SWOT Analysis of Saudi Aramco and BP - Case Study Example

Saudi Aramco and BP Name Course Lecture Date Industry overview The oil and gas industry usually symbolize global trade on an enormous scale. The energy markets in the world have continued to expand and the oil companies are spending a considerable part of their money in maintaining and increasing their gas and oil production. A great number of companies have also invited these oil and gas companies for negotiation for the right to explore their territorial waters and land hoping that they may be able to find gas and oil and thus create jobs and earn a lot of revenue from gas and oil sales. Background information of the two companies Saudi Aramco is a national oil company fully owned by the government of Saudi Arabia and also it is the largest oil producer as well as the largest holder of oil reserves all over the globe. The company is perceived as being the most influential and powerful oil company all over the globe. On the other side BP is the globes major gas and Oil Company and it is the third largest all over the globe. In the business arena BP is well known for participating in vertical integration in almost all areas of the fuel industry (Bamberg 2000). Recently the company has been involved in the invention of renewable energy. SWOT analysis of the two companies SWOT analysis is a common methodology that is used so as to capture the broad picture of a company. Through the matrix, the organizations internal resources that provide a favourable and notable impact on the organization are usually categorized as the strengths, while the inner resources that generate adverse impacts are termed as weaknesses (Porter 1985). In the lower line, the external factors that offer a favourable and notable effect on the organization is referred to as the opportunity while the other external factor that causes an unfavourable effect is referred as the threat. These elements of the SWOT analysis are clearly identified in the table below. Favourable effect Adverse effect Internal resources Strengths Weaknesses External environment Threats Threats Fig 1: Elements of a SWOT analysis SWOT analysis of BP Strengths i. BP’s brand/history BP is termed as being among the globes well known brand since it has being in operation since the early 19th century. The history of the company in a way dictates the stability and success of the business and through this it has strongholds in areas such as the United States which is rated as being among the largest consumers of gas and oil (British Petroleum 2013). ii. The largest producer in the gulf of Mexico In addition to the strong foothold it has in America it company also own numerous market and distribution channels thus making it to have a formidable and unique structure (British Petroleum 2013). Through the various networks that its subsidiaries have they are able to offer stiff completion to their competitors in the industry. iii. Geographically diverse organization Geographical diversification of the organization is another strength that is possessed by BP. BP has based their operations in almost 80 countries and they tend to operate under different names such as BP express, Amco, BP connect and Burmah Castrol among others (Bamberg 2000). In addition, BP is also listed on the LSE, NSE and in the FTSE. Nevertheless of all the brands that BP operates under BP Amco is the strongest brand. iv. Leadership in oil related innovations and technology Oil related technology is a term used to define oil production technology which helps in the maintenance of profits and revenues by the very aspect of offering the controlling firm the capability and ability to increase their production on new oil fields. The company also applies sup prior technology which allows them to utilize the existing oil reserves (British Petroleum 2013). Through the oil related technology BP has been able to gain a competitive advantage over its competitors since it has been able to increase their production in newly established oil fields. v. Focus on convectional oil This is another strength that is closely associated with BP. Back in the year 2007, the company announced that over the next ten years it would spend at least 8 billion dollars in doing research on better methods of digging conventional energy resources (British Petroleum 2013). Based on this BP seems to be responding to the fuel crisis that will be experienced in the coming years and they have thus changed their logo to Helios and their logo currently illustrate the company’s corporate social responsibility and through thus they have been able to gain a lot of customer confidence. Porter terms emerging industries as been the newly reformed and formed industries created as a result of technological innovations and they tend to lift new services and products to the level of latent feasible of innovations. Thus based on Porter’s argument the usage of unconventional energy seems to be an emerging market and BP is making extensive and diversified efforts for them to gain a competitive edge (International Energy Agency 2013). Weaknesses i. Negative perception from the consumers Over some time BP has been striving hard to position itself as an eco-friendly brand, due to the oil spills in the gulf of Mexico and Alaska consumers are in a dilemma is regard to the brand positioning (Robertson & Krauss 2010). Also BP has over time increase their oil prices as compared to their competitors in the industry. ii. Instability in the oil industry The oil industry and companies seem to be at stake due to the availability of their line of products in the future. Despite this the oil industry is among the highly profitable industries, the industry also suffers from volatility which in a way