This report will investigate the three most prominent external PESTEL factors which face BP (Beyond Petroleum). The report will provide a detailed look at how these factors affect the business, and explore the reasons behind them. Finally this report will make conclusions based on these findings.
2.0 BP the company
BP is one of the world’s leading oil companies on the basis of market capitalisation and proven reserves. Its main businesses are Exploration and Production, Refining and Marketing, and Chemicals. Exploration and Production’s activities include oil and natural gas exploration and field development and production, together with pipeline transportation, natural gas processing and gas and power marketing.
The activities of Refining and Marketing include oil supply and trading as well as refining and marketing. Chemicals activities include petrochemicals manufacturing and marketing. In addition, the Company has a solar energy business which is one of the world’s largest manufacturers of photovoltaic modules and systems. ‘Multinationals such as Shell and BP experience great complexity, operating across diverse political, legal and cultural systems’ Boddy (2008)
2.1 Political Factors Affecting BP Oil Production
Political unrest in countries such as Libya and Egypt in addition to the unstable environment within the Middle East, have had significant influence on the price of oil. In 2007 BP invested over $900 in an agreement with Libya to drill over 21,000 square miles of land. Libya produces about 1.8 million barrels of oil a day, and exports more than 85% of its production. However due to recent events and the political unrest, the company has had to withdraw its employees from the region, who had been working on exploring and drilling new oil fields, bringing operations to a complete standstill.
On Feb. 21, oil rocketed to a two-year high of more than $105 a barrel in what has been described as a domino effect of protests and civil unrest seemingly swept from Tunisia, to Egypt and onto Libya. This is not the first time that protests have reflected on oil pricing, but it is likely the most significant to date. Approximately 58 per cent of Libya’s GDP stems from petroleum revenues.These countries are also subject to threats of terrorism and suicide bombers on a daily basis causing yet more instability and sensitivity in these regions.
Since its peak in 1996 of 922,000 barrels/day, Egypt’s oil output has been in continuous decline by an alarming 26%. Further concern for the country is this decline is amplified each year as the rate of depletion in existing wells accelerates.
Egypt’s economy is like many middle-eastern economies dependent on oil exportation. This is because it relies on the revenue produced by oil exportation to import sufficient food supplies to feed its starving nation. But as Egypt’s post-peak oil production plummets, so do food subsidies and food prices surge. Egypt are unable to find buyers for the currency it prints and double-digit inflation is the norm. As food prices increase worldwide, this increase in price is multiplied in food importing countries like Egypt with a weak currency..
BP has invested in Egypt for over 44 years and has contributed to almost half of the country’s Oil and Gas production, and is the country’s largest foreign investor. The unrest in Egypt in early 2011 is a significant concern to BP since the country controls the Suez Canal, which effectively is the world’slargest gateway for oil transit, and as the food riots gradually take the shape of a revolution, the future of the Canal is uncertain.
Nearly 3 million barrels of oil transit daily through the Suez Canal, as much as Canada’s daily output, making it one of the world’s most important oil routes. The tankers ferrying this oil are coming from Saudi Arabia, Kuwait, Iraq and neighbouring producers and are for the most part headed to US and to a lesser extent Western Europe which also relies on the North Sea and Russia for its oil supply.
If the country continues to be de-stabilised due to war or political unrest, the security of the Suez Canal trade route would be threatened and subsequently all ships bearing oil from the region would be forced to navigate around the African continent which would increase logistical costs to BP in the transit of oil from the Middle East to Europe. This would have a negative impact on the demand for oil, as this would decrease as prices increase, causing loss of revenue to BP and other companies dependent on the Suez Canal trade route.
‘The price of Brent crude oil has passed $100 a barrel for the first time since October 2008 on concerns about the political unrest in Egypt. The price of Brent rose $1.66 to $101.08 before falling back to $100.01. Oil prices had risen earlier in the day on fears that protests could lead to the closure of the Suez Canal and disrupt oil supplies’.
3.0 Economic Factors Affecting BP Oil Production
Although the political factors surrounding the events in the Middle East and Libya are having a major effect on BP and other major oil producers, a closer look at the economic pressures facing BP will cause concern for the long term future of world oil consumption. These pressures can be attributed to VAT increases in the UK, increasing Oil Prices, reduction in world oil consumption
3.1 UK VAT Increases
The increase in VAT in the UK became effective in January 2011, and has affected the price of products derived from the refining of crude oil. These amongst others include plastics, paint, detergents, gasoline, and diesel fuel. ‘Economic factors such as wage levels, inflation and interest rates affect an organisation’s costs. Increasing competition, and the search for cost advantages drive globalisation’.Boddy (2008)
The profit margins for companies such as BP can be affected as sales decline due to the decrease in demand of these derivatives as a result of the 2.5% increase on VAT. Consumers and manufacturers may not be able to order the same amounts of the products derived from the refining of crude oil due to affordability.
