Effects Of Oil Price Volatility Upon British Petroleum

About British Petroleum (BP)

Question:

Describe about A Report on Effects of Oil Price Volatility Upon British Petroleum?

The volatility in the international markets of commodities like oil and gas has a great impact on the businesses within the sector. The report shall ponder upon the reasons of such volatility and elaborate the effects of the same on the business of British Petroleum, as a firm in energy sector. An example would give an idea of the volatility in pricing, where per barrel of crude oil in the International markets, as monitored by OPEC (Organization of Petroleum Exporting Countries) have shown massive price instability. In January of 2009 a barrel was priced at 42 USD which jumped to 100 USD in January 2011 and further went upto 125 USD in May 2011. Nevertheless, the January 2015 shows the price tag of 50 USD per barrel (Please refer Appendix). Such vast gaps are critical for business to be efficient and balance their act of future strategy formulation. Such uncertainties added with climate policies, growing social concerns, geo-political instability, limited supply are few of multiple risks that the business from this sector has to face (Bp.com, 2015, Csb.gov, 2013, Bergin, 2008).

British Petroleum (BP) is the British firm which ranks sixth among the majors of the global ‘oil and gas’ sector with fifth largest revenue earnings. The business had been operating as Anglo Persian Oil company since 1908 which later renamed itself as BP in 1954. The forte of the business is its global presence, strong brand repute and experience in the field of oil and gas exploration and energy generation business. The diversity of businesses that the firm has accumulated is exploration, generation, refining, distribution, trading, marketing, energy production and other such petro-chemical products.  Today the firm have an operational income of about 6.5 Billion USD with 84,5000 employees all across the globe. As on the end of 2013 the business had its presence in over 80 different nations from where 3.2 million barrel per day was the production volume. Further, the current reserves are estimated to be around 17.9 billion barrels (Bp.com, 2015).

Nevertheless, the growing political tensions in the various parts of the globe have made few fields vulnerable to Terrorist attacks (as in the Middle East) while fields of China and Russia have its own national policy fallacies those effects the investments over and above the fluctuating production quantity, thus price. Furthermore, the business has diversified into non-traditional sources of energy production owing to gain stability in such a market to enhance its sustainability in an oligopolistic market. Thus BP is a classic firm for a case to study to decipher the strategies they have taken to transform its operations to reach the targeted goal (Obadi and Koraek, 2012).

The firm has its strategies to counter the volatility in the energy sector. The recent technological advancements have enabled the producing firms the ability to produce and transport both in traditional and non-traditional refining methods. However, the demand still remains high and supply on the downside due to geopolitical reasons. Few events like the acquisition of local refineries and reserves along with local producers acquired while expanding was the way that BP developed its volume, as we see on date. The firm has also undergone strict public scrutiny in its business phase for direct involvements in oil spills, accidents and environmental endangering incidents.  The 2005 Texas city refinery explosion which caused 15 deaths, the 2006 Prudhoe bay Oil spills resulting in USD 25 million civil penalty, the 2010 Deepwater Horizon oil leak also attracted a huge outcry when it did hit the bio-diversity with a 1.8 billion gallons of oil leak in the high seas (Valvi and Fragkos, 2013). Thus the strategic overview of the business investments, project breakdowns, disinvestments, cost efficiencies etc to determine the strategic motives linked to volatility in crude oil price in international commodity markets.

Impact of Geo-Political Factors on BP

The Macro-economic view to mitigate the resilience of price had been the concern for all major oil and gas businesses since 1970s. The vulnerability has various macro as well as micro economic effects on the drillers being the most globalized commodity is huge. The climate change issues and production of fuel for economic growth are the two ends of the scale that the Nations are trying to achieve. Different laws to mitigate the carbon emission, changing regimes of nations with oil reserves along with policy shifts, drilling risks and cost to profit ratios are thus very uneven in the sector making a strategic stability very vulnerable and thus the forecasting unpredictable. The 90% of all the global energy is generated out of fossil fuel which then in turn drives the industrial revolution. Thus the fluctuations have a significant environmental and macroeconomic perspectives associated with it. The fundamentals of oil market suggest that the demand and supply of oil market are based on short term supply so the change in demand supply may have a large price deviation. Hence it can be said that the business of BP is thus vulnerable to many social, economic, political, technological factors those have direct effects on the businesses stability and strategies (Surrey and Gregg, 2003).

