Triggers and the Drivers of the Oil Spill Change - Case Study Example

BP case study Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: BP case study Introduction In a generic sense, British Petroleum (BP) can be perceived as a British multinational company specializing in gas and oil and headquartered in London. Based on the 2012 revenues, this firm has been rated as being the third largest energy company and the fifth largest firm in the world. Its major occupations in the oil and gas industry include exploration and production, refining, eventual marketing and distribution, power generation, petrochemicals as well as trading. Through the activities aforementioned above, BP has been credited of providing its consumers with adequate fuel for transportation purposes, energy for heating and lighting, lubricants as well as petrochemicals products which are core in the manufacture of day to day items which include but not limited to clothes, paints and packaging (BP Website, 1). This company has in the recent past attracted extensive attention which emanated from its offshore drilling activities for oil in the Gulf of Mexico. This phenomenon which resulted to oil leakage and spill has been attributed to a series of poor decisions by ununiformed staff which culminated to an explosion that killed 11 workers and led to billions of barrels of oil spurting into the gulf by a preliminary report (Jackson, 1). The subsequent implications exemplify diverse unintended and interrelated processes of change with far reaching impacts and effects. The relevance of this report is it will provide a formidable framework through which diverse organizations in different industries can manage change which is caused by unforeseen circumstances. Towards this end, this report is purposed towards investigating how BP managed the change process after the oil spill and leakage phenomenon which threated the viability of its operations around the world. The generic outline of this report is that it entails an introductory part and a body section. In the body, there is a comprehensive analysis of the causes, triggers and the drivers of the oil spill change, BP’s strategic position and competitiveness, implications and needed change, emergent change processes as well as an evaluation of the oil spill impact. This is succeeded by a conclusion which entails the change pattern. Analysis of the causes, triggers and the drivers of the oil spill change In regard to the causes and triggers, a report by BBC (1) revealed that the primary cause of this disaster was that the companies which were engaged in the activities in the Gulf of Mexico made decisions which were aimed at cutting down the cost of production as well as saving time which made a great contribution to the disaster in terms of increasing the level of risk. In this case, it has been revealed that BP failed to institute adequate controls aimed at ensuring that the main decisions in the months preceding the blow-out were not only safe but also sound from an engineering viewpoint. Jackson (1) cited that one of the most significant of these decisions that triggered the oil spill was the one to continue to temporary abandonment of the well as instigate the displacement of the heavy drilling mud with sea water which was much lighter. Additionally, the failure to conduct a proper test as well as the cement which was put into utility in sealing the bottom of the oil have also been alluded as being primary causes of this disaster. Another notable cause was inadequacy of the government oversight and regulation. This is best exemplified whereby the incompetent procedures that were conducted in the final hours preceding the explosion were under direct craftsmanship and direction by the BP engineers and had been approved well in advance by the federal regulators. This culminated in extensive recklessness and failure to appreciate the risks in these undertakings which eventually triggered the blowout (BBC, 1). In regard to the drivers prior to this oil spill, the main driver was the decision making organs of various companies which were directly engaged in the drilling process. This is best epitomized whereby when the well started to blow, there was a wide alley of decisions which were made by Transocean in regard to the mechanisms of handling the material coming out of the well. These decisions have been termed as being fateful and unfortunate which eventually led to the explosion (BBC, 1). Analysis of BP’s strategic position and competitiveness In a generic sense, the aforementioned phenomenon posed detrimental impacts on the strategic position as well as the competitiveness of BP. In using the Porters five forces model, there has been increased bargaining power of the consumers best represented by those individuals and collectives who were directly or indirectly affected by the oil spill. This is best epitomized whereby after BP pleaded guilty to criminal charges including felony manslaughter, it has already paid out an estimated $10 billion to the individuals, businesses as well as the local governments which were affected by the spill. Moreover, the basic fact that the consumers have the potential of switching from consuming the BP products in preference of another company as a protest to the activities of BP exemplifies increased bargaining power of the consumers. Additionally, the aforementioned settlements by BP evidences increased bargaining power of the suppliers whereby different businesses and local governments which supplied the company with various products and services and were affected by this spill have been entitled to a wide alley of settlements costs from BP. This company still remains vulnerable to