Oil and gas industry is significant due to the nature of its products which are crucial for economic growth. However companies operating in the industry face stiff competition and this case study seeks to analyze the industry's environment. The analysis also seeks to establish the competitiveness and brand position of British Petroleum in the industry by establishing its product profile, resources, competitors, as well as the strategies applied in the industry applies for its competitiveness.
Body
Industry
Industry Overview
Brief description and history
The oil and gas industry is significant by the fact that gas and oil consumption is essential to subsistence of economic growth of industrialized countries and economies as well as to the emerging economies on their way up the industrialization ladder. (Longwell, 2002) The industry mainly includes exploration, extraction, transport through pipelines & tankers, refining as well as marketing of oil products. The main focus of the industry as well as its and large volume of business is in gasoline and fuel oil. The industry also provides raw materials for other products including chemical products in pharmaceuticals, solvents, plastics and pesticides. (TrenPetro, 2013)
The industry experienced a flat growth in demand of gas and oil for the first five decades of the 20th century but picked after the World War II with a continued rise fuelling unprecedented economic growth. However, there was a stalled growth during the second oil crisis time but demand resumed its growth projectile in the mid 1980's. It is also said that the industry experienced its greatest exploration success prior to the creation of OPEC which was driven by significant discoveries in Russia, Middle East and Alaska's North Slope. In regard to the gas products, demand has been significantly rising at a faster rate than oil due to its rapid growth as a fuel for the efficient and clean electric power generation with most of gas discoveries believed to have been made between 1960 and 1980. (Longwell, 2002)
Factors affecting growth and growth drivers
Some of the industry growth drivers include technological advance with its ability to aid extraction and enhance efficiency in marketing and operations. The industry is also driven by the emerging economies demand for sustainable source of energy in their industrialization process. Other factors include economic growth and competition. (DBRS, 2013)
Government regulations and their impact
Respective governments usually seek to regulate the oil and gas industry due to its significance in energy security and as a key source of their revenue. This regulation takes the form of instruments like tax and environmental policies which forces industry players to work with and engage governments on many fronts ranging from environmental regulation consulting, collaboration in entrepreneurial initiatives as well as understanding of taxation rules. It also sometimes results to operations partnerships with governments through production sharing contracts. (BP, 2011a) Other prominent regulations include the permitting, safety standards and offshore drilling regulations. Others relate to environmental issues including oil spills, refining, rigs movement as well as water usage. However, although these regulations ensure smooth operations in the industry, they also impose costs on the operators in some instances affecting their performance. (DBRS, 2013)
Industry leaders
The oil and gas industry leadership is dominated by companies in the integrated segment which has the most stable corporations involved in exploration, production, refining, marketing as well as transportation. The leaders in the segment and the global industry include among others British petroleum, ExxonMobil, ConocoPhillips and Chevron. (DBRS, 2013)
Global industry leadership can be illustrated by the table below on the basis of asset ranking as well as on basis of production of liquid oil and gas products.
Rank by asset.
Company Name.
Global liquid oil production in million barrels.
Global Natural gas production in billion cubic feet.
1
ExxonMobil
725
2,383
2
ConocoPhillips
674
1,821
3
Chevron
341
1,906
4
Anadarko Petroleum
88
817
Source: Petro Strategies, 2013
Thus ExxonMobil is the leader in the industry in terms of its assets as well as oil and gas production followed by ConocoPhillips, Chevron and Anadarko Petroleum. (Petro Strategies, 2013)
Market and operational trends
The industry experiences various changes that are shaping it setting some trends that include:
Glowing global demand of oil and gas products despite a short-term market softening.
Increased growth of foreign investments in the industry including developments in the hydrocarbons markets. (Wipro, 2013)
Technological innovation which is increasing competition with early adaptors gaining a competitive advantage.