BP has invested in acquiring firms from around the globe to expand under different names depending on location and the conglomerations that they form there. For an example Russian BP owns nearly 20% of Rosneft as an investment (Csb.gov, 2013). This policy is a well judged one as the history of Shell, another Oil and Gas company experience in Russia was not good where the stake they had was over 80% in a Government backed conglomerate of Gazprom, which they had to surrender to the national Government with change of State policies under the Putin regime. Russia is the second largest oil rich nation thus the 20% stake in the market making a great stake the global hydrocarbon fuel reserve, ensuring future excavation resources for future. The business could manage 3.8 Billion USD in the year (Financial year/ FYI) ended as on December 2014 and have an operational cash flow of 32.8 Billion USD to the 21.1 USD of 2013 FYI (Bp.com, 2015). Thus the investments had been huge so has been the returns giving the liquidity needed for investments in offshore merger and acquisitions for future stability and reserve enhancement for a capacity that meets the demands for investors in future. It includes subsidiaries in oil and natural gas alike in 80 various nations, globally. This global expanse is another strategic investment from BPs part to establish the needed buffer as well as enhance the capacity from 2.1 million barrels of daily production to 3.2 million barrels in 2014 year end. Hence, the supply in a global scale as well as production sources in various parts have given the needed efficiency and cost affectivity to the business needed logistics support, marketing functions, manufacturing and distribution in 80 economies (Ey.com, 2014).

BP’s Strategies to Counter Volatility

The business started its inception as Anglo Persian out of Iran’s deposits. Later they acquitted various other firms in other corners like North Sea, Gulf, Saudi, China Sea, Australia like vast expanses with full fledged production, distribution and marketing activities that have effectively given the business leverage in terms of market presence and leverage in terms of cost of operations in various economies to its competitors (Nduka, 2015). The diversification had been a costly affair but had been a boon considering the potential and volume it had generated over time.  The downstream businesses like the petro chemical products like lubricants, nylon, plastic, poly-ethylene like byproducts have further consolidated the business. Natural gas deposits and exploration is the second major vertical which have been well utilized where they have effectively used the supply chain via trains, trucks and pipelines (Kretzschmar et al. 2007). The bio-fuel generating investments in terms of alternative fuel and energy production via natural renewable sources are the other aspect of the businesses investment.

The fluctuation in the energy sector have been well monitored and thus the alternative energy resources like wind energy, hydro and solar energy like ‘clean’ sources are been undertaken to boost the futuristic infrastructure needed for the eminent future due to massive climate change issues and social awareness (Murota and Ito, 1996). The change in crude oil price is not in the business’s control where the situations are politically manipulated and thus gives the price as well as production fluctuations. However, the businesses have its capacities to get enhance production in one part of the globe, if one part of the globe is posing problem. The demand and supply balance is needed to have the stability of global crude oil prices so the geo political stability is a necessity in those parts which rests on huge oil reserves (Reed, 2012). The futuristic model was build keeping the deepwater deposit,  Arctic deposits’, onshore deposits in a manner where the infrastructures was build to gain the best of operational leverage. However, the futuristic plans of alternative fuel, nuclear energy like clean sources would be more viable to invest into as the social perspective of fossil fuel is changing fast. The futuristic balance of alternate fuel for energy production, distribution network and infrastructure are being undertaken with the new explorations and network creation for future prospects. The investor’s finds the balance to be a safe bargain to invest into.

Nevertheless, there are aspects like safety and environmental damage control where the business needs to ponder more to apply technologies and safety measures that let no accident or disaster as had been the case in the past. The Chairman of the Business keeps the investor’s returns as priority. This priority have its flipside too where the production pressure needs to be equally distributed so that the business can generate the revenue, cater demands in all 80 markets even in times of political pressures on disruption of production. The balancing of revenue generation from the horizontal line of petro-chemical Business as well as oil and gas with vertical integration of the clean energy within the business value generation processes. Therefore, secure production infrastructure, safety issues control and further integration of global supply-chain for enhanced distribution and supply as per demand needs to be achieved (Bp.com, 2015).

