British Petroleum Oil Company - Investment - Case Study Example

TOPIC: RISK ASSESSMENT OF MULTINATIONAL ENTERPRISES IN INTERNATIONAL BUSINESS AND FOREIGN DIRECT INVESTMENT NAME: INSTITUTION: COURSE: INSTRUCTOR: DATE: The world has increasingly become globalized and for several decades now, local enterprises have increasingly been extending their business tentacles to all corners of the globe. This globalization has led to the development of multinational enterprises which by definition are corporations that deal with the management and delivery of products and services in more than one country. Indeed, global business is booming business and is in actual sense where the real money is. The oil industry, in particular, is an industry in which tapping into international markets is crucial. Yet, despite the profits associated with such profitable global business, there exists a resultant increased risk. In the contemporary world of business, every investor considers risk as a constant factor to be considered in the business decision making process. Be it in the marketing strategies, business planning or the expansion of business operations, appropriate ways of assessing risks are important to the ultimate success of new or already existing business operations. Risk assessment is very crucial with regards to the economic performance of international investment companies like the British Petroleum Oil Company (BP). In fact, the oil industry, due to the high risk nature of their products faces greater risks than other industries whereby even prior to prospecting, oil companies have to evaluate not only the geological risk but also the political risk (Sadgrove, 2005, p. 140). Political risk is particularly detrimental since without political backing, no oil corporation would be able to thrive internationally. BP is a global gas and oil company whose headquarters are situated in London in the United Kingdom. It is the third largest energy company globally and the fourth largest in terms of companies that deal with oil exploration, natural gas and petroleum product marketing. Its operations are spread over 80 countries with its largest division being in the US (BP, 2010). And while US is a huge market for BP, there is great risk in this country due to the high level of awareness concerning issues surrounding the environment and thus any oil corporation operating in the country has to conduct itself according to environmental laws failure of which can easily elicit massive protests from the public and consequently sanctions by the government. Identifying how companies such as BP deal with the risks of government and financial penalties, collapses in the company’s share prices, difficulties in raising capital, boycotts by stakeholders as well as environmental risks during foreign direct investment particularly in a country such as the US is very key. A proper risk management strategy is significant to managing risk and central to BP’s strategy are price risk management tools which are designed to give companies room to lessen their exposure to price risk through the contractual shifting of the risk to others (BP, 2010). The types of exposure that are mainly covered against risk include credit risk, weather risk, event risk, supply risk among others (BP America Inc, 2010). These risks are assessed and measures to curtail them summarily put in place. In addition to these tools, to effectively deal with risk, one of BP’s measures is to adhere to well defined externally generated policy statements that define and govern its undertakings. BP follows international policies to ensure that the required standards are established and most importantly, to help identify other possible risks facing company operations (BP, 2007). Most of these policies mainly deal with the relations a company has with other stakeholders in the global market especially in areas of marketing, advertisement, sponsorship, transportation of oil and competition in general. They also address environmental standards like cutting back on industrial emissions, safety in production and transportation of products. Principles and other instruments that define norms for acceptable corporate conduct formulated by organizations such as United Nation, International Labor Organization and also Organization for Economic Co-operation and Development are very essential in BP’s risk assessment program. Additionally, health and safety issues of its workers and consumers are considered, all of which are important in addressing risk in company operations (International Labor Organization, 2010). Furthermore, there are some specific laws/ policies that exist which are very strict and that act as deterrents to organizations that may engage in activities that are a risk to the environment and the public in general. These include the Oil Pollution Act of 1990; the Clean Water Act; the Migratory Bird Treaty Act; the Refuse Act; as well as the Endangered Species Act and just like all other multinational enterprises, BP is subject to them (Korosec, 2010). The violation of the same results in fines and penalties of varying degrees posing a great risk to any company’s bottom-line. For instance, a violation of the Clean Water Act can be very dear and could cost up to as much as $32,500 a day per violation (King Jr and Trottman, 2010). The BP Group plays a significant role in the operations of the company and acts as a body that assesses risk within the company. The group is involved in strategic planning, coordinating, guiding and directing divisions and business units. More specifically, its major roles include financial