BPs historical background and merger

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British Petroleum's origins are dated back to 1901 when William Know chief of the Anglo-Persian Oil Company, tried to explore oil in Persia.

However the fist discovery was made only 7 years later, in the Middle East.

After the World War I, the UK government became a major shareholder in the company until 1987.

In 1935, it changed its name in Anglo-Iranian Oil Company.

In 1950, although the post-war, the company prospered having the largest refinery in the world in Abadan.

Four years later, the oil industry was nationalized by the Iranian government, therefore the company was renamed British Petroleum as a diplomatic solution.

Due to the oil crisis in the 1970s, BP extended its oil extraction in Alaska and North Sea, diversifying the energy sources in terms of gas, coal and solar sources.

The 1980s oil crisis along with the recession led to a reorganization within the company. As a result it formed BP Nutrition acquiring Purina Mills and it diversified its activities in personal care products and reducing its operations in chemicals and refining.

In 1987 it acquired Britoil to consolidate its position in the North Sea oil industry, leading to a further expansion in American market.

Ten years later, BP and Amoco reached an agreement and they created the largest international group of oil and gas. Their vast technical knowledge and their commercial experience enabled the merged enterprise to achieve an outstanding performance. Therefore BP consolidated its competitive advantage in America.

Subsequently ARCO and Burmah Castrol were taken over. The latter owed 5% of the global market share in lubricants business in over 50 countries, with a strong market position in Latin America, China and India. BP Widened its portfolio in terms of high quality oil product and clean fuels. ( review)

BP tackled the global warming threat addressing its investments on alternative energies and changing the name in "Beyond Petroleum".

Bp was a step ahead of the competition with its strong market position.

In early 2006 it launched a low-carbon power strategy to develop and increase market share in market segment chosen. It focused its exploration and production operations on the Gulf of Mexico where it was found the major reserve of oil to produce gas, renewable and derivates.

In the same year, it targeted the Chinese market acquiring one fifth of Aviation Oil's equity and it became the major producer of jet fuel.

Over the last two years, BP has been focused on finding greater synergies within its vast portfolio and achieves better operation efficiency.

In March 2010 it purchased Devon energy's assets and the American deepwater in Gulf of Mexico.

However in April, an explosion caused 11 deaths and contaminating the wildlife habitat of Gulf of Mexico…..

MARKET ( 408)

The company acts over six continents counting approximately 100 countries. It operates mainly in Europe and the US and in India, Australasia, China and Southern Africa. The headquarters is in London and it employs about 10,000 people.

Bp operates in the energy industry, which in turn it is split into several sectors such as oil, gas, electricity, nuclear power, coal, renewable energy. BP is one of biggest oil companies in the market capitalization. It is the largest producer of oil, the second largest gas producer, the first in North America, and the largest overall producer of hydrocarbons in the UK.

It makes products for aviation, automotive and marine fuels, lubricants and a variety of petrochemicals used to make a vast range of plastic products and fibres. It serves its product both directly to its customers and through its major brands as Aral and Castrol. With regard to alternative energy business, BP is involve with hydrogen power, solar, wind, solar, carbon capture bio fuels.

Although it investments in alternative energy, BP focuses its interest on petroleum as the most profitable business for the company. It owes its dominant position in the market due to the global oil industry. However due to recent accidents and public awareness of negative environmental impacts caused, it has become necessary divert its funds onto other investments, such as further development in alternative energies as potential market of the future.

Figure 1: Market Share ( 214)

The pie chart shows the Bp's most relevant competitors, collectively known as the super majors, ranked in order of revenues achieved for 2009. They are the six largest energy companies, non state-owned.

As of December 1st, 2009, ExxonMobil ranks first amongst the supermajors in terms of market capitalization, profits, revenue and cash flow.

As a group, they control approximately only 6% of the global oil and gas reserves in the world. On the other hand, state-owned oil companies control about 88% of global gas and oil reserves, mainly located in the Middle East.

BP currently maintain the third largest market share amongst the supermajors, and boasts the largest global production of oil and the largest overall production of hydrocarbons in the UK.

During 1990, mergers were used as means to fight in an overcrowded market with petrol price volatility [i] . To face this instability, they draw advantage of economies of scale by making massive investments.

FINANCIAL PERFORMANCE ( 244 words)

The return on Average Capital Employed (ROACE) has been used to analyse the financial performance. The maintained ratio into consideration the operating income and the average of the opening and closing capital for the period. The green area represents the competitor's range and the red curve the average. In 2006 was identified a gap in terms of competitive performance. Over the last 3 years, Bp has implemented a strict cost control policy restoring revenue and earnings. This result has been achieved by cutting costs.

