BPs Gulf of Mexico Oil Spill - Case Study Example

Name Tutor’s Name Course 15 May 2013 Report on the BP’s Gulf of Mexico Oil Spill Abstract The oil spill at the Gulf of Mexico occurs on 10 April 2010. It affected the government, stakeholders of BP and the public as a whole. The oil spill is the greatest in the whole of United States of America. The country and BP needed to change in order to manage the oil spill. This paper evaluates and analyzes the various changes that BP has tried to make since the occurrence of the spill. It also highlights other changes that BP need in order to remain competitive. The paper finally concludes and gives the various strategies that BP can apply in order to regain their position in the market. Introduction Five states of the United States of America border the Gulf of Mexico. These are Alabama, Texas, Mississippi, Louisiana and Florida. In 2010, the gulf faced the worst oil spill disaster. The deep-sea horizon rig of British petroleum (BP) exploded forcing crude oil in to the waters. This reminded people of the Exxon Valdez spill that occurred in 1989. The spill at the Gulf of Mexico saw about 4.9 million barrels of the oil leak in to the Atlantic ocean within three months. Eleven people died, and 16 other injured when the explosion occurred. Ninety-nine people survived the incident, but sustained serious injuries. This leakage has had various implications on BP since then. The Gulf was also tremendously affected by the spill. since then, every department has sort to ensure that that gulf is restored to its position. Causes, Triggers and Drivers of the Oil Spill The creation of the deepwater horizon represented a change in the drilling of oil by BP. However, this was not the same when the spillage at the Gulf of Mexico occurred. The causes and triggers of the oil spillage have been highlighted by different committees including BP itself. A report by BP stated that the oil spill was a fault of the employees of BP and Transocean (Alexander par 3). Transocean owned the deepwater horizon. According to them, the employees wrongly interpreted the pressure test. Their negligence resulted to the explosion of the rig. The report also says that BP failed to acknowledge recommendations given by Halliburton to have other centralizers. The report further indicates that the crew did not redirect flammable gases. Transocean also made a response to this report claiming that the fatally flawed of BP for its incorrect design. The oil spill commission also tabled its finding on the cause of the oil spill. In their report, they stated that the attempt of BP to cut its operation cost affected its safety measures. It also said that some decisions made by BP’s management also triggered diverse risks. The commission also added that the management wanted the well to be completed quickly (Alexander, par. 4). This comment criticized the decisions of the management. The ignorance of the findings of advanced modeling software that indicated three times the current number of centralizers would sustain the rig. The report by the commission also includes six functions of equipments that triggered the oil spill. Mud circulation obstruction was by a small diameter hole. The high pressure of the mud caused the rig to explode. The valves used to prevent the backward flow of mud did not close. Evidence showed that some worker at deepwater horizon thought that the high pressures needed to circulate the mud so the changed the float collar. The cementing at the horizon was inadequate. The pressure tests were also wrongly interpreted. Monitoring of rising gases and oil helped to reduce pressure. However, this was not done (Alexander par. 6). The Impact of the Oil Spill at the Gulf of Mexico on the Competitiveness of BP The oil spillage at the Gulf of Mexico had both financial and economic impacts to BP’s competitiveness in the market. The knowledge of the porter’s five forces model enables an organization to position them in the industry. They can also compare their profitability with that of their rivals (Porter 27). The model comprises of five forces, which are 1. Threats of new entrants 2. threats of substitute products or services 3. bargaining powers of suppliers 4. bargaining power of buyers 5. Rivalry among existing competitors Threats of New Entrants Foreign forces enter a market with the aim of ensuring that they decrease the market share of existing firms (Porter 29). Competition in the firm results from prices, costs and investment. Considering the case of BP, there are no threats to new entries. This is explainable through the fact that it has continued to hold the third position even after the oil spill at the Gulf of Mexico. It is also evident that drilling of crude is expensive, and the business requires a lot of capital. BP continues to hold wide distribution channels across the world because of the policies required by the government in order to operate in the oil industry. The company has also suffered a great financial loss since the spill occurred (Cohen 11). There has been damage of the business reputation after the oil spill. All these factors could contribute to new firms entering the market. Threats of Substitute Products or Services (Porter 29) There are several uses of crude oil. The United States of America solely depends on the energy sector for their revenue. After the spill, the government declared a ban of oil drilling at