The Recent Global Financial Crisis on British Petroleum - Research Proposal Example

Emerging from Recession: BP Plc Case Study and Section # of This paper presents the research proposal for the dissertation/research-paper aimed at analyzing the impact of the recent global financial crisis on British Petroleum. Introduction to the problem UK’s economy has suffered a major down turn in the recent global financial crisis, which have been termed by economists as the deepest recession since the era of Great Depression in the 30s. The symptoms of growth, though very slow, but have been witnessed in the last quarter of the year 2009, where the economy expanded by 0.1%, which can easily be neglected when the real growth is measured i.e. in comparison with population growth; economy is only considered growing when the growth rate exceeds the population growth rate. The recession has led the economy in a fairly deeper hole than one can imagine. Apart from shrinking of the economy itself, currencies (pound sterling and euro) have also depreciated against the dollar that has weakened itself in recent years. This recession and depreciation of currencies has affected major businesses globally, with a significant impact on those who have any part of their supply chain associated with UK or European countries for that matter. British Petroleum is one of the major entities in the UK markets. Being a major player in the oil and petroleum sector on a global scale, it has suffered significant loss of business and value of business as well. This research proposal aims at highlighting the scope of the research that would be conducted to analyze the scale and scope of the losses that BP has incurred due to the prevailing crisis globally. Literature review BP Plc Customer Base Exploration and Production segment The Exploration and Production segment is involved in the oil and natural gas exploration, expansion, and manufacturing; and promotion and trading of natural gas liquids (NGLs), liquefied natural gas (LNG), and low-carbon power generation. The exploration and production activities can be found in the US, UK, Angola, Azerbaijan, Canada, Egypt, Russia, and Trinidad and Tobago, the Asia Pacific region, Latin America, and the Middle East. The Exploration and Production segment also operates crude oil and natural gas pipelines; processing and export terminals; and LNG dispensation plants and haulage (Businessweek.com, 2010). Refining and Marketing segment The Refining and Marketing segment operates the delivery and trading, refining, promotion, and haulage of crude oil, petroleum, and chemicals merchandise to wholesale and retail clients using the Amoco and BP trademarks. The Other Businesses and Corporate segment or Alternative Energy mostly handles its low-carbon operations, aluminium merchandise, in addition to producing energy via wind, solar, bio-fuels, hydrogen, and gas-fired resources. BP Plc. has a dual expansion accord with Martek Biosciences Corp. for developing microbial oils for bio-fuels use (Businessweek.com, 2010); (BP.com, 2010); (Google-Finance.com, 2010). Impact of Global Financial Crisis The global economic crisis hit the oil industry hard as oil price plummeted from the US$144 per barrel highs in July 2008, plunging by more than 70 percent within a span of few months to less than US$40 by year close as consumers’ cut back on spending and travelling to basic essentials. The market prices for coal and natural gas followed parallel trends. According to the BP World Energy Statistical Review Report (2009), ‘global oil consumption declined by 0.6%, or by 420,000 barrels per day (b/d), the first decline since 1993 and the largest decline since 1982’ (Pg.2). This decline was most prevalent among the OECD countries (3.2 percent or by 1.5 million b/d) while amongst the non-OECD countries the decline was at 1.1 million b/d as recession affected negatively on some Asia-Pacific nations like Japan, Taiwan and South Korea. BP Plc was likewise caught in the downturn with share prices falling rapidly (BP.com, 2010). The world energy consumption has slowed as result of several factors but mostly due to the global economic recession; conversely there has been an enhanced production from the OPEC member nations rising by 2.7 percent or 990,000 barrels-per-day (b/d), with Saudi Arabia remitting 400,000b/d while Iraqi increased their output by 280,000b/d even as alternative energy sources started to gain inroads on the energy sector. Another factor that led to low prices was the enhancement of the refining capacity in 2008 that added some 830,000b/d particularly in the Asia-Pacific region with China’s capacity expanding by 2.9 percent or 220,000b/d, thus leading to a decline of the global refinery utilization to 84.8 percent of the oil production. The net result has been a lowered retail energy prices impacting negatively