paying out additional billions for damages to other stakeholders in this fiasco (Writers, 1). In regard to the threat of new entrants, there has not been any significant increase of new entrants after the Gulf of Mexico oil spill. This is founded on the fact that the oil and gas industry is characterized by high barriers of entry as well as requiring high capital investment which tend to discourage new entrants. This is best epitomized whereby most of the companies in the oil and gas industry use expensive and heavy equipment at the well sites, for instance, pumping trucks. Additionally, there are massive capital investments in this industry best exemplified by high costs of infrastructure like land acquisition and pipelines which have tended to put off new entrants in this industry amid disasters like the oil spills in the Gulf of Mexico. In this case, the oil spill case did not necessarily affect the number of new entrants into this industry (Bright, 1). In regard to threat of substitute products, Bright (1) noted that this threat is low. It is worth noting that despite the availability of alternative fuels like coal, solar and wind power, nuclear energy and hydroelectricity among others, all these sources of energy are still in the development phase in different countries and thus oil still remains a fundamental source of power. In addition, the cost of production of the above energy sources is significantly high which has tended to minimize the threat of substitute products for BP even after the oil spill incident. Lastly, the competitive rivalry within the oil and gas industry can be perceived to have increased after this incident. This is founded on the fact that this industry is dominated by big companies like Royal Dutch Shell, Total, Exxon Mobil and Chevron among others which produce low differentiated products. In this case, the diminishing reputation of BP as well as the high financial liability incurred by BP in terms of settlements to the affected parties is perceived as having contributed to the increase of competitive rivalry in this industry after the oil spill incidence in the Gulf of Mexico (Bright, 1). Analysis of implications and needed change The preceding analysis has revealed that despite the limited threat of new entrants and substitute products, the BP brand has experienced significant decline and in urgent need of a ‘new lease of life’ if at all this company is to sustain its competitive advantage in the market. This is one implication of the oil spill disaster. Another implication is the need for other robust sources of capital by BP to compliment the enormous financial liability incurred in the course of compensating the affected parties after the Gulf of Mexico disaster with evidence still pointing to the fact that BP is still liable to pay additional damages which also includes rehabilitation of the environment (Writers, 1). There is also the implication of increased shareholder’s pressure which is detrimental to the smooth operations of BP. This is after the revelation by Weber (1) that angry shareholders of BP in Britain are urging the company to be more proactive and forceful in its legal fight against the huge amount of money in claims which is still being proposed by the US government and some gulf states which were affected by the Gulf of Mexico oil spill in 2010. The last implication as mentioned in the preceding section is increased competition rivalry in this industry as other companies seek to take a chunk of the shrinking market share of BP. This is further fortified by suggestions that Shell has been interested in a merger/takeover of BP (Bright, 1). In regard to the needed changes, it is imperative to note that there is need for an overhaul of the government oversight and regulatory framework if such incidences are to be averted. In this case, there are urgent reforms needed in the governmental regulatory policies, failure to which such disasters are bound to recur (BBC, 1). Secondly, there is need for changes in the basic practices of this industry. This is whereby the operations of various players in the oil and gas industry ought to be founded on some rudimentary principles of operation as opposed to saving time and money, a practice which has been widely credited for causing this disaster. This is linked to the third change whereby there is need for increased competence in practices like communication of risks, cement testing and engineering precision. This fact is fortified by the suggestion by BBC (1) that enhanced engineering thoroughness, communication of risks and cement testing could have played a fundamental role in the identification of flaws which precipitated this disaster. The last change which is needed is in regard to the review of the safety standards in the oil and gas drilling operations. This is supported by the findings that there was limited likelihood of the disaster occurring if the involved companies had been under constant guidance of unrelenting commitment to safety standards (BBC, 1). Analysis of emergent change processes There has been a wide alley of emergent changes processes after the Gulf of Mexico oil spill which have affected the larger oil industry. One of the emergent changes has been the sharp increase of insurance rates for the companies which are in the oil industry. According to KPMG International Cooperative (3), the aftermath of the oil spill disaster in the Gulf of Mexico has seen an acute elevation of insurance rates of the companies in this industry with estimates pointing to the fact that insurance rates of rigs which operate in shallow water had heightened from 15-25% by June, 2010. By September the same year, the oil spill had escalated