The industry is also characterized by mergers and acquisitions with operators seeking to enhance their competitiveness. (Ernst & Young, 2012a)
Prevalent marketing strategies
In their bid to compete for a market share in the highly competitive industry, companies employ diverse marketing strategies that include. Differentiation and application of appropriate marketing mix. Differentiation is used by the companies through provision of products which have different features compared to competitors; they also differentiate their services through provision of added services and attributes like BP's petrol stations locaters, journey guides as well as fuel cards. Products are also designed to meet their target customer needs which help in creating brands identities that their customer can identify with. Promotion is done through advertisement of products using traditional media of television and radio as well as new online and internet platforms. Promotion strategies also include price offers on products as well as discounts and point of sale promotions. Companies also use their supply chains as a key marketing tool with distribution centers being strategically located. (Kotler, 1994)
Industry nature
The oil and gas industry is a stable industry without seasonal fluctuations due to the nature of its products which have a continued demand and is only subject to the market players operations and economic fluctuations.
Effect of economic fluctuations
Oil and gas industry is characterized by a demand that has always followed overall economic trends in the recent years. This has resulted into the industry's demand and performance recovering in the year 2010 but faced with challenges in the year 2011 as a result of a strong world economic growth in 2010 which later slowed in 2011. Therefore economic growth of emerging economies has been and is expected to be the industry driver as developed countries lags be-hide with their effort to address internal fiscal imbalances. (Bp, 2011b)
Industry classifications
In its classification and categorization, oil and gas industry is divided into three categories; upstream, midstream and downstream. Upstream involves exploration, development as well as production of natural gas and crude oils while midstream involves the processing storage and transportation as well as marketing of commodities including crude oil, natural gas liquids and natural gas. On the other hand, downstream involves refining of crude oil as well as selling and distribution of products developed from crude oil. These products include gasoline, jet fuel, petroleum and other fuel oils. (Trenpetro, 2013)
Industry licensing
The industry has authorities that license industry operations verifying and ensuring safe installations, environmental protection, products safety, and emergency preparedness of the operators. Failure to meet standards by the companies in the industry results to penalties as well as the companies involved being held responsible for the damages. Licensing is also required for operations in foreign countries for the purpose of exploration, production and marketing. (Earns & Young, 2012b)
Market size and forecasts
Customers
Customers for the oil and gas industry range from industrial, aviation, marine, automobile and energy markets that are mainly in the emerging economies with an example of China.
Industry size
In total, 30 billion barrels which is an equivalent of 4.8 km3 of oil is consumed worldwide per year with developed economies on the lead with an example of US consuming 25% of global oil production in the year 2007. (Trenpetro, 2013) It is also estimated that the overall industry worth was $2,640 billion by 2010 with emerging economies being a significant market with an example of China which accounted for 71% of global energy consumption in 2011. The industry is expected to have an annual growth of 7% hitting $3,700 billion worth by the end of 2013. (BP, 2012b)
Sales trend
In 2011, the global energy consumption grew by 25% which was in line with a 10 year average with consumption in OECD economies reducing by 0.8%. On the other hand, non OECD economies' consumption grew by 5.3%. However, there has been a declining growth in oil and gas consumption in the global energy market for over 12 years which has resulted into a reducing market share of oil and gas in the global energy products consumption. In that respect, oil and gas demand represented 33% of the global energy consumption in 2011. (BP, 2012b)
Market forecasts
The industry's consumption of primary energy was projected to grow by 40% in the next 20 years beginning the year 2011. In addition, oil is projected to represent 53% of global energy consumption in 2030 compared to 57% in 2010 signifying a decline in its popularity. On the other hand, gas is expected to play a strategic role as a lower carbon fuel that is more affordable hence expected to meet 26% of global energy in 2030. (BP, 2011a)
Market leaders
The industry has a characteristic in that state owned companies tend to dominate local markets with the legacy of investments in non growth markets being carried by the private sector companies. However, the global leadership has been taken by multinationals including ExxonMobil, Chevron, BP and ConocoPhillips. (Mitchell, 2012)
Competitors
Existing competitors
BP faces competition in the market from other companies operating as integrated organizations having activities and operations ranging from exploration to marketing. The major competitors include ExxonMobil Corporation, ConocoPhillips Company, Chevron Texaco and Royal Dutch shell. (PetroStrategies, 2013)
ExxonMobil is the largest publicly traded oil and gas Company internationally having operations and facilities in most countries and exploring oil and gas in six continents. (ExxonMobil, 2013)
Chevron is one of the leading companies in the oil and gas integrated segment with worldwide operations. It was formerly known as Standard oil and was rebranded to chevron in 1984 after acquiring Gulf oil Corporation. (Chevron, 2013)
ConocoPhillips operates worldwide having assets as well as businesses in over 30 countries including Canada, Europe, Middle east, Latin America, Alaska and other international markets. (ConocoPhillips, 2013)
PEST/ Generic five force analysis
Business operations are usually subject to various factors outside their control and which determines the opportunities available to them as well as threats. In this respect, the generic five forces analysis is used to analyze the oil and gas industry by the factors affecting its operations.