on the major corporations and nations dependent on healthy consumption patterns. Nonetheless heavy consumption from emerging economies like China and India continue to consume a lot of energy as their economies register high growth with ‘the Asia-Pacific region accounting for 87 percent of world’s energy consumption growth’ even in the midst of world economic slowdown (BP World Energy Statistical Review, 2009). According to BP CEO Tony Howard (2008), significant funding is needed to enhance global energy production and the oil majors can only effectively do this. The International Energy Agency (IEA) has estimated that over US$26 trillion is needed to meet future energy demands mostly in the power sector but also in oil and gas sectors. In efforts, BP injected US$22 billion to fresh production fields, upgrading refineries and research on alternative energy sources (Hayward, 2008). Although the current drive for alternative energy sources has expanded in recent years, Howard considers the developments as just embryonic with insignificant impact on the global energy needs but still regard the current proven and potential oil reserves adequate to cover the demand in the near future. Nevertheless, the continuing resurgent economic growth and demand still proves a major challenge hence still offering high potential for the major oil producers and marketing firms burgeoning growth potential (Reuters.com, 2010). BP Plc’s Strategies against the Economic Recession BP Plc has projected a ‘slow and gradual’ recovery from recession after a modest fourth-quarter results release disappointedly from the expected high forecasts. Refining margins were relatively low dropping to $1.49 per barrel in the last quarter of 2009 as revealed by the productivity indicator, the Global Indicator Margin representing a 94 percent production capacity in 2009. Net earnings were US$4.3 billion, which was still a commendable rise from the previous period that recorded US$3.3 billion (BP.com, 2010). According to CEO Hayward, ‘Refining margins in the fourth quarter were the lowest for 15 years...but BP is the only company that’s made any money in the downstream business in the fourth quarter at all.’(Swint and Gismatullin, 2010). Oil Discovery – Gulf of Mexico Hayward predicted a better future with the company’s announcement of a major oil find at the Gulf of Mexico even as production improved in the fourth quarter of 2009 by four percent to 3,998 million barrels daily. This significant find was expected to boost production by 50 percent with projections of a 300,000-barrel-per-day output. The company is forecast of for 2010 was an enhanced oil demand of between 500,000 to 800,000 barrels daily (Telegraph.co.uk, 2009). Capital Shift to Asian Markets The company strategy was to gradually move capital from the developed western markets to the emerging economic giants of China and India, which currently stood at only 15 percent of their total global outlay. Nevertheless, the company expected further losses from its alternative energy segment within the first quarter of 2010. The company’s other flagship segment of natural gas was still stagnant with prices only rising by 12 per cent in the US in 2009. The company would still continue to be heavily involved in the alternative energy sector since the enhanced energy cutback standards and the development of biofuels and electric cars do not portend further improvement in oil prices hence the potential for the embryonic sector were excellent (Crooks, 2010). Enhance Supply Chain Management The company is other strategy for 2010 was to reduce service industry due to the perceived ‘overcapacity in the supply chain’. This was in line with continued production costs reductions that went $4 billion lower in 2009 and layoffs for over 7,500 employees seeking to recover a $20 billion investment expenditure and $10.9 billion in dividend payouts. The company is however not aiming at undertake further internal restructuring but would mainly focus on enhanced efficiency from the suppliers to enhance its capacity (Robertson, 2009). Acquire more Assets in Emerging Economies The company also planned to attain further chattels from the emerging economies including both Brazil and China in addition to expanding its markets more in Asia encompassing Indonesia, Jordan and Egypt. In Asia, BP in conjunction with China Petrochemical Corp. was aiming at increasing its market share even as it liaised with Iraq firms to enhance its crude oil production in Rumaila by injecting approximately US$15 billion (Swint and Gismatullin, 2010). Summary Although the UK economy had shown signs of recovery, CBI, a leading economic forum, projected a further fragile year as job losses and wages freezes continuing unabated in the first quarter of the year. This analysis was pessimistic in view of the Office for National Statistics (ONS) revealing a 0.1 percent economic growth in the fourth quarter of 2009 from recession started in the second quarter of 2008. At BP Plc has a more promising picture as the company registered 45 per cent fall in annual profit in 2009 but with all its main rivals presenting heavy losses in the same period, BP Plc has reason to be optimistic in its 2010 projections (Smith, 2010) [see Table: 1]. CBI expected the government to be further pressurised in its public finances spending to improve capacity and boost the economy in view of the sustained credit squeeze (Ross, 2009). Table: 1 BP Performance Against Other Major Competitors Valuation   ▲▼ Company name▲▼ Price▲▼ Change▲▼ Chg %▲▼d | m | y▲▼ Mkt. Cap ▲▼ BP BP plc (ADR) 53.21 0.32 0.61% 166.45B BP BP Plc 578.70 11.30 1.99% 108.61B CVX Chevron Corporation 72.30 0.19 0.26% 144.16B TOT TOTAL S.A. (ADR) 55.66 0.28 0.51% 124.23B XOM Exxon Mobil Corporation 65.00 -0.14 0.21% 307.26B COP ConocoPhillips 48.00 0.30 0.62% 71.22B RDS.A Royal Dutch Shell Plc 54.74 0.07 -0.13% 170.83B STO Statoil ASA(ADR) 22.47 0.13 0.58% 71.50B BRGYY BG Group plc (ADR) 87.38 0.02 0.02% 58.93B YPF YPF SA (ADR) 41.05 0.10 0.24% 16.15B MRO Marathon Oil Corporation 28.95 0.01 0.03% 20.49B Source: Google.com/finance (2010)   However the company’s joint venture with Russia’s TNK which generates a quarter of the company’s output has been considered as a risky political exposure while the corporation’s safety standards have been questioned in view of several accidents in its plants including the Texas refinery explosion and the Alaska pipeline oil spills. Erstwhile disquieting uncertainties regarding the OPEC oil quota allocations persist, thus casting a gloomy picture on the company has projected growth plans (Milostan, 2010). Globally, the World Bank warned of a relapse in economic growth but expected a 2.7 percent growth in 2010, rising to 3.2 percent in 2011. The global economy contracted by 2.2 percent in 2009 as the financial crisis took its tolls on several financial and production sectors. The real impact would be revealed when the various stimulus packages from central banks fade. Global investment declined by 4.9 percent in 2009 however oil prices are expected to remain constant (Yahoo!Finance, 2010). However, the economic prospects for exporting firms like BP in the UK are brighter due to the comparative advantage of the weak pound against other currencies, 20 percent lower from pre-recession levels (U-TV.com, 2010). Conclusion The slow recovery of UK’s economy has affected most sectors of the British economy as consumption patterns have gradually been eroded and job layoffs continued to plague the production and service sectors. However, the weakened sterling pound has meant that exporting firms like BP Plc have managed to register modest growth due to the comparative advantage against other currencies. For global conglomerates like BP, the world recession has been somewhat cushioned by the relatively minimal decline in growth patterns in the emerging economic giants like China, India and Brazil where the company has heavily invested. The price of crude oil has also steadied and is projected to be sustained while the continued trend towards fuel economy will compliment the company’s alternative energy investments, which are unprofitable. BP Plc has therefore erected appropriate sustainable recovery strategies that are currently bearing fruit even as rivals suffer heavy losses in face of the global economic downturn. Research design For the purpose of this research, explanatory and evaluation research strategies shall be utilized. Explanatory research would assist in determining a cause-and-effect relationship between the global crisis and the crisis suffered by BP, enabling the research to conclude whether the sufferings have been a net output of the global crisis or does this have a reality beyond the crisis picture. Evaluation strategy would enable the research to conclude how effective are the strategies imposed by BP to ensure safety towards its investors and to the future of the business on the whole. For achieving this task, research will be conducted in two phases; secondary and primary. Secondary research would entail a detail literature review, comprising of critical analyses of various articles, news clips, and other forms of literature, of recent publications. Primary research would include interviews with open ended questions, aimed at analyzing the respondent’s views and opinions about the issue under consideration. The target audience for these are mainly the investors, BP concerned officials, and some gurus from the petroleum manufacturing and marketing sector. The total sample size shall be 15 as a maximum; a bigger size would make it difficult to analyze and conclude them. Practical and ethical issues The major limitations for this project shall be