scares the investor’s away (Bamberg 2000). Opportunities i. Energy independence BP has invested 8 billion dollars into research of alternative fuel methods and conventional sources of energy, through this there will be able to tap well the opportunities that will arise in natural, solar gas and wind energy (Robertson & Krauss 2010). ii. Expansion of their territories The company can consider expanding its borders to other suitable oil reserves and they can also make great use of this opportunity by acquiring gas and oil industries in other areas all over the globe (Jareer 1999). iii. Pricing and high quality In the aim of capturing the existing opportunities BP needs to reconsider its pricing policy so as to address the tough competition that it is facing from its rivals in the industry (Robertson & Krauss 2010). Threats i. Oil spillage BP is usually alleged for undertaking a number of activities which can harm the environment for example in the oil excavation subsequent to the oil spills in Mexico and Alaska. Also there has been an occasional fire incident in some of BP oil rigs, deterioration of oil pipelines and this may also seem to be facing a major threat to the oil company (Roach 2006). ii. Saturation of resources There is a natural saturation of resources in most oil wells and thus would be another threat to the existence of the company. iii. Instability Also BP’s oil producing regions is now confronted with unstable governments and this in a way makes the business more unpredictable. SWOT analysis of Saudi Aramco Strengths i. Good relationship with government Though it is not specifically an internal resource, the relationship that the company has can be discussed as being strength (Abdulaziz & Osamah 2005). Based on the fact that the company is a state owned entity, the company seems to be under tough national control and it is also an essential instrument for the government. ii. Access to low cost oil and gas production assets The cost of producing oil in Saudi Arabia is very low as compared to other countries that produce oil in the globe (International Energy Agency 2007). This can be greatly attributed to the fact that a great number of portions of the Saudi oil fields are usually free flowing from pool pressures and thus they do not require pipes or other advanced equipments to extract the oil. iii. The world largest spare production capacity The core aim of Saudi Aramco is to maintain and certain a considerable level of their spare capacity. This is based on the fact that the company leverage with other oil producers and consumers usually originates from their spare capacity (International Energy Agency 2007). Thus in order to maintain and defend its unique influence, Saudi Aramco needs to continually maintain a considerable share for the foreseeable future. iv. Advanced upstream technologies and highly motivated employee This seems to be a major strength that the company takes advantage of. Saudi Arabia inherited a lot of technological expertise from the former owner that is from the former Arabian America Company (Abdulaziz & Osamah 2005). The company uses this technology and the motivated employees for a better advantage since they are able to sell their commodities at fair prices. Weaknesses i. Sour crude The sour crude oil is usually sold at discount prices as compared to those which have low sulphur compounds. Based on the tightened petroleum trend in the globe, it seems that there will be decreased demand for the sour grades as the years goes by, thus in actual terms the crude oil of Saudi Aramco will be a matter of great concern for all people (Abdulaziz & Osamah 2005). ii. Heavy dependence on sale of crude oil This can also be considered as being a major weakness that is facing Saudi Aramco. Crude oil is said to dominate in the exports that are made in the company (Jareer 1999). The ultimate lack of diversification in their sources of revenue has led to very unstable revenue flows over the years, thus the company need to diversify its revenue source so as to stabilize its yearly incomes. iii. Relatively small downstream capacity Saudi Aramco relative position in regard upstream capacity over downstream capacity can be viewed as being another major weakness that Saudi Aramco is facing. The company can be said to have the largest deficits when it comes to refining as compared to the NOC’s and the IOC’S rivals (International Energy Agency 2007). Indeed the company needs to consider securing outlets for their crude oil and increasing the vertical integration in the company. Opportunities i. High price for crude oil With the high prices of oil all over the globe, Saudi Aramco can be able to secure sufficient funds for other capital investments, and this will in a way provide them with more opportunities, supported by the current cash flow windfall, the company has been able to launch a number of projects which covers the entire value chain that is about exploration, refining and ship building (Roach 2006). ii. Growing oil demand In regard to the company's future potential, the growing demand for oil coupled with unpredictably low price elasticity unquestionably offers great potential for a company such as Saudi Aramco, which has great oil reserves. Based on a forecast that was made by the international energy agency, the demand for oil in the world in the next quarter of the century will be more than that of the past quarter century (International Energy Agency 2007). It is also widely accepted that oil is and still will be an essential source of energy since it maintain a considerable share of the globe's primary energy supply. When this is combined with the above forecasted demand for oil, a brighter future seems to be ahead of Saudi Aramco. iii. Joining of the