matters such as the raising of capital, distribution through corporations, accounting and tax and profit audit. Most importantly this function addresses the risk of difficulties in raising capital since the group is capable of extracting capital from resource fields and other financial centers The group is also involved in the external affairs of the company such as public relations, the building of the company brand and initiating relationships with other organizations like governments, NGOs and other cultural institutions. These measures are crucial for its foreign operations such as in the US and help ensure its ability to operate all over the world as well as to weigh political opinions and strategic support from the government (Rademacher P. 2010). Yet, despite all these measures that are meant to help reduce risk, BP was recently faced with the greatest challenge to its minimization of risk. This occurred in the April oil rig spill along the Gulf coast in which gallons of oil spilt in the ocean posing a great health and environmental hazard as well as a threat to the livelihoods of thousands of families who made a living from the Gulf coast. This came only 5 years after the 2005 explosion at the company refinery in Texas City that killed and four years after the 2006 pipeline oil leak in which 200,000 gallons of crude oil were dumped at Prudhoe Bay in Alaska (Mauer and Tinsley, 2010). Financially, BP has taken a major hit for its risk management failure. For instance, following pressure from the Obama administration, BP established a $20 billion escrow fund to compensated affected Gulf businesspeople and residents (Memoli and Nicholas, 2010). The oil spill saga resulted in the collapse of BP’s share price and according to Herron (2010); there was a collapse in its share price to a low of 16 in the US % following the disaster while BP shares had fallen more than 40% in London after the oil spill. The oil spill resulted in BP's stock price dropping and has seen the company incur hefty penalties the cost of which is now approaching $40 Billion that will inevitably negatively affect the company’s economic state (Korosec, 2010). This coming after the $ 1.6 billion BP paid out following the 2005 Texas City refinery fire (Bergin and Bryar, 2008). More significantly, though, is the political fall- out following this disaster has created which has been tremendous with the administration of President Obama being under great pressure from the public to hold BP accountable for what has arguably been the US’ worst oil spill tragedy. Clearly, BP no longer has the good will of the politicians or the public and according to Efstathiou Jr. and Plungis (2010), the risk of government interference in the operations of a company is a great one and. As Barnet (2010) explains, observing mutual dependencies between the company and the politicians is crucial in avoiding political risks yet BP failed to do this by its careless lack of adequate risk management. In this instance, government interference was inevitable and unfortunately very harmful to BP. It has resultantly been hit with huge penalties and has already spent close to $1 billion for the containment of the spill as well as cleanup efforts and as if this was not bad enough, BP faces billions of dollars in liability for environmental damage (Korosec, 2010). In addition, the public outrage at the spillage has been unprecedented and it is actually this public outcry that put pressure on President Obama to react in the firm way that he did. Disapproval for BP has been so high that calls for a boycott of all BP products have been common. In fact, a movement termed the Boycott BP movement which caught on mainly due to the social networking sites Facebook and Twitter has been in full swing, urging Americans to shun BP completely (Neuman, 2010). Yet, all of this would simply have been avoided if BP’s risk management strategy was well developed and adhered to conclusively. Despite the evident risk involved in deep-sea welling, BP acted with shocking complacency. BP’s risk management strategy is a perfect example of a risk management failure as the risk management strategy that BP used or was governed by is highly questionable. In fact, Francis (2010) even posits that the mentality displayed is evidence of a total lack of a risk management plan as BP did not take extra precautions like, for instance, the use of backup systems or relief wells. According to Tucci (2010), an internal BP document provided to the Times newspaper by a Congressional investigator shows that out of two options available to BP, the company decided to choose the riskier option which was to merely seal up the well. This action was by no means foolproof and almost immediately after the sealing, the well began to churn out vast volumes of oil into the ocean. The choice of this risky option was motivated simply out of financial considerations and convenience purposes. The fact that BP consciously chose the riskiest option shows that BP followed a risk management strategy that actually puts the environment at risk instead of one that minimizes risk. Furthermore, BP’s risk management strategy backfired on the company, costing it several billions. Sikich (2010) explains that the entire oil spill saga contains sober lessons on enterprise risk management lessons especially in relation to impunity and taking things for granted. As Korosec (2010) reveals, BP was warned two days prior to the exploding of the rig that the well had acute gas flow problems and that a failure to install more centering devices would be highly detrimental. Despite this warning, BP