Examine the Following Issues of British Petroleum - Assignment Example

?An Analysis on British Petroleum PLC Introduction 1 Background This report aims to analyze the methods used by British Petroleum PLC (BP) to allow it to grow in size and the reasons of them choosing the methods. Additionally, PEST analysis is conducted to give us an insight into the macro environment in which BP is operating giving comments on the current position and the economic climate of the Company. Lastly, forecast and future performance of the Company would also be investigated. 2. Findings 2.1 Introduction British Petroleum PLC is provides energy products such as fuel for transportation, energy for heat and light, retail services and petrochemicals products to the global market. It operates across six continents – Africa, Asia, Australasia, Europe, North America and South America and offers services in more than 100 countries. (BP plc, 2011) In the next section, we would further discuss on the methods adopted by the Company for its successful evolution. 2.2 Growth Methods and its Reasoning BP plc mainly grew its business through acquisitions and partnerships. The recent acquisition took place in July 2010 where BP Biofuels North America acquired Verenium’s cellulosic biofuels business, a biotechnology company which possesses a portfolio of specialty enzyme products (Verenium, 2011) as a stepping stone for the Company to continue its venture in the cellulosic biofuels industry (BP plc, 2011). Synergy adds values to parties working together through mergers and acquisitions as companies can share skills and expertise and derive cost efficiency. The acquisition of Verenium for intance expedited the commercialization of the technology and accelerates the delivery of low cost, low carbon, sustainable biofuels, at scale. Its announcement in February 2011 on a partnership with Reliance Industries Limited in India seeks to combine BP’s exploration capabilities with Reliance’s management and operations expertise. (The Financial, 2011) Besides that, BP plc seeks to grow its business by diversifying in other industries comprise of Alternative Energy business, shipping, aluminum business and corporate activities (Annual Report, 2010). Extensive research initiative has been taken focusing on development of biofuels, wind power, solar energy and carbon capture and storage to provide future growth options and meeting the increasing global energy demand. The diverse portfolio brought multiples sources of income to BP plc besides reducing the risk of natural energy shortages and climate changes. In 2010, the Company derived sales of 325MW from the solar business, an increase of 60% over 2009 and several strategic supply deals were signed (Annual Report, 2010). Additionally, sustainable growth in terms of market growth, margin growth and new access is achieved by its advancement in technology, quality and well-located refineries portfolio and strong market position. The industry leading technology focusing on ensuring safe and reliable operations, develop of innovative exploration technologies and oil recovery technologies form a solid base for them to win new access and markets. Technological advances enhancing flexibility and reliability of refineries and improving cost efficiency fetched a strong margin to BP plc. For example, the new integrity-monitoring system launched in 2010 enables frequent, repeatable wall-thickness monitoring give an insight into the condition and capability of oil and gas assets has successfully improved operations efficiency and reduced wastage. (BP plc, 2010)  2.3 PEST Analysis 2.3.1 Political Factors Political developments have always been BP plc’s concern due to its diverse nature of operations around the world. It is operating in countries where some countries are experiencing political instability, changes to oil and gas environmental regulations and changes in taxation. These have posed a significant threat to the Company potentially disrupting or terminating its operations and development activities. For example, the US has banned oil drilling in new areas of the US coast following the oil spill in Gulf of Mexico had an adverse impact on BP. President Obama said that BP is ultimately responsible for paying the costs of response and clean-up operations (BBC, 2010). As a result, BP recorded a $49bilion charges in 2010 and faced possible impact on the ability to access new markets in relation to the incident. (Annual Report, 2010) Additionally, Egypt’s crisis has created intense political risk to BP. The strongest protests in Egypt, since 1977, against President Hosni Mubarak’s 30-years-old rule and the communication blackout in January 2011 have affected the Company’s operations causing a reduction in production (Quijano, E.). 2.3.2. Economic Factors According to the World Economic Situation and Prospects 2011 published by DESA (Development Policy and Analysis Division), global economy is on a recovery mode but a slower growth is expected in 2011 and 2012. In UK, the fourth quarter 2010 GDP is 1.5% higher than the fourth quarter of 2009 (National Statistics Online, 2011). Inflation rates have declined for most countries due to increasing international competition and soft demand from the world financial crisis (CIA Factbook, 2011). The energy market in particular has recovered in 2010 with crude oil prices bouncing back fluctuating in the range of $70-$80 per barrel and exceeded $90 per barrel in December 2010, being the highest price since 2008 (Annual Report, 2010). The price increase was due to wider spending on energy (Fels, Pradhan & Andreopoulos, 2011). Besides that, the natural gas prices have also strengthened. The average US Henry Hub First of Month Index rose $4.39/mmBtu, a 10% increase since 2009 and the spot gas prices at the UK National Balancing Point increased by 38% at an average of 42.45pence per therm for 2010 (Annual Report, 2010). The favorable gas prices have yielded a higher profit for BP plc. 2.3.3 Socio-cultural Factors The socio-cultural factors vary from country to country and concerns on the