Bp has the lowest production costs among the super major. However the enormous cost-cutting in safety maintenance has been considered as the main cause of the disaster in the Gulf of Mexico.

Looking at the stock price trend, it seems clear that since the beginning of the Horizon oil spill disaster, in April of this year, BP's share price fell by $300. The collapse diminished BP's stock by $20 billion, with a loss of 50% of its value. BP's stock price fell further still, when the federal government launched an investigation into the disaster to determine whether any laws and legislations had been violated.

The drop significantly hit UK investors and pension holders. Millions of pounds have been lost in pension funds since the UK invested huge amounts of money in BP[2].

Although the extend of the damage was relatively obvious, BP said in a statement: "The company is not aware of any reason which justifies this share price movement."[3]

INTERNAL FACTORS

EXTERNAL FACTORS

WEEKNESSES

Increase in petrol prices in the UK;

Environmental disasters and "dirty oil" image;

April 2010 the sinking of the Transocean Deepwater Horizon drilling rig;

Criminal charges due to the spread of oil in the Alaskan tundra in 2006;

Toxic spill of methanol in the oil field in Alaska;

Environmental regulation;

Instability of petrol price;

Increasing drilling costs in Golf of Mexico;

Competition of Exxon Mobil and Chevron;

Occasional refinery explosions;

Competition from Shell and Chevron risk of takeover.

STRENGHTS

Wilde geographical presence

(Africa, Asia, Australasia, South America, America, Europe);

Strong market position;

Success in exploration and production;

Vertically integration operations;

Participates in London Stock Exchange, IPO in New York Stock Exchange and it is listed in the FTSE 100 Index;

BP has the capability to invest a great deal in research to improve alternative energy technology.

Investments in alternative fuel methods such as hydrogen, natural gas, wind and solar;

Increasing aviation fuel demand;

Increasing market in China;

Tax breaks to promote clean energy;

Increase in Liquefied Natural Gas;

Expansion of post- soviet Union territories for future reserves;

New strategic acquisitions in North Sea area;

Oil and gas exploration projects.

SWOT analysis ( 533)

One of the main weaknesses is the environmental disasters and "dirty oil" image.

Compared to alternative energy companies, BP has the disadvantage of its negative "dirty oil" image. BP has been involved in some of environmental disasters such as the explosion on the Transocean's rig in April 2010 that caused 11 deaths. Furthermore the spill caused a multi-billion dollar damage, affecting the wildlife and environment as well as the fishing and tourist industries that suffered high unemployment.

These accidents have negatively impacted on company's reputation, BP has attempted to re-brand its image to a more environmentally friendly oil company, giving a positive public image.

In June 2010, BP announced that several measures would be undertaken since the company was liable for the obligations arose from the oil spill.

The heavy financial penalties by the regulatory authorities eroded BP's profitability.

A part from having a wide geographic presence and a dominant market position, BP due its competitive advantages to its vertical integration and thus its operational efficiencies. BP is vertically integrated as its operations are involved with upstream, midstream, and downstream oil businesses.

BP operates through two business segments: refining and marketing and exploration and production.

The vertical integration provides an efficient control over the value chain, since the company produces different products at different stages.

The upstream activities entail oil and gas exploration and production, instead transportation and processing activities, along with refining and manufacturing the petroleum products, represent the midstream activities.

The main threat for BP is the instability of petrol price. The petrol price is influenced by a pluralism of factors, such as demand, weather, taxes and political events.

The price is subjected to increase as a result of a rise in demand, tied to economic cycle, or due to hurricane season that can interrupt the production.

Besides, over the last three years, the number of oil companies that is drilling costs in Golf of Mexico has grown of 43%. This represent a threat to BP that has there the biggest reserve of oil and gas.

The later environmental disasters could lead to a more strict political regulation to prevent further incident. Furthermore BP may incur further penalties due to failure to comply with environmental legislation.

Based on some rumours, Bp may run the risk of a possible takeover or merged with ExxonMobil or Chevron as oil spilt has involved the company in financial issues. However, creating a firm worth $400 billion, there is the threat of causing major political ruptures in both the U.S. and Britain.

In terms of opportunities, BP can take advantage of the "tax breaks" that the government has introduced to encourage corporations and individuals to use alternative energy as a means of electricity. As a result there has been an increase in demand of alternative energies that had driven BP to invest on solar energy sector. Moreover the use of Liquefied Natural Gas will grow very strongly over the next 15 years, thus enhancing its profits. [1] 

Concerning alternative energy, BP Solar can make photovoltaic cells more cost efficient by investing on technology and it can this improvement to create synergies between the petroleum side of the business and the solar side by powering its operations with solar energy.

TOTAL 1685

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