3.2 Increasing Oil Prices
The Brent Crude index has shown significant rises in the cost of oil over the last few years, which is largely being proportioned to a series of world events such as the political unrest in Egypt, Iraq, Tunisia and most recently Libya the world’s sixth largest oil producer. All of which BP have had significant investment in the refining of oil within those countries. The political unrest in Egypt saw the price rise to $101.08 per barrel and finally to $105 per barrel following the unrest in Libya. These events affect the price of oil for two reasons.
Operations within those countries are either reduced or suspended which then causes an element of panic buying. As detailed earlier in this report the geographical significance of Egypt and the Suez Canal particularly heightens this consumer fear as it disrupts the perceptions of the availability of oil.
3.3 Reduction in World Oil Consumption
Oil Prices may be increasing, however statistically world oil consumption is decreasing. Up until 2007 they had risen, however since then data provided by BP’s energy review 2009 shows it to be in decline in every area with exception to Asian Pacific Grouping. This was the first decline since 1982, which would support the evidence that similarly to the recent decline it could have been consequential to global recessions.
Although it is also possible that greener attitudes and a heavier commitment by global political leaders to reduce carbon emissions and a move towards hydro power or solar power could also have been a factor. BP profits were unsurprisingly lower than the previous year by 25%. If we continue to head into a double dip recession it is likely that this would further harm BP’s profit margins as oil consumption continues to decline.
3.4 Environmental Factors Affecting BP Oil Production
As an oil company, BP is directly linked with the use of fossil fuels linked with major environmental challenges on a global scale. With its major – and controversial – rebranding and commitment to becoming a sustainable energy company rather than simply an oil company – it has inspired and impressed some, and irritated others. In 2000 BP undertook a £100 million rebranding initiative, in an attempt to improve its greener attitude to move away from oil, towards a more environmentally focused future.
However despite a new company emblem and a significant financial investment the company still faces continuous controversy in wake of a series of global disasters. In recent years the company has experienced oil spills in Alaska in 2005 and most significantly the largest oil spill recorded in the Gulf of Mexico in 2010. The latter of which significantly saw share prices plummet in the immediate aftermath of the disaster. [pic]
In addition to severe financial penalties imposed by international law, this has also consequently caused the US government to implement an immediate moratorium on new deep water drilling for the foreseeable future in the region, and a suspension of drilling off the coast of Alaska. The aftermath resulted in a High Court judge granting permission for Greenpeace to bring a case arguing that it was unlawful for the UK government to grant new licences in the wake of BP’s Gulf of Mexico oil spill.
The most significant environmental impact facing BP is the impact on climate change caused by the use of oil by BP’s customers. Scientific evidence has raised serious questions over if the human race can afford to burn all the hydrocarbons whose existence we have so heavily relied on in oil refinery. The results of the above can result in a tarnished corporate image, and the challenge of which BP’s profits are continuously affected. As the share prices show a damaged reputation will affect its image and therefore its profits.
This report has established the importance of the three most prominent external pestel factors facing BP. The importance of these to BP are that in order to overcome them they must be aware of the issues and challenges facing them. Although other legal and technological factors are significant external factors facing the business, the international globalisation of the company and the complexities of international politics and world events in addition to environmenally tarnished reputation cause greater concern to the external factors facing BP. Despite BP’s rhetoric about social responsibility, profits seem to count most.
They might invest in solar energy and admit that global warming should be prevented, but they will do all they can to ensure they can go on drilling for fossil fuels and expanding their markets for them. This report concludes that BP’s focus should be on re-establishing its green image and international reputation.
Boddy, D, (2008), Management an Introduction 4th Edition, Essex: Pearson Education Limited http://seekingalpha.com/article/254295-libyan-unrest-could-affect-bp-oil-production[Accessed 19 March 2011] http://www.bbc.co.uk/news/business-12328745[Accessed 19 March 2011] http://www.bbc.co.uk/news/business-12328745[Accessed 22 March 2011]
http://www.bbc.co.uk/news/business-12176898[Accessed 22 March 2011] http://www.natural-environment.com/blog/2008/03/06/uses-of-crude-oil/[Accessed25 March 2011] http://seekingalpha.com/article/254295-libyan-unrest-could-affect-bp-oil-production[Accessed 28 March 2011]
http://www.suite101.com/content/bp-goes-from-beyond-petroleum-to-big-polluter-in-csr-setback-a235924[Accessed 29 March 2011] http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8346145/BP-Gulf-of-Mexico-spill-Greenpeace-can-bring-case-against-UK-deepwater-oil-drilling.html[Accessed 1 April 2011] http://shareprices.com/detail?chart_time_period=2_year&movingaveragetype=&chart_comparison_tickers=e.g.+RBS%2C+BARC&tidm=BP.&startyear=2011&startmonth=01&startday=07&endyear=2011&endmonth=02&endday=07&frequency=daily[Accessed 1 April 2011]
http://www.cnbc.com/id/37553167/BP_s_Corporate_Image_Moves_Pro_and_Con http://www.sourcewatch.org/index.php?title=BP[Accessed 1 April 2011] http://www.thesun.co.uk/sol/homepage/news/3498975/Petrol-prices-rising-again.html[Accessed 3 April 2011]
———————–Beyond Petroleum Pestel Analysis
Brian Vanhinsbergh-Perez Business and the Environment4/4/2011