demographics, labour market, living conditions and lifestyle of the local communities. BP has benefited the local communities by providing job opportunities, tax revenues and economic growth to the host country but it is important to engage openly with people who could be affected by their projects and manage local expectations appropriately in terms of health, safety, environmental and other impacts. Environmental destruction, economic and social damage to communities, human rights abuses and unsafe working conditions have been the major issues faced by BP plc. For example, BP was claimed by the UK government for violating human rights rules in the Baku-Tbilisi-Ceyhan (BTC) Pipeline Project in 2011 for failing to respond to the complaints lodged by the villagers living along the BP’s flagship oil pipeline in Turkey (Amnesty International UK, 2011). Besides, one failure in any part of the system could cause massive disaster such as the oil well leak in the Gulf of Mexico has caused fatality, injuries and widespread pollution (Annual Report, 2010). 2.3.4 Technological Factors A broad Federal and State regulatory and policy changes were initiated following the recent BP oil spill and is expected to increase the health, safety and environment regulatory requirements. Addition to the political risk caused by the policy changes, it is anticipated to cause a significant increase of spending in technologies such as health safety and environment (HSE) system, enterprise asset management (EAM) systems and advanced analytics used to manage physical assets such as rigs and pipelines and to improve the safety level. According to Rick Nicholson, the vice president of IDC Energy Insights Research, the worldwide spending by energy companies on HSE system is estimated to be $131million in 2010 and would potentially double the spending of the application for the next 2-3 years following the oil spill disaster. (IDC, 2010) Some countries highly encouraged innovation and research and development for example the introduction of Scientific Research and Experimental Development (SR&ED) investment tax credits and IRAP funding in Canada aim to promote new inventions and developments and improve oil and gas tools (TSGI, 2011). Companies would definitely like to benefit from the funding in order to reduce their capital expenditure thus government support on R&D would be one of the key considerations affecting BP business grow. 3. Forecast and Future Performance BP is the largest producer of hydrocarbons in the UK and the Company seeks to continue its focus on its in-field drilling and develop new field in the future. The objective of the Company is to improve its performance by focusing on achieving safe, reliable and compliant operations, restoring missing revenues and delivering sustainable competitive returns and cash flows. The forecast financial performance is to improve by at least $2 billion between 2009 and 2012 through efficiency and productivity. However, slower global growth is expected in 2011 due to emerging economies from developing countries(World Bank, 2011). 4. Conclusion In conclusion, BP has grew international as the world’s leading international oil and gas companies with its effort on mergers and acquisitions, diversification and technology advancement to meet the growing need for energy. However, it is currently facing confidence crisis by the public within the financial markets attributable to the oil spill in the Gulf of Mexico. The macro environment discussed above play an important role in driving BP’s performance and operations and it is critical for BP to manage the threats and opportunities brought from the external environment. References 1. Amnesty International UK (2011) BP violating human rights rules, says UK government. [Online] Available at: http://www.corporatejustice.org/bp-violating-human-rights-rules.html [16 March 2011] 2. Annual Report (2010) BP Annual Report. [Online] Available at: http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Form_20F.pdf [5 March 2011] 3. BBC (2010) Gulf of Mexico oil spill sparks new US drilling ban. [Online] Available at: http://news.bbc.co.uk/1/hi/8654138.stm [5 March 2011] 4. BP plc. (2011) About BP. [Online] Available at: http://www.bp.com/sectionbodycopy.do?categoryId=2&contentId=7065607 [ 3 March 2011] 5. CIA Factbook (2011) Inflation Rate (Consumer Prices). [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/fields/2092.html [6 March 2011] 6. DESA (2011) World Economic Situation and Prospects 2011. [Online] Available at: http://www.un.org/en/development/desa/policy/wesp/index.shtml [6 March 2011] 7. Fels, J., Pradhan, M. & Andreopoulos, S. (2011) The Time Is Different. [Online] Available at: http://www.morganstanley.com/views/gef/index.html [6 March 2011] 8. IDC (2010) Oil & Gas Companies to increase IT spending as a result of BP oil spill, According to IDC Energy Insights. [Online] Available at: http://www.idc.com/about/viewpressrelease.jsp?containerId=prUS22445310§ionId=null&elementId=null&pageType=SYNOPSIS [6 March 2011] 9. National Statistics Online (2011) GDP Growth. [Online] Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=192 [6 March 2011] 10. Quijano, E. (2011) Egypt Cuts Off Communication amid Crisis. [Online] Available at: http://www.cbsnews.com/stories/2011/01/29/eveningnews/main7297700.shtml [5 March 2011] 11. The Financial (2011) BP and Reliance Industries Announce Transformational Partnership in India. [Online] Available at: http://www.finchannel.com/news_flash/Oil_%26_Auto/81405_BP_and_Reliance_Industries_Announce_Transformational_Partnership_in_India_/ [16March 2011] 12. TSGI (2011) Potential R&D Applications – Oil and Gas Tools. [Online] Available at: http://www.tsgi.ca/oil-and-gas-tools.html [6 March 2011] 13. Verenium (2011) Home. [Online] Available at: http://www.verenium.com/ [16 March 2011] 14. World Bank (2011) Developing Countries Will Lead Global Growth in 2011, says World Bank. [Online] Available at: http://blogs.forbes.com/evapereira/2011/01/12/developing-countries-will-lead-global-growth-in-2011-says-world-bank/ [16 March 2011] Read More