Environment Analysis

Case Study: BP Plc – UK

Over the last couple of years, BP Plc the London based integrated Oil and Gas Company has been in the news and most occasions, for the wrong reasons. After the 2010 Deepwater Horizon Oil Spill, the company has suffered a dent in its reputation taking a severe toll on its profitability (Webb, 2010). Similarly, a report by BBC notes that the oil spillage cost the company to the tune of £12bn, something that has affected the company’s financial stability (“BP to pay £12bn for Gulf oil spill,” 2015). Somehow, after the incident, the company has managed to get through the rough period and is expected to channel its capabilities and financial resources towards its prospects. Apart from the 2010 incident, BP has been successful in power generation, petrochemicals, and trading among other activities. Moreover, the working environment is highly competitive and analyzing the company’s external environment is one of the great methods of understanding its business model in the modest environment, what the factors mean for the company and if there are any prospects for new growth opportunities.

Four External Factors Affecting BP Plc – UK

For any business to maintain its competitive advantage with the ever-changing business world, it has to suffer the powerful external forces that affect the business environment. With its widespread and complex history in the energy market, BP Plc-UK has been involved in several political, environmental, technological, and legal controversies.

Political Factors

Usually, political factors are in the form of government policies that affect inter-countries relations, trading policies, and lobbying. Currently, the global energy markets have increasingly become more volatile due to geopolitical instability alongside a buoyant Chinese economy that has been threatening several nations with volatility. As it is, China is now the second largest consumer of oil around the globe after surpassing the U.S. in late 2013 (“China overtakes the US as the biggest importer of oil,” 2013). More importantly, as Walker (2015) notes, when China’s economy slows down, the impact is discernible in the oil market. Similarly, the issue of climate destabilization has spurred governments to shift from forms of energy that emit carbon monoxide to more maintainable forms of power and given oil companies until 2040 to hit zero carbon emissions (Johnston, 2017). This is likely to affect the company’s business model negatively. More precisely, although economic analysts predict that demand for oil will increase until 2040 to power the world’s energy needs, there is a huge risk for BP and other oil companies. For instance, the company might be forced to forcibly eliminate large percentages of their gas and oil reserves as well as incur enormous costs in these operations.

Environmental Factors

Extraction, refining, and production of oil have been associated with the emission of harmful gasses that affect the environment. One major environmental factor that has negatively affected BP oil was the oil spill disaster that happened in 2010 forcing the United States government to oppose oil exploration under the sea (Webb, 2010). The UK Environment Management System has also been stringent on laws that help in controlling oil and gas operations and risks posed by oil companies’ operations. All these are more likely to limit the actions of BP, especially in oil exploration operations. Similarly, as Ferrell & Hartline (2013) notes, although BP tried to correct the damage caused by the oil spillage, the amount of environmental damage might have destroyed Bp’s image, forcing consumers to avoid their products in the U.S. markets.

Technological Factors

Within the business model, technology is a major external force that affects the operations within an organization. According to a report by BP, the company already has advanced technology in deep water oil exploration (BP, 2015). On the brighter side, this has enabled them to focus on energy efficiency and production of energies with low carbon concentrations. By far, the company has a competitive advantage over its rivals. This is especially evident in the way they finally managed the largest oil disaster in the human history in the Gulf of Mexico.

Legal Factors

In the United Kingdom, the government is concerned about the health and safety of people working in the oil industry and therefore regulates these policies. This aids in protecting the personal health of the individuals in the exploration, drilling, distribution, as well as disposal. In the case of BP oil, Webb notes that the new legislations after the oil spillage forced them to be more accountable and even compensated those who were affected by their mistake.

Industry Analysis Using Porter’s Five Forces

Porter’s five forces are significant strategic tools used to evaluate the opportunities, threats, and risks for the oil and gas companies within the global industry. Essentially, the model uses five key factors, which include competitive rivalry, the potential of new entrants, bargaining power of buyers, the power of suppliers, and threat of substitutes.

Competitive Rivalry

Competition with a particular industry represents the number of competitors and their ability to threaten the business existence of a specific company. According to Pitatzis (2016), the oil sector is a vast area, with several companies active in the industry, but the number of the oil companies that can explore and mine is limited. Nonetheless, this does not mean that BP is not faced by competitive rivalry. Based on the political factors, governments are encouraged to adopt more sustainable energy forms as a way of living up to their climate change agreement. The rivalry in this is a bit high, especially after 2040, when the agreement will be fully effective. The environmental factors revolve around releasing harmful gases to the environment and the risk of oil spillage when exploring. Unfortunately, this has affected the company especially on the side of the consumers who prefer other oil companies at the markets as a sign of riot to the amount of environmental harm they caused. Yet, the risk is significantly low as the company has been able to handle the oil spillage and compensated the victims. Within the technological factors, the company already has a competitive advantage over its rivals; evident in the manner they managed the largest oil disaster in the Gulf of Mexico. In the context of legal factors in relation to the competitive rivalry, the risk is too low.