the sea. It also stated that it would closely monitor the safety measures undertaken by BP in the future. It is difficult to substitute crude oil with another product. This is mainly why the government did not look for other ways of solving the problem after the explosion. Crude oil is a raw material in the petrochemical industry. There are other sources of energy such as nuclear energy, solar energy, bio fuel among others. However, these sources are not cost-effective. The substitution of the crude oil with other product has not been possible implying that BP has no threats. Bargaining powers of suppliers Suppliers choose their customers very carefully. Most suppliers would supply their goods to competitive firms (Cohen 6). The reputation of a firm is also important when suppliers are selecting the people they would supply their products. Countries that have oil fields and oil reservoirs are the main suppliers of BP. these countries usually bid for their oil exploration. Suppliers would want to sell their products at high prices. This is because they want high gains. After the oil spill, the bargaining power of BP suppliers increased. This is because of the fear of occurrence of another disaster that could be linked with them. For example, the owners of the deepwater horizon bore part of the blame for the explosion. Bargaining power of buyers Consumers always bargain to have favorable prices that would suite the demand (Porter 30). The consumers of crude oil on BP after the spill demanded crude oil at lower prices. This is because the felt that BP needed to compensate them. The consumption of oil has declined causing the profits of BP also to decrease. However, it should be noted that the prices determination of crude oil is through the market forces. Rivalry among existing competitors Health competition among firms in the same industry is necessary for growth of businesses. However, some companies take advantage of the crisis faced by their competitors so that they lead in the market. Many companies explore, refine and distribute oil (Bernstein pg 81). The leading companies include Total, Shell, Conoco, Chevron and BP. the companies that can explore and mine crude oil are constraint with financial needs. This is the reason even after the oil spill disaster BP remained the third largest company that refines and distributes crude oil. The rivalry in the oil industry is low compared to other industries. The implications for BP BP faces implications of the oil spill in several ways. Some of the implications include 1. financial and reputation loss After the oil spill, BP has incurred several costs. These costs were not part of the budget. This implies that the money required to compensate all the people who accused them was high and not budgeted. the people leaving around the gulf of Mexico were not happy about the spill. This caused the public image of British petroleum to be ruined (Cohen 6). 2. political implications After the spill, there were formulations of government policies that restrained the operations of BP (Fombrun 331). The royalty rates of offshore drilling rates increased to discourage other companies from drilling the same. 3. decline in share prices Within 50 days after the oil spill, the share prices of BP dropped by 50%. A price of $ 26.97 issued to the shares was very low compared to previous years (Jones and Phillips 108). This shows that the share capital of BP declined tremendously due to the reduction in share prices. Their position in the stock market also decreased. 4. environmental implications The oil spill affected the environment through pollution of the air and water. This caused BP to pay a huge amount as fine for defiling the Texas Clean Air Act and Water Act. 5. low profits The annual report for the company in 2010 showed that the revenues earned from the distribution of oil declined (Bernstein 54). This is because the government stops relying on their transport of oil but instead started importing crude oil. The expenses of the company also increased because they had to compensate all people affected by the oil spill Changes needed to improve BP’s situation Change is necessary if BP is to improve on its market competitiveness some of the steps that BP could follow include 1. BP should market penetration as a strategy of trying to improve on its sales. They could also try to continue with deep water exploration 2. Market development is also important (Fombrun 333). BP can try to sell its existing products in new markets. 3. BP could introduce new products such as bio fuel in to the market so as to diversify 4. The company should improve on its social image. It should have ways of compensating all those affected by the oil spill 5. The company should advertise and campaign for restoration of tourism and business along the sea. 6. Ensure they pay their suppliers in time in order to avoid conflicts with them 7. Offer affordable prices to their customers (Roberts and Dowling 1084) Other Emergent Change Processes That Inadvertently Resulted From the Oil Spill The oil spill forced various bodies involved to change their operational activities. These bodies include the interior department, the oil industry, the industry critics and the company itself. The federal government has strived to ensure that the industry returns to its position before the oil spill. Here is some of the change process that is evident in the various