Political factors
Political instability in the Middle East and African countries affects oil and gas operations in the regions affecting performance.
Government policies like taxation and licensing regulations affects ability of the industry operators to operate in different countries. (API, 2013d)
Economic factors
Economic growth affects demand of oil and gases hence the demand being high during positive growth like 2010 and declining during low or declining economic growth.
Exchange rate fluctuation affects the value of the returns for the companies operating in the international market. (Delloitte, 2012)
Inflation in an economy affects consumers purchasing power hence demand in the industry depending on the various economies inflation rates as low inflation favors demand and vice versa. (API, 2013c)
Social factors
Increasing concern over clean energy is negatively affecting demand for hydrocarbon products in the industry.
The society view of companies operations determines how they relate with them in respect to the industries perceived negative impact on communities where they operate. (API, 2013c)
Technological factors
Technological advance in favoring more complex explorations hence enhancing industry efficiency with an example of its application in hydraulic fracturing to enhance extraction of shale gas.
Technology also provides more effective avenues for promotion like the internet where brands can increase their customer's awareness. (IBM, 2013)
Environmental factors
Environmental concerns over the pollution resulting from the industry operations negatively affect the industry performance.
Environment policies put in place also hampers operations of the industry operators in some country. (API, 2013b)
Company
Company overview
Brief description and market positioning
British Petroleum is one of the largest oil and gas companies worldwide marketing oil products in over 70 countries. (BP, 2012b) It is one of the leaders in the integrated oil and gas sector positioned as a global brand whose interests are operated through subsidies, joint ventures, branches and associates. It is based in London with UK as its center for legal, finance and trading as well as other business functions and has established operations in US, Europe, Russia, Canada, Asia, Australia and South America as well as Africa. In addition, 61% of BP's fixed assets are in OECD Countries while 37% is in US and about 18% in Europe. (BP, 2011b)
Profile
BP operates as an integrated business within four categories of exploration & production as well as refining & marketing. Exploration and production, the operations are responsible for oil and gas explorations, production and field development. It is also the segment responsible for midstream storage, transportation, processing and trading of natural gas. (BP, 2011b)
Refining and marketing is the segment responsible for manufacturing, refining, transportation and marketing as well as trading and supplying of petroleum, crude oil and petrochemicals and related services. (Bp, 2011b)
Through these segments, BP provides gas and fuel for retail brands, transportation as well as energy for light and heat. (BP, 2012b) In addition, the business's products are marketed globally through its key brands including BP, Castrol and Aral with many of its retails being operated as franchises. BP's business model is designed to create value across the entire hydrocarbon value chain starting from exploration to marketing of oil and gas products. (BP, 2011b)
Impacts
In its operations, BP has had both positive and negative impacts on the society and the economy. Such impacts include the significant contribution to government revenues through tax payments, employment creation for communities within which it operates as well as society growth through some of its initiatives like the education initiatives supported in various countries where it operates. However, its operations have had negative impacts including air pollution from its extraction activities as well as the carbon emission from its products and operations. The company has also had negative impact on the environment and society with some of its operational crisis like the Gulf of Mexico's oil spill. (KPMG, 2013)
Challenges
In its operations BP has faced some challenges including the Gulf of Mexico oil spill and increasing pressure on key resources like land, water and minerals which are crucial in enhancing sustainability in energy consumption and production. (EPA, 2013) There have also been challenges in the deepwater drilling and production due to the technical complexity involved. (BP, 2011b) Other challenges includes logistical and communication problems in its operations in remote areas where there is limited or no infrastructure. (New Sat, 2013)