went ahead and installed six instead of the proposed 21 devices. To deal with the oil spill tragedy, BP hired ESIS which is a risk-management firm that is dealing with the claims from fishermen, small businesses and shrimpers all who were adversely affected by the oil spill (Francis, 2010). In addition, it has largely succeeded in its containment measures plus it has forked out billions for the claimants. All this has helped turn the tide on what would have been the greatest PR (and consequently financial) disaster for BP. In a nutshell, it is evident from the case of BP that adequately assessing the social, environmental and political risks in the country one wants to invest in is crucial to avoid incurring of losses. Most multinational enterprises worth their salt take great caution in assessing possible risks ranging from drops in prices, foreign exchange as well as environmental, social, and political risks among others before or during their direct investments in foreign countries where business operations are carried out in a different atmosphere and governance from their home country. Failure to conduct such an assessment will result in a situation similar to that which occurred during the Gulf coast spillage which caused great environmental damage, led to highly damaging negative publicity for BP and likewise cost the company billions in dollars in containment costs, fines and penalties. With strict adherence to proper practice and risk assessment measures, such tragedies can be drastically reduced and in turn lead to reduced risk for the greater prosperities of multinational enterprises in all industries, both now and in the future. REFERENCES Barnet, Richard J. & Ronald E. Muller. 2010. Global Reach: The Power of the Multinational Corporations. Answers Corporation. Retrieved August 21ST , 2010 from http://webcache.googleusercontent.com/search?q=cache:DSBTTxD7c3cJ:www.answers.com/topic/multinational-corporation+Why+oil+multinational+oil+company+in+Mexico+address+social+risks+in+its+international+businesses+and+direct+investiments&cd=2&hl=en&ct=clnk&gl=ke&client=firefox-a Bergin, Tom and Bryar, Quentin. 2008. BP's Texas City Compensation Bill Tops $2 Billion. Reuters. Retrieved 24th August, 2010 from http://www.reuters.com/article/idUSL0490088220080304 BP. 2007. BP Code of Conduct. Retrieved August 22nd, 2010 from http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/C/coc_en_full_document.pdf BP. 2010. Where we operate. Retrieved August 21, 2010 from http://www.bp.com/sectiongenericarticle.do?categoryId=6&contentId=7019358 BP America Inc. 2010. NGL - Risk Management Term: Exposure. Retrieved September 2, 2010 from http://www.bp.com/genericarticle.do?categoryId=3050098&contentId=3050044 BP PLC. Efstathiou Jr. and Jeff Plungis .2010. BP May Lose U.S. Oil Leases, Contracts After Spill. http://webcache.googleusercontent.com/search?q=cache:7Fn_kvVhBrgJ:www.businessweek.com/news/2010-06-14/bp-may-lose-u-s-oil-leases-contracts-after-spill-update3-.html+how+BP+Oil+company+deals+with+risks+of+government+penaties&cd=3&hl=en&ct=clnk&gl=ke Francis, Diane. 2010. BP Risk Management Boondoggle Retrieved August 21, 2010 from http://www.huffingtonpost.com/diane-francis/bp-risk-management-boondo_b_611016.html Geary Sikich.2010. Enterprise risk management lessons from the BP Deepwater Horizon catastrophe. Continuity Central. Retrieved August 22nd, 2010 from http://www.continuitycentral.com/feature0790.html Herron, James. 2010. 3rd UPDATE: BP Says Share Price Collapse Not Justified By Spill. NASDAQ. Retrieved August 22nd, 2010 from http://www.nasdaq.com/aspx/company-news-story.aspx?storyid=201006100232dowjonesdjonline000344&title=bp-says-share-price-collapse-is-not-justified-by-spill International Labor Organization. 2010. Codes of Conduct for Multinationals. Retrieved August 21, 2010 from http://actrav.itcilo.org/actrav-english/telearn/global/ilo/guide/main.htm King jr, Neil and Trottman, Melanie. 2010. BP Risks Big Fines and Loss of Major US Contracts. The Wall Street Journal. Retrieved August 23rd, 2010 from http://online.wsj.com/article/SB10001424052748703630304575270822261954614.html Korosec, Kirsten. 2010. BP’s Gulf Oil Spill: The Odds of Fines, Jail Time and the “Death Penalty. BNET. Retrieved August 22nd, 2010 from http://www.bnet.com/blog/clean-energy/bp-8217s-gulf-oil-spill-the-odds-of-fines-jail-time-and-the-8220death-penalty-8221/1879 Mauer, Richard and Tinsley, Anna M. 2010. Gulf Oil Spill: BP has a long record of legal, ethical violations. McClatchy. Retrieved August 23rd, 2010 from http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html Memoli, Mike and Nicholas, Peter. 2010. BP Agrees to $20-Billion Escrow Fund; Cancels Dividends. LA Times. Retrieved August 22nd, 2010 from http://articles.latimes.com/2010/jun/16/nation/la-naw-obama-bp-dividend-20100617 Neuman, Scott. 2010. As BP Backlash Grows, So Do Calls For Boycott. Retrieved 28th August, 2010 from http://www.npr.org/templates/story/story.php?storyId=127110643 OECD. 2008. Employment and Industrial Relations. Guidelines for Multinational Enterprises journal. Retrieved August 21, 2010 from http://www.oecd.org/dataoecd/56/36/1922428.pdf Rademacher P. 2010. How big is the Deepwater Horizon oil spill? Retrieved August 24, 2010 from http://paulrademacher.com/oilspill Sadgrove, Kit. 2005. The complete guide to business risk management. Burlington, VT: Gower Publishing Limited. Tucci, Linda. 2010. BP’s risk management strategy put planet in peril. Retrieved August 24, 2010 from http://itknowledgeexchange.techtarget.com/total-cio/bps-risk-management-strategy-put-planet-in-peril/ Read More