The history of BP was set in motion as the Anglo-Persian Oil Company in Persia in 1901. William Knox D’Arcy, an English entrepreneur hired George Reynolds, a geologist and explorer to dig Persia for oil. Reynolds could smell natural gas and was most certain they would hit oil. After several years and after D’Arcy had spent nearly all his savings and on the verge of losing his homes, he gave Reynolds one last attempt.
The orders were to drill 1600 feet and give up. This took several months of trials and tribulations but eventually paid off on May 26, 1908 after drilling 1,108 feet. A fountain of oil was discharged. Within a year, the Anglo-Persian Oil Company now known as BP became a business.
The previous years for the explorers were rough but they were no comparison over the course of the next fifteen years, where situations didn’t improve. A few factors which hindered the process of turning thick crude oil into a useable product included lack of equipment, construction delays and sickness. In 1914, the Anglo-Persian project was near bankruptcy for a second time.
The problem didn’t consist of producing the oil but they had no product market. To protect Britain in World War I, the company British Petroleum was created to market its product. During the next ten years, major adjustments were made. Gas and electricity replaced kerosene, gasoline would fuel delivery vehicles and the automobile use immensely increased.
During the 1920’s and 1930’s, gasoline pumps began to appear around Britain. All was going well until World War II which caused gasoline to become a rationed commodity and forced BP as well as others to pool their fuel together. After the war ended, companies began to move forward. D’Arcy reached an agreement with former Shah of Persia to drill in the Middle East. At this time, in 1954, the board changed the company’s name to The British Petroleum Company.
New technology pushed explorations into unexpected lands. Explorations began in Alaska in 1968 and in 1969 BP uncovered the largest oil reservoir ever found on the North American continent. BP was an extremely prominent force. In 1971, Muammar al-Ghaddafi announced Libya would take a higher percentage on all oil left in the Middle East.
Over the next few years, BP’s supply had dwindled down to 10% from 80%. It seems as if this economic factor would cause BP to lose steam but it was just enough for BP to re-focus their energy which brought on the merger of Amoco, ARCO, and Castrol motor oil. With the emergence of a new millennium, BP began to look to the future. Research of fossil fuels and new forms of low-carbon energy was the foundation for BP to unveil its new unified global brand.
In keeping with continuous improvement, BP has published a statement which sums up their company mission, “What We Stand For”. Their mission is to be progressive in building relationships, responsible by being committed to providing a safe environment, innovative by thinking outside the box to find the next breakthrough, and performance driven to provide safe and dependable operations.
The company’s attempt to live up to this mission stands the test of time. Even though BP was recently involved in an oil spill, they have continued to provide the services outlined in their mission. For example, BP was performance driven in the oil spill because they were constantly involved with the restoration and repair of the pipe that was broken.
BP constantly had people searching for a solution. BP is aware of the extreme loss of marine life, environment damage and the loss of jobs. They are still working diligently a year later to correct loss of wages and restoring the ecological environment. In society, a company will not please everyone but in my opinion, BP has owned up to their mistakes and making attempts to correct and restore society back to normal.
BP currently operates in six continents which include Africa, Asia, Australasia, Europe, North America, and South America with products and services available in more than eighty countries. BP is vertically integrated in production and distribution, increasing its power in the economy. BP has involvement in refinery, production, transportation, and distribution, just to name a few areas of vertical integration.
BP’s product line includes gas stations, credit cards, natural gas and solar power energy. In 2008, BP even ventured out to sponsor a professional BASS fishing team. To overcome some barriers in their scope of operations, BP employs multilingual and multicultural staff. By having multilingual employees, they are able to break language barriers with staff in the states and overseas. Having multicultural staff can assist with the cultural differences we face. For example, a handshake, a nodding of the head or two thumbs up are gestures that may be offensive in other cultures. Being a global company, it is imperative BP understands and overcomes all barriers.
In an oligopoly economic environment, there are a limited number of competitors, high barriers to entry and have a strong control over pricing. They also have a kinked demand curve with an equilibrium price point. Some of BP’s competitors include, Exxon Mobil, Apache Corporation (Royal Dutch Shell), and Conoco Phillips. In an oligopoly environment, BP has the ability to lower their prices. This in turn will either cause the competitor’s to lower their prices as well or allow for BP to gain market share because customer’s would most likely be willing to wait in line for gasoline purchase for a savings of five cents a gallon and possibly less.
As of today, BP currently stands number three in the market. After researching the past four years of financials, BP suffered a terrible loss resulting from the Deepwater horizon rig explosion and oil spill. BP’s net income for the year of 2007 was over twenty billion increasing in 2008 to approximately $22 billion. In 2009, net income dropped substantially to $16 billion. The cause of this drop is unknown but in the next few months there was an explosion and fire on an oil rig. In April 2010, oil was found leaking from the well.
During the oil spill, BP paid out billions in research, equipment and loss of wages claims. In 2010 BP’s net income was a -$3.7 billion. In direct comparison to Exxon Mobil, Exxon as well had a strong net income. In 2007, their net income was $20 billion more than BP, $9 billion more than Royal Dutch Shell and almost $30 billion more than ConocoPhillips. BP’s current ratio shows they have the ability to convert assets into cash by 1.15%. In comparison to Exxon Mobil, BP has a greater chance to covert assets. For every dollar BP has in assets, they have 1.15% available for turnover. BP is considered a liquid company; they have enough money that can be quickly converted to cash.
When calculating BP and Exxon’s debt to total assets ratios, I noticed both companies were very close in leverage. BP’s debt to total assets ratio was 65% while Exxon had a 51% ratio. These ratios show the percentage of assets that have been financed by debt. The higher the percentage, the more leverage and more risk a company has. In the Activity ratio category, I used the total assets turnover ratio to determine if BP compared to Exxon is generating a sufficient volume of business for the size of its assets investment.
