sources are part of the plan but this makes up such a small part
of the revenue of the company as the majority of this is made up through its oil and gas
production (Bousso, 2018) even so far as the noted increase of 8.2% growth in production
that led to the company doubling its profits. This is suggestive that the business is not as
willing as it seems to move to focusing on renewables as it could lead to a loss in profits that
the company will not risk. The business model clearly needs to change to a greater target of
renewables, but it is unlikely to happen unless the company’s focus is forced to shift from
fossil fuels.

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Risk Analysis

Climate change can be defined as a long-term shift in climate patterns either globally or by
region. It is often used to refer directly to a rise in global temperature which dates to the mid
2oth century and continues at present (National Geographic Society, 2019). The main cause
of climate change has been traced to global warming, which has many negative consequences
on biological, human and physical systems (Acciona.com, 2019). Human activities have
maximised the greenhouse effect which has caused a higher increase in the planet’s
temperature. Carbon dioxide also known as CO2 is a leasing case of global warming and is
caused by humans burning fossil fuels to generate electricity, for transport, heating, industry
and construction. Combing fossil fuels use with a growing population sees a greater demand
as more resources are needed which increases greenhouse gas emissions in return.

Climate change can cause changes in many things that effect the business such as law
regulations, policies, obligations, social attitudes and customer preferences relating to the
transition to a lower carbon economy. This could have a cost impact for BP who could see the
compliance costs which are, expenses incurred by adhering to industry regulations, these
costs cover a range of things from time and money spent on reporting, to the installation of
new systems to meet retention. Company’s like BP face increasing litigation costs due to a
mass of reasons, oil and gas companies like BP make money selling commodities for the best
return, however when prices fall, they are forced to cut costs and many times this is done by
cutting investment which leads to litigation costs, in turn effecting the company’s strategy.
Changes in cost can lead to restrictions on production and the supply ad access of new
reserves being limited.

Another huge risk to BP is that it makes most of its profits from oil and gas production which
is in direct conflict with the growth of renewables. Technological improvements and
innovations are rapidly increasing and although this supports the transition to a lower carbon
economy and matches the new consumer demand BP may struggle with an accurate
response. Consumers and producers are being offered incentives to change their fuel and
power choices, this can be seen in the growth of electric vehicles and the movement away
from house being heated by oil. Bps response is based on the speed and nature of changes to
the environment in which they operate, there is many ways they can be adversely affected,
such as demand falling for their products or investors pulling investment and placing it
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elsewhere. BP like every company relies heavily on profits in order to support change, if their
profits fall, it looks to others that their competitiveness has also taken a turn which future
investors and current stakeholders will not support.

Bp like most oil and gas companies has forecasts showing that the demand has a peak and
then a decline although they all differ somewhat on the timing range as evident in figure 2.
Oil demand has peaked already in the Organisation for Economic Cooperation and
Development (OECD). This depletion creates an opportunity even though global demand
slows. Figure2 also shows that BP either is optimistic about the level and duration of oil
demand or that the 2C target will be missed by a wide margin in the global economy. If the
target has been missed, then economies may respond by focusing much more on the adaption
to the effects of climate change but also on tightening policies which will make them more
extensive but also much more costly for companies like BP (Mitchell, 2019).

Figure 2 source (Mitchell, 2019)

Bp has joined many companies in moving from oil to gas as an act that is described as better
positioning in the energy transition which is true to an extent as it does reflect in a lowering

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of the company’s net carbon emissions. But gas still has its risks and is behind the decisions
to chase after renewables. Many countries have legacy assets that BP has its hands on and
this is discouraging for them to fully commit to solely gas and renewable production. There
are many incentives for renewables currently from different political groups and depending
who is in power at the time makes a huge change in how oil and gas companies may see
legislations given out.

Renewable energy was once seen as a niche market, but it no longer can be with its growth
predicted to rise quickly during a slowing demand for oil and gas. Its position in the market is
increasingly compelling even for those in the oil Industry. Its value position is seen to be more
competitive than some sources of upstream investments.

To conclude, Bp and other oil and gas companies may not be able to predict as accurately as
once thought the speed at which clean energies are growing. Energy experts are being forced
to adjust forecasts as cleaner technologies emerge and develop much faster than previously
predicted. BP place the argument that responding to climate change is not solely on the
companies shoulder but that strategic direction must come from governments. Its puts the
pressure on governments to set out a framework that is not only for producers of energy but
also the consumers who use it daily. Low carbon energy is still seen to be more costly for the
business than higher carbon energy, although there is evidence that as renewable businesses
scale up then the costs associated begin to fall.

Militation

BP admitted to a knowledge of the issues surrounding climate change and as a result

implemented the RIC Framework as a way of delivering low carbon for the global economy
(Askeland, 2019). This framework aims to reduce emissions throughout the business
operations, improvement of products and low carbon businesses (Pratt, 2018). To meet goals
of lower emissions, BP focused on lacing energy production on gas as opposed to other fossil
fuels as it causes the least amount of pollution, thus limiting excess gas production
(Bousso,2018). Still, this could be viewed as not doing enough to address the rising concern
of climate change as it continues during the production process to create a form of pollution.
The company has gradually made changes to its operational activities for fuel plants, an

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example of this is the movement away from gas turbines to electric ones at the US production
base. Furthering this move across all plants would make for a greater contribution to the
company’s sustainability measure. Developments have also been made in the
implementation of waste heat recovery in plants that turns excess heat t steam that the
powers turbines (BP Technology Outlook, 2018). This effective method is part of a closed loop
recycling strategy that purpose is to omit waste. Bp has placed an investment of $100m in
upstream operations that is used to aid the design of future emission reduction projects
(Murray, 2019).

Bp has diversified its focus towards climate change, in they not only actively work on lowering
gas emissions but have also developed products in their carbon-neutral lubricants and engine
oi products that help consumer reduce emissions further themselves (Gilvary, 2018). BP has
the capabilities of producing lower carbon purified terephthalic acid (PTA), a raw material
used in the manufacturing of high-performance multi-purpose plastics (BP, 2019). The
company has also created carbon offset fuel cards for business drivers, which is an integrated
smart fuel card that allows business fleets to offset fuel emission an allow individuals to
analyse data collected in carbon emissions on an individual vehicle basis (BP, 2019). BP is
showing through this scheme it is helping others play their parts in reducing emissions.

Conclusion

In conclusion, there is evidence that the concern of global climate change has reflected in the
oil and gas industry facing several risks because of changing circumstances of investors,
consumers and potential employees, BP and other oil and gas companies have started
diversification efforts. BP has put in place strategic plans that reflect the Paris agreement
through there implementation of the Reduce, Improve and Create framework. However, this
is not enough to match the growing concern. The primary conflict with its foundational
business in oil and gas where much of its profits stem and the movement to renewable
sources an area that needs much investment funding, with many unknown costs. In the long-
term alternative energy has greater pathways for growth opening a new area for competitive
advantage than may bring with it a new talent pool. This would mean a better trained
workforce for the future who want movement away from the past business operations. Bp is
already showing change and a view that it’s a ware of the risks and is thus taking actions of
caution by investing in low carbon business rather than building them from scratch. BP needs
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to change its overall targets to a distinct focus on renewables as this is the way the future is
going. The transition may be forced out of the company’s hands if the dangers to climate
speed up or further legislation is enforced to create faster change. Therefore, it is time for BP
to adapt its business model and focus on the expansion of renewables rather than the
reductions in emissions in producing oil and gas.

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