time and cost allocated for it, since a free hand and an extension of 6 months could have led to a much wider scale of project development. Ethical issues may arise because the interviewees prefer being anonymous especially when their interviews are expected to give conclusive opinions about some big name such as BP itself. This would be taken care of by not disclosing their names and designations, and also not voice recording their interviews, but only taking them down in writing. Plan and timetable of activities Following is the plan and timetable of activities associated with this project: Activity Time Needed Literature Review 7 days Conducting Interviews 21 days Summarizing and making brief of interviews 7 days Writing of the report 42 days Getting report reviewed 14 days Finalization of the report 7 days References BP.com (2010). BP at a Glance: Where we Operate. Retrieved February 28, 2010, from BP Online: BP.com (2009). BP Statistical Review of World Energy 2008. London: BP Plc. Businessweek.com (2010). Snapshot News Charts Financials Earnings People Ownership Transactions Options.Retrieved February 28, 2010, from Businessweek.com: http://investing.businessweek.com/research/stocks/financials/financials.asp?symbol=BP:US Crooks, E (2010). BP Sets Sights on Exxons Crown as Industry Leader. Retrieved March 2, 2010, from The Financial Times Online: Swint, Brian and Eduard Gismatullin (2010). BP Predicts Slow, Gradual Recovery After Profit Misses Analysts Estimates. Retrieved March 2, 2010, from Bloomberg Online: Google-Finance.com (2010). BP Plc (ADR) Discussions. Retrieved February 28, 2010, from Google-Finance.com: Guardian (2010). UK Scrapes Out Of Recession but Growth Figure Disappoints City. Retrieved March 2, 2010, from The Guardian Online: Hayward, T (2008). Delivering Energy for Sustainable Growth. Beijing: Tsinghua University. Milostan, C (2010). BP Plc: Stock Research and Analysis. Retrieved February 28, 2010, from Morningstar Index (Market Barometer) : Reuters.com (2010). BP Sees Oil Holding Current Range In 2010. Retrieved March 2, 2010, from Reuters Online : Robertson, J (2009). Is Real Recovery on its Way? Retrieved March 2, 2010, from BBC Online: Ross, A (2009, December 12). CBI: UK’s Economic Recovery Still “fragile;” Increase in Job Losses, Wage Freezes in 2010 . Retrieved March 3, 2010, from Topnews Online: Smith, D (2010). BP Expects Gradual Economic Recovery. Retrieved March 3, 2010, from Microsoft.com: Telegraph.co.uk (2009, July 28). BP says Recovery will be drawn out as Profits Tumble. Retrieved March 3, 2010, from Telegraph Media Group Online: U-TV.com (2010). UK Recession Ends with a Feeble Whimper. Retrieved March 3, 2010, from Guardian News and Media Online: Yahoo!Finance. (2010). World Bank:Global Recovery May Wilt as Stimulus Fades. Retrieved March 3, 2010, from Yahoo! Finance: http://uk.messages.finance.yahoo.com/UK_Stocks/forumview?bn=UKF-Stocks-BP.L Yahoo!Finance.com. (2010). BP p.l.c. Common Stock. Retrieved February 28, 2010, from Yahoo!Finance: http://finance.yahoo.com/q/h?s=BP&t=2010-02-26T15:13:37-05:00 Appendix: Data Collection Instrument Following are the open ended interview questions intended to be targeted towards the respondents to get the maximum possible information relevant to the desired research objective: What are your observations about the performance of BP in the past couple of years i.e. in the years of recession? Does the return received by investing in BP (stocks and other investment instruments) worth or balance the risk being beard by the investor when investing in the same? What influence do you think the recession has had on the performance of BP? What efforts has BP made, internally and externally, to encounter the recessionary circumstances and scenario? What is your opinion about these efforts and strategies? Are these effective in the present time? Would these be successful in the long run? Where do you see BP in the next five years if recession continues or otherwise? How has the petroleum sector performed in the past few recessionary years with all prices and foreign currency rates fluctuating? What is the current state of petroleum industry and how would the future be if recession prevails or otherwise? These are the fundamental questions that would relate to the research objectives and the answers of the same would lead to the achievement of the research objective. Additionally, more questions can be developed spontaneously while interviewing the respondents, developing cross questions from their answers, and therefore, these pre-defined questions have been limited to certain numbers. Each interview would have three interviewees; one for asking questions, one for observing the body language and expressions, while the third one would be writing the responses. Observations shall be written on paper as the respondents speak. Read More