British Petroleum Risk Management Failures - Case Study Example

British Petroleum Risk Management Failures Introduction BP, also known as British Petroleum is one of the largest corporation in the energy industry of the world. It provides various sources of energy, fuels, petrochemicals, retail services, gasoline, industrial and motor lubricants, solar power and other services for the market consumers. The British Petroleum is now a popular seller in the industrial sector of the society. It focuses its business to provide products which could possibly improve the quality of life of their consumers, to perform by global standards, improve solutions to problems of the people and to meet the needs of their customers (BP, 2007). Formerly the Anglo-Persian Oil Company or APOC, BP is now providing worldwide services in six continents of the world. The continents are: Africa, North and South America, Australia, Europe and Asia. Their head offices are found in Europe particularly in London, the United Kingdom or UK and in England (Wikipedia, 2007). Most of their resources are coming from the various locations onshore like the Caspian Sea, Mediterranean Sea and in the Gulf of Mexico. They also have their operations offshore specifically in Angola, Azerbaijan, Trinidad, Algeria, Alaska and the famous BTC pipeline or the Baku-Tbilisi-Ceyhan or the BTC pipeline running through Azerbaijan, Georgia, and Turkey to the Ceyhan Marine Terminal (BP, 2007). Most of the services offered by British Petroleum are in the energy, motor lubricants and the gasoline industry. However, aside from these products, they also offer convenience items and pastries like bread, sandwiches and coffee to their consumers. Their retail shops offer only two percent in their market sales which is about six billion of their revenues, but they continue to enhance their operation because their sales in convenient shops are higher than their petrol retailing (BP, 2007). BP products and services have the following brands: BP, AM/PM, Arco, Aral, Castrol and the Wild Bean Cafe. BP stands for “Beyond Petroleum”. They set for quality standards to produce energy for the consumers and to build innovation to help the public to gain access to quality living. The AM/PM convenience stores are found in different locations to provide quality services and to provide snacks or food and drinks to satisfy the hunger of their customers. Arco is one of the retail gasoline brands of BP. Together with AM/PM; they serve about 24 million customers a month. Aral is the petrol brand of BP while Castrol is a brand of automotive lubricant. Together they bring better motor performance to machines and vehicles. BP does not only provide energy, gasoline, petroleum and lubricants. They also offer pastries, sandwiches and drinks or coffee through their Wild Bean Cafe (BP, 2007). Objectives The BP organisation performs to achieve their two systematic objectives. They are the Centralised Direction and Decentralised Implementation. The Centralised Direction is for their goals and objectives. They unify their corporation by implementing strategic objectives, values, behaviours and standards to be performed and understood by their people. They are important for the work ethics in every level of their organisation. Another systematic objective of BP is the Decentralised Implementation. It is for the work and operation of the company. BP offers products with quality to their customers. They work to deliver products and services to satisfy their consumer needs. The Decentralised Implementation makes up three business segments namely: Exploration and Production, The Gas, Power and Renewable and Refining and Market (BP, 2007). Company Profile of the BP British Petroleum is a widely known brand in the industry sector. Although it provides various services and products, it is still bound to have problems and controversies. Last March 2005, BP's Texas City Refinery in Texas City – one of the largest refinery in the United States and in the world – had an explosion due to an unidentified ignition source injured almost 100 people and led to the death of 15 people including those who are working at BP. On March 2006, a leak in one of BP’s pipelines found on the North Slope of Alaska caused an oil spill in the tundra of the region. The incident led to the replacement of the federally regulated Oil Transit Lines (OTL's) in Alaska. Another unpleasant incident on August 2006 led to the shutdown in the oil operations of BP in Prudhoe Bay. The shutdown decision was made because of corrosion in their pipelines. This event would eventually cause a reduction of 400,000 barrels per day and an increase oil price. Recently, the Alaska Department of Environmental Conservation stated that the Prudhoe Bay oil field discharged toxic spill of methanol combined with crude oil and water spilled into the tundra which may poison the ecosystem in that location (Wikipedia, 2007). Last 2000, British Petroleum changed its name into BP. Its logo made in green and yellow sunflower pattern made a controversial meaning as the emblem of the company’s alternative and environment-friendly awareness. However, the green logo did not matter to the people because it was listed as one of the “ten worst corporations” last 2001 and 2006. In 1992, Greenpeace International named the company as one of Scotland’s largest polluters and the BTC pipeline was condemned human rights, environment and safety violations (Wikipedia, 2007). BP, with Royal Dutch/Shell or RD, was also assessed to be responsible with most of the climate change due to the oil industry (commondreams.org, 2003). Other controversies that happened to BP were the controversial contribution to politics and to political campaigns. They were also criticised due to the rise of fuel prices in the United Kingdom (Wikipedia, 2007). Key Financial Risks of the BP Risk Factors may lead to the inability of the company to increase the revenues, and enhance opportunities, increase the threats, inefficiency and legal compliance and the ineffectiveness of the company (BP, 2007). BP’s controversies and problems have given organisational risks to the company. According to Steven Minsky, a risk expert and a visionary in BP, problems which BP encounters are environmental or disaster risks in the oil business. BP was warned