Achievements
Among BP's achievements is its ability to extract shale gas through application of hydraulic fracturing method. This has been enhanced and enabled by its application of technology and innovation to establish responsible construction and operation of shale gas wells addressing the stakeholders concerns over hydraulic fracturing effects and impacts. The company has also been successful in establishing a global brand that seeks to identify with community needs within its areas of operations. (API, 2013a)
Future perspectives
British Petroleum has a plan to enhance its operations through drilling of up to 25 wells per year to the year 2015. The organization also seeks to establish nine major upstream projects startups. In addition, cash margins from upstream operations are expected to double in 2014 compared to the 2011's average. BP also expects that its overall operating cash flow will increase by 50% in 2014 as compared with the 2011 cash flow. (BP, 2011b)
Tools for competition
In its bid to enhance its competitiveness relative to competitors, BP utilizes a wide range of tools including continued innovation which involves technical advances and innovation in exploration, production, refining and related energy usage. It also employs efficient investments with an efficient selection of its markets in respect to value and capital expenditure. It also seeks to build capabilities along the value chain in exploration, production and developments as a key strategic tool for competition. BP also employs successful recruitment as well as development of skilled and talented staff in its operations to enhance its performance. (BP, 2012b) There is also application of strategic partnerships as a tool of increasing competitiveness through enhancing overall efficiency. This can be demonstrated by its effort to enhance its fuel and lubricants efficiency through partnership with equipments and vehicles manufacturers. A perfect example was the partnership with Ford in production of Ford Econetics models that include Monde and Fiesta which are specially engineered to reduce carbon emission and improve fuel efficiency. BP has also partnered with researchers to identify policy pathways and technologies suitable to address the climate change. Example is the company's working with Tsingua Clean Energy Research and education centre with a five year study on the future energy trend in China including water, power and renewable resources. (BP, 2011a)
Company analysis
SWOT analysis
Strengths
British petroleum has a strong brand that is already established in the market.
Its integrated operations provide it with a competitive advantage through the operational synergy from the integrated chain.
It has technical leadership in the industry aided by its extensive research and development efforts.
Its large scale operation provides economies of scale that helps in reducing cost per unit of its products.
It has an extensive and strong supply chain all across all the countries of operation.
Great financial and operation performance provides it with the financial muscle to invest more and outcompete other operators. (BP, 2013c)
Weaknesses
The company's oil resources face the challenge of declining reserves which could hamper its delivery.
Weak safety and risk management capabilities which could result into crisis in operations.
Opportunities
Technological advance in the industry provides an opportunity to provide deliver products more efficiently
Markets liberalization with WTO increasing pressure on countries to open up their markets to foreign firms provides an opportunity to venture into new markets.
Availability of renewable energy resources is an opportunity for the company to deliver more efficient energy products meeting the changing customer needs.
Emerging growth markets like China provides new markets where the company can expand it operations hence increasing its market share.(Ernst and young, 2012c)
Threats
Increasing and intensifying competition in the market threatens the brands performance with operators strategizing themselves through means like mergers and acquisitions.
Increasing environmental concerns risks the sustainability of hydrocarbon products delivery.
Political instability in its operation territories like the Middle East is a threat to its operations.