WTO Back in the year 2005 Saudi Arabia joined the World Trade Organization (WTO) and this in a way created an opportunity for the oil company and most especially in the petrochemical business. The country was able to persuade the other members to allow it maintain their low domestic gas prices and this in a way created cost competitiveness for the Saudi natural gas industries (International Energy Agency 2006). By joining the WTO, Saudi Arabia was able to get access to the lucrative markets for example in countries such as China and this area served as being prospective areas for diversification of Saudi Aramco in all its oil related revenue sources. Threats i. Rapid growth of domestic gas demand Even though no renowned threat currently exists for the company, the rapid and enormous growth of Saudi Aramco domestic gas demand may act as a threat since it may lead to a gas supply shortage in the country. The potential risk of a possible shortage in gas is looming (International Energy Agency 2006). At the moment Saudi Aramco is the one that is in charge of proving and securing sufficient natural gas for all the domestic users in Saudi Arabia, and based on these state energy firms is currently under burly pressure to enhance the already existing supply capacity. ii. Likely slow down on oil demand This seems to be another major threat that is facing Saudi Aramco. In regard to this there may be low oil demands as people try to invent other means of energy which can act as alternatives to the oil (Roach 2006). Saudi Aramco management style, culture and organizational structure The management style that was adopted and which is currently in use in Saudi Aramco is American management style and it focused more on innovations as well as effectively tackling the challenges that the world is usually exposed to (Saudi Aramco 2013). Saudi has also maintained an organizational culture that individuals and teams in the organization excel in that advancement is usually based on work, merit and skills. This kind of environment is usually vital to the operational reliability, success their ability to Retain and attract the top talent for the company is looking for the opportunities and challenges in addition to the appropriate reward and appreciation for their contribution and efforts (Saudi Aramco 2013). Saudi Aramco reports to its owner the Saudi Arabia government through the supreme council. BP management style, culture and organizational structure The management style that has been adopted by BP is the vertical integration. The organizational structure of BP is mainly divided into three major segments so as to enable the effective management as well as the success of the organization (British Petroleum 2013). The first segment is related to exploration and production and it deals with natural gas and oil exploration. The second segment deal is marketing and refining and it deals with the supply, refining, marketing, trading and transportation of petroleum and crude oil products to the retailers and wholesalers. The third segment is the power, gas and renewable. This segment was introduced back in the year 1999 and 2002 respectively (British Petroleum 2013). Below is the organization structure of BP. Fig 2: BP organizational structure Whether the companies are suitable investment vehicles Based on the above discussion about BP and Saudi Aramco, it is clearly evident that through the management styles, cultures and structure have played a great role in the current success that has been achieved by the two companies. Thus based on these the two companies can be good investment vehicles that investors can invest in so as to get high level of returns as well as benefits. Due to the use of vertical integration BP is able to have more control to their value chain. Through this they are able to decide the way in which their product will be presented to the customers and also the price it will be retailed at. This makes the oil industry an important investment vehicle which investors should be keen about. The organizational structures that have been adopted by the two companies seems to have benefits in that there is an effective flow of information and thus the organisations are effectively managed and the risk of business failing are minimal thus investors can invest in the organization. References Abdulaziz, A & Osamah, A 2005, Evaluation of upstream petroleum agreements and exploration and production costs, OPEC Review, 250 Bamberg, J 2000, The History of the British Petroleum Company: British Petroleum and Global Oil, 1950–1975: The Challenge of Nationalism, Cambridge University Press, Cambridge. British Petroleum 2013, British petroleum official website, accessed 8 November 2013, International Energy Agency 2006, World Energy Outlook 2006, Organization for economic cooperation and development, Paris. International Energy Agency 2007, Oil market report, pp.13 International Energy Agency 2013, International Energy Agency, accessed 8 November 2013, Jareer, E 1999, The world key national oil companies: Saudi Aramco, Energy intelligence group, New York. Porter, M 1985, Competitive advantage: creating and sustaining superior performances, Free press, New-York. Roach, J 2006 (March 20) ‘Alaska oil spill fuels concerns over arctic wildlife, future drilling’, National Geographic News, 20 May, accessed 8 November 2013, < http://news.nationalgeographic.com/news/2006/03/0320_060320_alaska_oil.html> Robertson, C & Krauss, C 2010, ‘Gulf Spill Is the Largest of Its Kind, Scientists Say,, New York Times, , 2 August, accessed 8 November 2013, Saudi Aramco 2013, Saudi Aramco official website, accessed 8 November 2013, Valerie, M 2006, Oil Titans: National oil companies in the Middle East, Chatham House, London. Read More