before the oil pipeline leak happened in Alaska, but no action was made by the higher officials (Minsky, 2006). Several financial risks may also occur like the failure to operate in the financial structure of the company may lead to their loss of their stockholders. Incapability to verify credits of the company may lead to the financial loss and the fluctuation of currencies in different nations or foreign exchange rate can impact the underlying cost of products. External factors can affect the provisions and liabilities of the company. These external factors can be through changes in laws and regulations in a community or market volatility. Ineffective investments and negotiations can also increase the probability of having financial risks. The effect of these factors can cause an effect to the adequacy of provisions for tax, pensions and environmental and legal liabilities of the company (BP, 2007). Management controversies are also serious in the business industry. In one of Robert Heller’s web articles, he stated a problem which occurred to BP’s management. The Big Boss of BP, Lord Browne, had a controversy for missed production targets last November 2002. Browne has avoided the senior executives of the firm and found out the actual situation of the business from the juniors at the grassroots level of their company. The problem which occurred was evaluated and the blame went back to the chairman of the company due to his creation of fear which led to the fright of his executives to report failures and give inaccurate data (Heller, 2006). In the business industry, competition is a great risk factor. Competition is considered as a strategic risk. Every company has two or more competitors which creates challenges to the corporation. Many of the competitors of BP creates pressure to the company in supplying oil, gas and petroleum to the different sectors of society like the home, business, transportation, commerce and manufacturing sectors. Competition demands considerable management order due to its effects to product prices, production and marketing, unit costs and supply efficiency (BP, 2007). Aside from competition, there are other factors which may become strategic risks. Variation from the level of supply and demand in the market affects prices, market stability and income generation of BP. Socio-political factors like administrative instability, wars, modification of the regulatory setting of the government, civil strife and other government misunderstandings affect the plans and operations of the company. They may distress the company if by chance, they cancelled or non-renewed their contracts. Internal factors like lack of materials, conflict between members of the organisation and employees also influence to the strategic risks of BP. Ethical misconduct is also a factor. They may damage the reputation of the company and lose the trust of their stockholders or investors and their market consumers (BP, 2007). Key Operational Risks of the BP Operation of a company also involves risks. Failure to pay attention to the operations leads to many problems and loss of life for the workers and employees. In the case of BP, some of their failures were the explosion of one of their refinery and their oil spill. Apart from those, their business requires chemicals and hazardous materials including hydrocarbons which need proper maintenance in their operating sites or pipelines in order to lessen the possibilities of having injuries, environmental damages, and loss of materials or loss of life in their workforce. The same guidelines to proper operations of a firm should also be done for the security of the company and technological resources (BP, 2007). In a business, one of their goals must be to provide quality products and services to the public. In the case of BP, they should also keep in mind the transportation of certain hazardous chemicals. Failure to meet the quality product standards of a firm may lead to loss of their customers and the risk of transporting hazardous chemicals always needs proper handling or transportation (BP, 2007). Working with the Management Team in Establishing a Framework for Identification, Measurement and Control of the Risks Managing a large business enterprise is a very tedious work. Research and various data and technological studies must be considered in order for the success of a business venture. Although there are many risks involved, effective risk management can be a solution for the accomplishment of the goals of a business establishment. Risk management is a valuable strategy of any business venture in order to be successful and to grow strongly. When an organisation properly designed their scheme for risk management, they will be able to secure the future of their company while taking risks (Aon, 2007). Methods of Risk Management to Consider Risk management maybe a valuable solution for a business to help control their organisation, but in the case of BP’s oil leak, other resolutions must be considered. According to Minsky, BP’s case is categorized as low frequency and high impact risk. Quantitative analysis of patterns of numbers in databases may lead to incorrect or no decision making because of two reasons. Minsky said in one of his articles that the reasons were, “First, there is insufficient data historically to analyze and many possible outcomes can easily and incorrectly be “fit to the data”. Second, with too little data, the patterns of correlation, dependency and therefore big picture ramifications can not be easily understood.” which is why Enterprise Risk Management or ERM must be taken into account (Minsky, 2007). The different steps that BP should follow for proper risk management are as follows: 1. Establish the Context/Framework for Identification, Measurement and Control of the Risks. 