BP and the Consolidation of the Oil Industry_Group 1_Sec A.docx

BP and the Consolidation of the Oil Industry Group 1 Anushree Mundhra 14A Ishita Agarwal 23A

Avni Malhotra 17A Neha Rai 36A

Chandraket Mall 19A Swati Verma 53A

BACKGROUND Prior to Year 1988, BP had core competency in the field of exploration and production. Also, its strength mainly lied in the organizational and financial discipline that had contributed to its short term performance. But still, the company possessed following weaknesses: 1. Inadequate natural gas exposure – this impacted the overall results as natural gas sales were more profitable to than oil sales 2. Poor returns 3. Weak competitive positions in the retail segments in United States and Europe 4. Insufficient access to growth/emerging markets 5. Narrow portfolio in chemicals Consequent to mergers and acquisitions in the later five years, the company developed distinctive capabilities and assets in the areas like refineries, service stations and petrochemicals plant. The major gains from the inorganic expansion were: 1. Reduction in the exploration and production costs 2. Increase in Return on fixed assets (Refining and Marketing) from 7.5% in Year 1996 to 21.6% in Year 2000 3. first mover advantage of new opportunities, such as investments in emerging markets

FUTURE STRATEGY BP has four strategy options for growth in future: 1. 2. 3. 4.

Acquisition Internal growth Divesture Business diversification

In our opinion, the company should follow a mix of internal growth and business diversification strategy

RATIONALE: 1. Internal growth

In past years, BP has only focused on cost reduction (through acquisitions). However, for sustainable growth, company needs to focus upon the productivity. This is only possible through internal/organic growth. 2. Business diversification In order to remain relevant in the changing times for energy sector, BP needs to diversify into fields like Renewable energy segment (Solar, wind), B2B energy services like consulting. Advantages of Internal growth strategy: 1. This strategy involves less risk than the external growth 2. Growth can be financed through internal funds 3. This approach allows business to grow at a more sensible rate

CORPORATE

LEVEL APPROACH FOR THE CHOSEN STRATEGY: 1. Grow sustainable free cash flow by: a. Growing oil and gas production (E&P) b. Controlling cost increases c. Increase ROCE d. Maintain capital discipline 2. Using the above free cash flow for building a portfolio that is distinctive but also fit for the future. A portfolio that builds on the company’s strong resource base (exploration and production) and is capable of delivering sustainable growth over the long term.

STRATEGY

IMPLEMENTATION AT BUSINESS LEVEL: A. Exploration and Production I. Investment in a portfolio of large, lower-cost oil and gas fields which will give high ROCE (return on capital employed) II. Increased efficiency in management of these assets. III. Investment in developing technology like geophysical imaging, etc. IV. Disciplined increase in capital spending B. Refining and Marketing I. Develop deep business-to-business customer relationships that can transform into strategic partnerships II. Improving margins in marketing through superior focused customer offers and rigorous cost management C. Petrochemicals I. Focusing on core products that are used in manufacturing of a wide variety of consumer products like plastic bottles, food packaging. These products should be chosen on the basis of growth characteristics, group integration value. D. Renewable energy I. Participation in clean energy segment like Solar, wind farms.

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