bodies. The interior department One month after the oil spill, Salazar Ken (interior secretary) was unhappy with the management of offshore drilling. He announced the management of mineral services would be split in to three. The main aim of doing this was to minimize the conflicts of interests (Jones and Philips 119). Bromwich Michael took over as CEO in June 2010 to lead the efforts of reform. The interior department has also come up with effective standards on drilling and other significant policies The industry The institute of American petroleum quickly responded to the disaster by setting up forces that would examine the safety of deepwater drilling. The marine well and helix well prove the industry has taken up measure that would help them deal with future oil spills. President Obama also recommended the creation of the institute that teaches the safety measures of oil spills. The industry’s critics Since the oil, congress democrats have urged the citizens to move to safe sources of energy other than oil. These include Markey Edward and Menendez Robert. Environmentalist also advocated for the same. The company Systematic failure caused the oil spill according to a report by the president’s commission. The then CEO of the company Hayward tony had to resign after several accusations. He was then replaced by Dudley Robert Impact of the Oil Spill on BP and Its Stakeholders The oil spill affected the public image and reputation of the company. This decreased the goodwill of the company (Williamson 54). The stocks of BP trade on the London stock exchange. The stock value also decreased by half. This implies that the investment of shareholders in the company was threatened. The financial losses through payment of fines also increased costs of the business lowering their profits. The market value loss totaled to $ 100 (Alexander par. 4). The return of investment to shareholders decrease because of its low profits. The level of price of share today is 30% lower than the prices before the spill. Stakeholders have since then withdrawn their shares and sold them. American invertors hold 38% of BP shares while 35% is by British investors. The majority shareholders include Black Rock Investment Ltd (5.39%) and legal & general investment limited (3.82 % Alexander par. 7). Patterns or Change Patterns Observed In the Last Three Years after the Oil Spill It is three years since the oil spill disaster at Gulf of Mexico. The government and management at BP are trying to ensure that they change by coming up with various strategies of solving oil spillage in the future. Since then, there has been no report of another oil spill. Implementation of restoration projects help to ensure that the environment returns to its position (Alexander par. 8). Congress established a restore act in 2012. Eighty percent of the money that BP paid as penalty would be used in the re-establishment of affected countries. There was the establishment of a command center that would address the environmental impacts of the oil spill. The management also shut down two pipelines of the rig before carrying out an inspection. They have also continued to support the research at the gulf that will try to mitigate the occurrence of future oil spills. They have also tried to support tourism at the coast of the gulf Conclusion Change is necessary in the success of a business. The reputation of a business also plays an influential role in the business failure or success. BP should advocate for restoration of the gulf for it to regain its public image and improve its profits. The changes experience in the management and industry should be acknowledged by the organization. A SWOT analysis can also help the management to monitor the progress of its performance since the oil spill. It is crucial to retain customers to ensure that competitors do not gain an advantage. Even if, crude does not have close substitute, BP should identify various ways of improving its brand. This will ensure they remain competitive in the market. Technology and innovation help a business to increase its production and sales. However, the appropriate technology should be used in order to avoid inherent risks associated with technology. Work cited Alexander, Kristina 2010, The 2010 Oil Spill: Criminal Liability under Wildlife Laws, Congressional Research Service. PDF file. 15 May 2013. http://editorialsamarth.blogspot.com/2010/06/editorial-210610.html Bernstein, David. Company, Image and Reality, New York: Holt, Rineheart and Winston Ltd, 1984. Print. Cohen, Mark 2010, Deterring Oil Spills: Who Should Pay and How Much? PDF file. 15 May 2013. http://www.rff.org/rff/documents/RFF-BCK-Cohen-DeterringOilSpills_update.pdf Fombrun, Charles. “Indices of Corporate Reputation: An Analysis of Media Rankings and Social Monitors' Ratings”. Corporate Reputation Review 1.4 (1998): 327-340. Jones, Davey, and Phillips, Patrick. “Estimating the Costs of the Exxon Valdez Oil Spill”. Research in Law and Economics.16.1 (1994): 109- 154. Porter, Michael. Techniques for Analyzing Industries and Competitors, Newyork: The Free Press, 1980. Print. Roberts, Peter and Dowling, Grahame. “Corporate reputation and sustained superior financial performance”. Strategic Management Journal 23.1 (2002): 1077–1093 Williamson, Oliver. The Economic Institutions of Capitalism and Firms, Markets and Relationship Contracting. New York: The Free Press, 1985. Print. Read More