The lower the ratio, it is reviewed to have slower sales. BP has a ratio of 1.09% while Exxon is 1.27%. Both companies have the ability to use assets to generate sales. The rule of thumb in business finance is anything over 1 is good. The profitability of BP is a sore subject for shareholders after the effects of the oil spill and explosion. BP’s profitability for the past year ended in a -.01%. The net profit margin shows how well a company converts sales into profits after all expenses are paid. This negative standing was expected after the payment of claims, attorneys, and clean-up. In comparison to Exxon, Exxon has an 8% chance to convert sales into profits.
BP has had tremendous growth in sales over the past 3 years. Each year, BP has shown at least a one percent growth in sales. Even with a tough economy, BP recorded a growth in sales. After researching the history of BP, it is my observation that after a major slump, BP rises and surpasses their economic trial. BP has had their highs and lows but with careful strategic management, marketing, and financial budgeting they will soon be on their way to becoming the company who can proudly say again “What We Stand For” and really mean it.
Case Study Questions
1. What do you perceive to be the most immediate challenge that should be a priority for BP? Defend your answer. Discuss what must be done.
The most immediate challenge, in my opinion would be the restoration of the Gulf. The challenge I see BP facing is the question of, at what point have we restored the Gulf back to its original status? As of November 2, 2011, BP was allowed to end active cleanup operations. They are officially off the hook should any more oil wash up. But, the question remains when operations will return back to normal for the people of the Gulf.
Yes, BP has paid almost a billion dollars in loss of wages claims but when will the natives begin to feel it safe to swim, fish, or lay out on a beach again. I believe this is an immediate challenge because BP will never be able to please everyone. There will always be something someone says they can do more of. BP must be fully involved in the Natural Resource Damage Assessment done by the federal government. A pledge to fully restore the Gulf should be made publically and should not stop until all avenues are exhausted.
2. What are the secondary issues that are emerging and must also be addressed? What do you recommend?
The secondary issue I see facing BP would be the reemergence of tourism and deep sea fishing. The oil spill had a ripple effect on tourism, deep sea fishing and the economy as a whole. Tourism drastically decreased because people were afraid of oil washing up on shore. Tourists, as well as local restaurants were not able to serve seafood courses which are popular in the Gulf Coast region.
Commercial fisherman weren’t able to deep sea fish which meant they were out of a job. The oil spill was a lose-lose situation for most people in the area. It has been stated, BP has denied numerous claims for reimbursement for loss of wages. This is an issue because society will hold a grudge against BP for leaving many families without jobs, food and income. BP should pay a minimum amount on all claims provided proof of income then do a follow up on any extenuating circumstances to make the people of the Gulf whole again.
3. What external issues have emerged for BP due to this unforeseen event? Consider and discuss political, legal, and financial as well as others.
A political factor which has emerged is how involved should the federal government be. The government is proposing to request BP release all rights to drilling in the United States. This would essentially cause BP to go out of business. Not only would it affect BP but there would be an effect on the number of jobs lost in the US. As a legal factor, BP has paid out in claims which can extend several more years which means they must continue to have a legal team focusing on the oil spill.
The attention given to the oil spill reduces the opportunity for BP legal analyst to help find ways to work with the government should a situation like the oil spill happen again. The financial factor shows deeply in the loss of net income BP reported. As of November 2011, BP is still processing medical, legal, and death claims. BP will need to formulate a marketing strategy to show people they are still a good company and encourage people to return their faith in them.
4. From your analysis, what role should the Federal government play, given what is or could be at stake in the economy should this company fail. In research concerning the Federal government and the current role they have played in the oil spill, the government should only set guidelines for BP to follow. The Federal government should not provide any other assistance because they do not have the knowledge or the manpower to handle oil rigs. BP has staff that are trained and educated to handle these matters.
The government’s idea to drill farther out and deeper had a significant role in the oil spill. They should take partial blame. The main issue was the result of BP safety control but had the drilling site been closer and in more shallow water, this would have allowed BP to stop the leak quicker. BP is one of the largest oil and gas producers in the United States, if the government was to step in and force BP to sell assets to cover costs, BP could eventually go bankrupt again. At this stage, I believe BP would be out of business for good. If BP fails, 23,000 people would lose their jobs which in turn would cause the economy to remain in a slump.
These 23,000 people work, eat, purchase items and reproduce. Having an amount of people of this quantity out of work would force the government to pay out additional unemployment therefore the economy would take longer to be stimulated.
5. Why or why not should there be some protection against tort actions? I believe there should be some type of protection against tort actions. A tort is defined as a wrong that involves a breach of a civil duty owed to someone else. In most tort cases, it is the responsibility of the injured party to prove that the injury was caused due to negligent acts. If this is proven, the responsible party should pay a determined amount.
However, I do feel some judgments are too extreme. In society, when there is a major event such as a car accident, storm or in this case oil explosion and spill, I feel there should be a cap on the amount which should be paid out in damages. It is my belief that people will sue for higher amounts when they feel the person or company has access to the money. Then when the case is settled the majority of the settlement goes to an attorney and not the injured party. Therefore, I believe there should be some protection for the injured party against attorneys and the negligent party.
6. What steps would you recommend to ensure that an open culture exists at BP that allows issues to be identified and communicated? I would recommend BP to take a step back and re-visit its company mission and vision statement. Having an open door policy would also be an option so if someone sees an area that needs improvement, they can openly state their opinions and offer solutions to correct. BP should also make some long term goals which should include restoration of the Gulf, final compensation to commercial fisherman, and seek ways to make off shore oil rigging safer. These steps would help BP return to a trusting and profitable company.