Increase of substitutes in the market with discovery of numerous clean energy sources could threaten its operations mainly based on the hydrocarbons. (Report linker, 2013)
Portfolio analysis
BP has a diverse portfolio of products and services for consumers at home, businesses and for those on the road. Products and services for road users include gas and fuel cards, gas and fuel stations, BP bio-fuels, Route & journey planner, Motor oil lubricants, BP target neutral as well as Gas and petrol stations locator. Products for home users include Liquefied petroleum gas while those for businesses include BP crudes, BP franchises, Air BP, Asphalt and bitumen, BP shipping, Gas and fuel cards, Gas and power energy, Liquefied natural gas, industrial lubricants, Marine fuels and lubricants, Liquefied petroleum gas, petrochemicals and Natural gas liquids. The extent of the product range is a competitive advantage over the competitors who specialize in production and those without integrated platforms to deliver products at all levels of the chain. (BP, 2013a)
Resources based organization view
BP's key resources shaping its operations as well as its position in the market include human resource, oil and gas reserves, technology as well as equipments and other assets.
People comprise a key resource for BP's operations with its sustainability being highly dependent on their skills and commitment. The company has more than 83,000 employees in over 70 countries and seeks to retain skilled and talented workforce with increased recruitment of graduates creating an internal pipeline for future talent. (BP, 2011a)
Oil and gas reserves include the deepwater reserves which are a key component of its energy mix. The company has deep water drilling in various countries including Gulf of Mexico, Angola, Brazil, and pursuing others in Egypt, South China Sea and North Africa. It also has natural gas reserves which plays a critical role in provision of low carbon energy. The natural gas reserves include those in Oman, US and Indonesia with 80% being unconventional reserves. (Bp, 2011a)
Technology is also a great capability resource for BP enhanced by its research and development which enhances its ability to deliver more efficient energy in an efficient manner. Technology has for instance enhanced its extraction of shale gas through hydraulic fracturing. (BP, 2011a)
Equipments and other assets also form key resources including its refineries where it has 16 strategically positioned refineries in US as well as seven in Europe. (BP, 2013a)
In respect to competitors, BP's effort to have sustainable resource management ranging from human resource, reserves and technology helps in enhancing its competitiveness compared to competitors. However, some competitors like ExxonMobil, Chevron and ConocoPhillips have more assets and reserves hence their ability to outcompete BP in the market. (BP, 2011a)
Strategies
The industry's competition landscape is defined by factors including global production levels, oil and gas demand and prices as well as government regulations and alternative fuels. In that respect and due to the high competition in the oil and gas industry, industry players often employ strategies meant to increase their competitiveness relative to their competitors. Some of those key strategies applied include:
Mergers and acquisitions as companies seek to tap operational synergies on their operation. Example was the acquisition of Gulf oil by Standard oil to form the Chevron brand.
Developing more efficient energy solutions in the market is a strategy that companies use in their bid to meet customers need for clean and sustainable energy sources.
Key partnerships establishment with governments as companies seek to get favorable taxation schemes and access strategic oil and gas resources.
Improving efficiency in order to reduce unit costs is employed through large scale operations which gives firms the power of economies of scale.
Innovation in production technologies has been a key strategy with the companies' bid to deliver efficient source of energies. (Statoil, 2013)
Integration strategy where downstream operators seek to integrate operations through support to the upstream and diversification providing them the opportunity to capture the full value of the chain. (DBRS, 2011)
Seeking establishment of favorable tax schemes and regimes in their countries of operations in order to enhance their competitiveness. (Longwell, 20002)
Conclusion
Oil and gas industry has been demonstrated to be one of the industries with tight competition and experiencing significant changes. The industry has gone through a transformation from an industry solely reliant on hydrocarbons to a wide variety of clean and efficient energy sources including bio-fuels and shale gas among others. Consequently, oil is losing its popularity as the key fuel to other bio-fuels hence its declining share in the energy market consumption. In this respect, British Petroleum has sought to enhance its competitiveness in the market and increase efficiency through innovation, recruitment and development of skilled staff and adoption to new production methods. This has greatly enhanced its competitiveness hence its ability to compete with per companies in the integrated sector of the industry.
