BRITISH PETROLEUM (BP): CORPORATE GIANT IN A GIANT MESS?

By Feso Bright

First of a 3-part series on BP: I wrote this in 2010 in the wake of the Gulf of Mexico oil spill disaster

British Petroleum (BP) is one of the world’s biggest corporate entities in the oil and gas industry; the business prides itself as having gone beyond petroleum in its quest to fulfil world energy needs. In 2005 BP suffered an explosion at its Texas City refinery (ICIS Chemical Business, 2007) and faced a series of inquests into its risk management practices. The business claimed to have learned from that experience yet more accidents happened. Furthermore, in May 2007, the erstwhile chief executive officer (CEO) Lord Browne had to resign abruptly due to allegations of improper conduct from his former partner Jeff Chevalier (British Petroleum, 2007)- thereby raising suspicion of lax corporate governance controls.

This series of 3 articles examines the corporate culture, stakeholder relationships, corporate governance and risk management practices employed in BP business activities of exploration and production, refining and marketing, as well as gas, power and renewable energy. The essence is to identify and discuss the theoretical underpinnings of possible strategic thought processes driving the actions of the business; with a view to understanding the implications of these actions on the future of the business.
In order to achieve this, a triangulation of various perspectives on strategic outcomes, a market approach and the resource based view have be employed to give the much desired insights into subsequent analysis.

The core competencies of BP and its key stakeholders are also examined in order to establish the strength of existence or otherwise of BP’s strategic configuration and its continued ability to meet the needs of its stakeholders. Upon examination of the company’s historical performance and an assessment of the contemporary issues surrounding the company, an extrapolation of the results suggests that the corporate set up of the company is about to change in a very big way; it is possible that the company’s brand or corporate existence may cease to exist as we know it in the short to medium term.

Emergence of BP as a Global Transnational

Multinational corporations may exist in various forms as they evolve over time from international to multi-domestic, global companies and transnational companies; with the transnational companies transforming into hybrid cross-border operations of mixed strategies, simultaneous centralization and decentralization (Bartlett & Ghoshal, 1995, cited in Needle, 2009, p. 56). Over 110 years (Tharoor, 2010), BP has evolved into a true transnational company and has become one of the largest corporate entities in the world (Anderson & Cavanagh, 2000, p. 9) with turnover sales in excess of the gross domestic product (GDP) of many nations. At the end of financial year (FY) 2009, the business had a market capitalization in excess of £113billion (FTSE, 2009); is currently the third most capitalized firm on the FTSE (Financial Times Stock Exchange) and is the top energy sector name (FTSE) with up to 32% of the FTSE energy sector market capitalization (FTSE, 2010).

Life cycle: How long can a company “live”?

The corporate existence of BP began when as Anglo-Persian oil the company had won the concession to exploit oil in Persia (later to be renamed Iran) in 1901 (Tharoor, 2010). So far, the company has survived 110 years comprising two world wars and a couple of name changes; yet it remains to be seen if and how BP will surmount its current challenges. Some posit that every company will die, that the people who work in the companies will rather outlive these companies; companies have come to terms with this fact (Meyer, 2003, p. 1). Others suggest that long living companies may exist for between 100 to 700 years while the average life expectancy of a company is 50 years (de Geus, 1997, pp. 52,53).

Mortality could be attributed to a skewed focus on economic and financial principles while the real people behind the organizations are relegated to the background (de Geus, 1997, p. 52). BP is an old company (Lindgren, 1953); as companies get older their ability to learn new tricks of survival and adaptation may be called into question (Meyer, 2003) thus is BP going through a denial phase? According to Meyer (2003), “as with people the hardest part for dying companies is to admit the end is near”. BP in recent years has been faced with pressures which stem from an unhealthy risk appetite evidenced in its safety record in oil and gas exploitation, the circumstances leading to the resignation of its former CEO Lord Browne and the general corporate culture of the business. All these point to questions on whether BP has been able to adapt its corporate strategy to its competitive environment or if the company is failing to do so. In order to obtain more insight to the problem it is necessary to proceed with an understanding of the competitive environment in which BP operates.