Potential of New Entrants

The force of new entrants can also affect the power of an existing company; however, within the oil industry, several factors affect the new businesses that want to enter the oil and gas business (Pitatzis, 2016). Such include, huge capital, the dominance of national oil companies, increased internal competition, the threat from existing companies in case they increase their R&D, as well as volatility in oil and gas prices among others. Apart from the political factors on the issue of climate change and the need for manageable green energy, we can conclude that the other factors cannot in any way pose a threat for new entrants in the oil industry and BP.

Bargaining power of buyers

Due to the nature of the oil industry, the bargaining power of buyers is relatively small. As it is, Pitatzis notes that oil and gas customers are interested in the price and quality of the product. Similarly, global oil benchmarks such as Brent Blend, West Texas Intermediate, and Dubai determine the price of oil. According to a report by Energy Routes, it is evident that the buyers are unlikely to affect the oil prices. This means, even with the increased demand from China’s economy, the impact will be relatively small.

 Power of suppliers

BP Oil is among the big vendors in the oil and gas sector and is integrated fully into the industry. The ability of the oil companies to affect prices is high due to their involvement in all the business segments, which means that their bargaining power is significantly higher than that of the buyers (Pitatzis, 2016). Given the technological abilities of BP that places them at a greater competitive advantage, the company has a higher bargaining power, with the capacity to choose their contractor. In regard to the other factors, the impact is relatively low on the issue of bargaining power of suppliers.

Threat of Substitutes

According to Pitatzis (2016), nuclear energy, coal, hydrogen, biofuels among other renewable forms of energy such as solar and wind powers are the main alternatives to oil and gas for production of energy. These alternatives combined with the political factors on the climate change agreement are a threat to the global energy mix after 2040.

Rationale for factors with lowest to greatest impact

Legal Factors facing British petroleum revolve around issues of health and safety policies by the governments where the company operates. According to analysis, not unless something emerges in the future, these are normal standards that the company must adhere to and do not have a greater impact.

Technological factors within BP Oil Company already show that the company is advanced in its technological area. This covers one of its strongest points, which has also helped them in the past especially with the 2010 oil spillage. Its impact is substantial, but cannot be ignored.

Environmental factors affecting the company’s operations revolve around harmful gases emitted due to extraction, refining, and production of petroleum to the environment. Similarly, there are several laws aimed at helping to control oil and gas emissions. It is also evident how the Gulf of Mexico oil spillage affected the company’s image in 2010. All these combined pose an averagely higher risk for the company especially if it is ignored.

Political factors often differ from country to country or state to state, with the interpretation of laws and regulations working differently too. While oil companies prefer to operate in politically stable countries, there is no prediction when a country’s stability may vanish. Numerous issues may arise including sudden nationalization or change in political winds affecting the regulatory environment. By far, this is one of the factors with the greatest impact on the company’s business model.

Recommendations

The oil industry has a vast set of products; however, their main products are crude oil, which cannot be differentiated. In light of this, British Petroleum lacks many choices especially with the looming need for more manageable forms of energy apart from substituting their products with bio fuel. Similarly, with the 2010 oil spillage incident, the company’s image changed to that of a business that is not environmental friendly. It is the responsibility of management and other stakeholders to show their support towards environmental awareness.  Along with that, the incident somehow affected their market in the United States. As such, they should try to penetrate into the U.S. market more, create a better image, and appeal to the political arm. Lastly, BP is one of the oil companies with advanced technology in oil exploration. Focusing on deep waters for oil exploration may have better and more rewarding benefits in the future for the Plc.

References

“BP to pay £12bn for Gulf oil spill.” (2015). BBC. Retrieved from: http://www.bbc.com/news/business-33363672

“China overtakes the US as the biggest importer of oil.” (2013). BBC. Retrieved from: http://www.bbc.com/news/business-24475934

BP. (2015). Deep-sea data makes oil production smarter. Retrieved from: http://www.bp.com/en/global/corporate/bp-magazine/innovations/deepwater-technology-vision.html

Ferrell, O.C., & Hartline, M. (2013). Marketing Strategy, Text, and Cases. South Western: Cengage Learning.

Johnston, I. (2017). World must hit zero carbon emissions ‘well before 2040’, scientists warn. Independent. Retrieved from: http://www.independent.co.uk/environment/world-zero-carbon-emissions-before-2040-two-decades-climate-change-global-warming-greenhouse-gases-a7682001.html

Pitatzis, A. (2016). Porter’s Five Forces Model for Oil and Gas Industry. Energy Routes. Retrieved from: https://energyroutes.eu/2016/05/23/porters-five-forces-model-for-oil-and-gas-industry/

Walker, A. (2015). China’s slowdown and cheap oil. BBC. Retrieved from: http://www.bbc.com/news/business-34060921

Webb, Tim. (2010). BP oil spill: failed safety device on Deepwater Horizon rig was modified in China. The Guardian. Retrieved from: https://www.theguardian.com/environment/2010/jul/18/deepwater-horizon-blow-out-preventer-china

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