Environmental Concerns Related to BP

The strategic acquisition of the business was such that it covered each part of the globe where the model was to build a full proof exploration, drilling, refining, distribution and marketing easy, cost effective and thus gained substantial share of market. The infrastructure investments had been huge but to attract investors the business had to go miles in choosing fields to acquire, explore or go in a conglomerate from another economy outside UK. Steady but slow process of choosing what to acquire and invest into. The 2014 had a volatile time for the sector and is supposed to go on in 2015 too. The ISIS threat of Middle East for one have been a source of concern for the authorities as the black market of oil mafia have disrupted the stability of 100USD per barrel cost (Bashir and Holtam, 2015).

The evidence of cheap black-market oil being bought by Power plants has further made the pricing volatile and unpredictable to a large extend. Nevertheless, the average output of the 94.9% efficiency in refining and 90% in operating plant efficiency have given the business the edge to mitigate such local threats in an overall global perspective (Bp.com, 2015). This is the strategic measure to develop a quality portfolio with a medium pricing strategy where the fluctuations would not be the reason of loss making or drainage of funds allocated for other projects. However, the Ernst and Young survey suggests that the economic collapse global have reduced the demand for oil for energy production and so has the global outlook towards fossil fuel which poses a long term threat. The business in next five years has to integrate in a way that it can balance its revenue from energy production from both fossil fuel and renewable source of energy. This would give the firm to focus upon the way the International Governments wish to take the energy policy forward in the next five years. Therefore, investments in renewable sources and disinvestments in volatile political areas would give a better stand and resilience for BP in the coming years.

Conclusion and Recommendations

The volatility of the Crude oil commodity in the international market is thus projected to be continued. The business thus needs to accommodate the risks and opportunities to gain the best value out of the business for the investors. The mix of new age technology, integrated supply chain, new explorations, investments and disinvestment in accordance to the Geo Political conditions are the key that holds the future for the BP. Nevertheless, the futuristic exposure to renewable energy sources is a very measured strategic step that the business has undertaken for investors confidence. The recommendations for BP for its future ventures shall be focusing in 3 major areas in its strategy formulation. The operational, financial and portfolio resilience is the key to it. The recommendations are as follows:

Figure 1: The Recommended model of Strategy formulation in next five years for BP

(Source: As designed by Author)

The model would be designed to identify the areas of concern, look for a viable solution and adapt in it to mitigate the futuristic risks, if any. The investments in the operational processes that enhance safety while gives better equipment efficiency is what the business should be looking into.

Macro-Economic View of Oil Price Volatility

Financial Resilience: The optimization of capital structures with best venture selection that attracts banks and investors to invest so as to keep the ongoing projects fund pumped to generate more value. Thus which is asset and what are the liabilities needs to be identified to mitigate future risks. The balance of cash inflow also needs to be equated with the returns so that the attractively is maintained among the investors. For an example the business may venture in the south China Sea where Vietnam and China have disputes and in the long run the investment may be fatal due to geo political reasons. Had it been invested in a stable part of globe like Australia or in Arctic seas it would be safer considering the current trends of political stability globally. In the same way the business may shift its focus from Syria till the time its volatile which again would needs the business to venture in a stable place that would give over all stability and volume needed for investor’s returns and well as maintain operational cash flow on.

Portfolio resilience: The business of BP has already read the sings of the future and has invested in alternate energy generation so that it may sustain itself assuming one vertical is not profitable so that the business in entirety do not suffer. Allocation of funds on an overall product portfolio is needed so that one may mitigate the risks. The opportunity to enhance in petrochemical line for an example if the Gas production is hampered would let the business sustain in the overall returns of projects it has invested into. For BP the alternative energy generation sources, opportunistic acquisitions while disinvestments in volatile assets like fields of Iraq may be a good option forward.

Operational resilience: The integration of business in a model that delivers the best cost savings in operations and distribution. The BP’s gas pipeline projects across national borders have enhanced its ability to have cost savings and greater integration of supply chain. Further, the technology investments for safety to see least wastage and most efficient use of plant and machinery for operational efficiency is the call of the times.  In the same line the exploration and identification of new fields to explore and optimize the financials in the oligopolistic global crude oil market.

Thus the future belongs to the business of BP depending upon the aforesaid criteria as well as its strategic ability to adapt in futuristic energy need situations, identify the scopes and thus mitigate the risks as needed from time to time depending upon the macro-economic factors to keep the investor’s confidence upright in a volatile energy sector, globally.

List of References

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