Competitive environment of the Oil and Gas Industry

The oil and gas industry may be organized along the lines of exploration and production (upstream), refining and marketing (downstream), pipelines, marine, service and supply (American Petroleum Institute, 2010). The industry is typified by large dominant firms, mainly in the exploration and production as well as the refining and marketing (which may include pipelines) as shown in figure 1 below:

Figure 1: World's Largest Oil and Gas Companies in 2007 Barrel of Oil Equivalents

Source: (Oil & Gas Journal, cited in PetroStrategies.org, 2008)

The competitive environment in the industry is a result of the dynamic interaction of a broad range of factors. In order to properly identify these factors the political, economic, socio-cultural/ environmental, technological (PEST), Porter’s 5 forces, value chain as well as risk factors shall be examined.

PEST and Porter’s 5 Forces: Upstream & Downstream

Figure 2: Upstream PESTLE and Porter’s 5 Forces Matrix

Adapted from: (Wit & Meyer, 2005, p. 187)

From figure 2, the arrows represent the feedback from the PEST external environment to the internal industry Porters 5 forces and vice versa- indicating the complexity in the dynamics of the oil and gas market (Wit & Meyer, 2005, p. 187). Competition is very keen in this market as costs are high and margins are thus very important for success. The regulatory environment is very advanced in some countries while very weak in others; exploration is constantly pushing the technological barriers with deep sea drilling advancing steadily; environmental impact of exploratory activities is a major concern as well. We also observe that upstream sector is characterized by oligopolistic tendencies, relatively low buyer power (except with governments), few viable alternatives to oil & gas energy, high barriers to entry, low supplier bargaining power (due to existence supply and purchase agreements); all these factors may make the Porter’s 5 forces relatively strong for this segment industry (Porter, 2008, p. 80). However, no business can thrive without adapting to the PEST factors (Buchanan & Huczynski, 2004, p. 45).

Figure 3 below represents the PEST/ Porter’s 5 forces interaction for the downstream sector of the oil and gas industry. The dynamics for this sector are slightly different from that of the upstream sector. Transit tariffs become a major issue with respect to pipeline distribution and marketing with implications for pricing; technology of transportation has implications for economies of scale and margins; antitrust regulation prevents joint selling in some economies while it encourages joint selling in others; environmental awareness in some countries of operation have high and costly operation standards. The Porter’s 5 forces are also relatively strong, depending on oil prices; when oil prices are

Figure 3: Downstream PESTLE and Porter’s 5 Forces Matrix

Adapted from: (Wit & Meyer, 2005, p. 187)

high the absence of substitutes, low buyer power, highly globalized supply chain and barriers to entry may work to the favour of operators (Porter, 2008, p. 80).

Oil & Gas value Chain and business risks

Figure 4: Oil and Gas Value Chain

Source: ( Oil and Gas Journal, cited in PetroStrategies Learning Center, 2010)

Figure 4 outlines the stage by stage process of value creation in the oil and gas industry; from exploration to marketing. These stages may be categorized broadly into the upstream and downstream sectors respectively, as earlier discussed.

Figure 5: Oil and Gas Value Chain Economics

Source: ( Oil and Gas Journal, cited in PetroStrategies Learning Center, 2010)

Figure 5 shows in greater detail the impact of costs on value addition and reveals that costs may represent up to 60% of pump price of oil while up to 75% of revenues of an integrated firm may be sourced from the upstream side of the business (Oil and Gas Journal, cited in PetroStrategies Learning Center, 2010); this gives more insight to some push factors informing corporate strategy.

The oil and gas industry value chain is so complex that business operations are susceptible to various risks. In fact in recent times market conditions are known to change quickly; as such it is necessary for decision makers to be aware of the business risks (Ernst & Young, 2009, p. 2).

Figure 6: The top 10 business risks for oil and gas

Source: (Ernst & Young, 2009)

The risks shown in figure 6 give a perspective to the pressures that BP has faced in recent times. The pressures of the competitive environment typified by intensive competition especially in the upstream segment, high costs, a very complex value chain and high risk factors require a corporate strategy focused on the right processes and desired outcomes. However, these processes and outcomes may vary based on management ideology.

NUTSHELL: 

In this article, I have attempted to lay a foundation upon which I will build a case to suggest that the BP brand may be weakened, tired and in need of a new lease of life. Recently we have heard of suggestions that Shell may have been interested in a merger/ take over. Another imminent threat is the recent report that indicts BP along with its counterparties  and regulatory authorities on the Macondo well for negligence due to cost cutting measures et al. Some regard this as good news for BP as government is now sharing the blame, however it remains to be seen how this will turn out. In the next article, we will explore the extent to which a corporate organization like BP will go in order to secure and retain ''LEADERSHIP'' or ''COMPETITIVE ADVANTAGE'' as we know it.