2. Identification 3. Assessment 4. Potential risk treatments 4.1. Risk avoidance 4.2. Risk reduction 4.3. Risk retention 4.4. Risk transfer 5. Create a risk mitigation plan 7. Review and evaluation of the plan 8. Identify the Limitations Measurement of Success or Failure in an Enterprise Risk Management Analysis and Implementation for the BP Company Enterprise Risk Management (ERM) implies to the methods and processes used to organise risks while being able to grab opportunities. ERM offers a background for risk management involving circumstances relevant to the business goals and objectives. It determines and assesses different strategies, monitors progress and identifies risks and opportunities for the business venture. ERM also integrates strategic plans for operations management and internal and external control of the company (Wikipedia, 2007). Minsky (2007) defined ERM as a potential solution to the problems of BP. ERM uses business risk self-assessments which recognizes, evaluates and controls risks depending on the impact to the firm and how the business organisation manage those risks (Minsky, 2007). ERM starts by the identification of potential root causes of problems. After the identification of problems, they then organise and quantify the total risk consequences and consider quantitative and situation analysis. ERM measures the best content practises like key risk indicators and business processes (Minsky, 2007). BP’s Effort in Establishing an ERM Program to Manage the Risks Identified In the situation of BP, Enterprise Risk Management needs to be considered. The company should consider their core processes and the internal and external factors that may affect their establishment. The core processes are the primary activities of the business organisation which are critical to the success of the business. These processes reflect to the enterprise customers, major cost drivers, and the business operations. Failure in the performance of these core processes may lead to the decline of the business (Minsky, 2007). Strategic objectives in a business plan must be well thought-out. Satisfying customers’ wants and needs must be considered in order to be patronised by many. Focus on leadership and management actions, sustainable business growth, operational efficiency and effectiveness, development of partnership, increase selling, best marketing strategies and selling competencies must be researched and planned by BP in order to maintain good business organisation (Heller, 2006). BP organised various ways on how to implement Enterprise Risk Management to their corporation. They research for the causes of the problems in their company and buy and sell products which are in regulated markets to avoid compliance and ethical risks. They planned a financial framework in order to assess and maintain the level of liquidity, financial constraints, capital risks and capacity of their assets. Safeties in operation sites are very important to avoid injuries and death among workers. They make frequent checking, management and control throughout their work system. Inspection of products is critical to the business. Failure to meet the safety of their products will cause bad reputation to their business and the revoking of their licence. They ensure the safety of their customers and workers by frequent examination of their products and machineries. They certify their investments by making enquiries before they let go of their assets. They invest by choosing the best option to avoid loss of expenditures and value of their market products. Successful project execution depends on the implementation of their group plan and strategy. They make sure that major projects and activities are studied and planned ahead of time before execution. Business infrastructures or machineries especially their technological and digital facilities should be reliable and maintained properly. Security threats are controlled in their business and operational supervisions are ensured. Employee trainings and briefings about the job and the code of conduct during work are very important to the company. They also make sure that before a worker performs the job assigned to him/her; the person is properly trained and has expertise in the position (BP, 2007). ERM Program of BP Assisted Management to Increase Shareholder Value Having a large business, BP may increase shareholder value to ensure that the Enterprise Risk Management of the business establishment will be successful. The company executives must keep in mind the goals of their company not only to gain profit, but to ensure the safety and security of their people and resources. ERM can be a helpful strategy to avoid conflicts in the business and to protect their company from controversies and environmental issues. A management organisation must keep in mind the various problems and consequences which may occur from wrong decisions and irrelevant information. Safety of many may lead to higher profits. Summary and Conclusion The following must be undertaken in the British Petroleum in addition and consideration of those discussed above: It is important to plan the methods of risk management. will be conducted must be undertaken. The plan should include risk management tasks, responsibilities, activities and budget. A risk officer who will be given the authority and the responsibility can lead in foreseeing potential problems. Maintain the risk database. Create risk reporting channel for low level and mid level managers. Mitigation plans are essential for the risks. Summarize the plan and face the risks. References: BP. http://en.wikipedia.org/wiki/BP BP. http://cve.mitre.org BP official website. http://www.bp.com/ Commondreams.org .(2003). Report: Top Greenhouse Gas Emitters in Oil, Utility and Auto Industries Not Disclosing, Acting on Financial Risks of Climate Change. < http://www.commondreams.org/news2003/0709-09.htm> Dorfman, Mark S. (1997). Introduction to Risk Management and Insurance (6th ed.). Prentice Hall. ISBN 0-13-752106-5. ERM - http://en.wikipedia.org/wiki/Enterprise_Risk_Management Minsky, S. (2007). BP Oil Pipeline Leak: A Cry for Enterprise Risk Management. Minsky, S. (2007). Risk Management: What is the role of BPM and Content Management technology? < http://www.logicmanager.com/contents/knowledge_center/blogs.php?risk_management_what_is_the_role_of_bpm_and_content_management_technology> Minsky, S. (2007). Success with BPM requires Enterprise Risk Management. Heller, R. (2006). Business Vision: Closing the management gap with strategic objectives. < http://www.thinkingmanagers.com/management/business-vision.php> Heller, R. (2006). False accounting: The way forward after 2002, the worst year for management in post-war history. Risk Management-http://www.aon.com/us/busi/risk_management/default.jsp Read More