the insurance premiums for deep water oil operations by 25-30% and for deep water drilling by almost 100%. This reveals a fundamental change in the processes of insuring oil operations around the globe. The second emergent change has been based on the heated debate in regard to whether major oil operators ought to retain increased in-house skills and minimize their dependency on the contractors. Despite the replies by oil companies that contractors ought to address integral items related to safety, they have also become cognizant of the fact that they need to elevate their level of operations control on their own rigs. This will subsequently reduce their dependency on contractors and aid in avoiding future oil spills. Towards this end, major companies have adopted the formation of joint ventures (JV) with contractors. This is best epitomized by the agreement between Royal Dutch Shell and Frontier Drilling based in Norway. Shell is convinced that this JV will enable it to exercise more direct control over operations (KPMG International Cooperative, 5). Lastly, the oil spill culminated in a review of risk management practices by different companies around the world. This is best epitomized whereby in July 2010, major oil companies including Shell, ExxonMobil and ConocoPhillips arrived at an agreement to invest US$1 billion in the development and deployment of a system which has the capability of capturing and containing oil from any underwater well in the deep water Gulf of Mexico. BP announced its intention to join this system which exhibits an emergent change process in the control of oil spills by diverse oil companies. Evaluation: Oil spill impact This oil spill posed diverse impacts on the stakeholders. These stakeholders include the shareholders, the insurance agencies, the contractors/sub-contractors, the regulatory agencies and the consumers. To the shareholders, this oil spill has culminated to extensive loss of dividends as BP grapples with paying billions of dollars as compensation to those affected by the oil spill. This has happened when the BP’s share prices has continued to experience extensive difficulties in gaining traction. This has left most shareholders disgruntled and feeling like the billions of dollars which the company has paid in form of damage claims as well as cleanups has so far exceeded the actual spill damage (Weber, 1). To the insurance agencies, the preceding discourse has evidenced that the oil spill disaster prompted the increase of insurance premiums due to the increased risks involved in oil operations. As a result, major companies have opted to self-insure themselves since the high insurance premiums could be cost prohibitive in covering deep-water operations (KPMG International Cooperative, 4).This move is bound to affect the revenue foundation of the insurance agencies. On the other hand, the contractors/ sub-contractors will be obliged to enter into JVs with the oil companies which are bound to minimize their operation autonomy which they had previously enjoyed. To the regulatory agencies, the oil spill incident is bound to increase the level of focus on the undertakings of these agencies which will have extensive impact on their level of autonomy. Additionally, the environmental groups are bound to exhibit increased assessment of the environmental implications of this oil spill and pressure the legal systems to impose increased liability on BP to engage in elevated environmental rehabilitation. To the company itself (BP), the oil spill has diverse impacts ranging from financial liability in compensating those affected either directly or indirectly as well as environmental rehabilitation, declining public reputation, deteriorating share prices and increased competition among other impacts, most of which have been outlined in the preceding sections. Conclusion The Gulf of Mexico has been presented as a major change trigger in the operations of BP as a company. This is perhaps one of the most significant negative occurrence in the history of BP which is does not occur so often in the oil industry. Evidently, this event is bound to pose extensive impacts on the future decision making process of this company towards more consultative and precise decision-making process based on the revelation that major decision flaws extensively contributed to its occurrence. Works cited BBC. US oil spill: ‘Bad management’ led to BP disaster. 8th Sept. 2010. Web. 13th May, 2013. (http://www.bbc.co.uk/news/world-us-canada-11230757). BP Website. BP at a Glance. 2013. Web. 13th May, 2013. (http://www.bp.com/sectiongenericarticle.do?categoryId=3&contentId=2006926). Bright, Feso. British Petroleum (BP): Corporate giant in a giant mess?. 7th Jan. 2011. Web. 13th May, 2013. (http://www.themixoilandwater.com/2011/01/british-petroleum-bp-corporate-giant-in.html). Jackson, Elizabeth. Report finds bad decisions behind BP spill. 21st Nov. 2010. Web. 13th May, 2013. (http://www.abc.net.au/news/2010-11-19/report-finds-bad-decisions-behind-bp-spill/2344288). KPMG International Cooperative. After the Gulf of Mexico Oil Spill: Recent developments in the oil and gas industry. 2011. Web. 13th May, 2013. (http://www.kpmginstitutes.com/global-energy-institute/insights/2011/pdf/gei-gulf-of-mexico-oil-spillv2.pdf). Weber, Harry. BP is told to keep fighting on spill claim. 11th April, 2013. Web. 13th May, 2013. (http://www.chron.com/business/energy/article/BP-is-told-to-keep-fighting-on-spill-claims-4428619.php). Writers, Staff. US plans $16 billion Gulf spill settlement with BP: report. 23rd Feb. 2013. Web. 13th May, 2013. (http://www.energy-daily.com/reports/US_plans_16_billion_Gulf_spill_settlement_with_BP_report_999.html) Read More