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Key Topics
- Solution
- INTRODUCTION
- EXTERNAL FACTORS AFFECTING THE BUSINESS
- POLITICAL RISK
- GEOLOGICAL RISK
- RISK OF PRICE
- RISK OF DEMAND AND SUPPLY
- RISKS OF COST
- TAXES
- CLIMATE CHANGE AND ENVIRONMENT ISSUES WITH BRITISH PETROLEUM
- INTERNATIONAL AND GLOBAL POLITICS
- REGULATIONS BY GOVERNMENT RELATED TO THE INDUSTRY
- CONCLUSION
- APPENDIX
Solution
INTRODUCTION
Multinational companies working in highly complex, different kinds of economy, social structures need to enhance, conform and build up their systems to ensure that they are up to the mark. It is important for firms like British Petroleum to look at the factors that affect their business and profitability. Being in a highly capital intensive market, it is important that the firm looks and decides with utmost care.
There are a slew of factors that are ruling the minds of corporations. Issues ranging from politics, taxes to the environment have started being involved in businesses like never before. Operating in different nations means looking at laws that may need a change in the way a firm works.
Factors that affect the way a company functions can be external as well as internal. It is important that the firm prepares for all these factors to ensure that they don’t falter .
Environment has been one of the biggest issue for oil and gas industry. There are stringent rules and regulations in various countries and they have to be followed. Oil spills have been a headache for the firms in the industry. These not only give a financial set back but also hurt the credibility of the firm in a big way.
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EXTERNAL FACTORS AFFECTING THE BUSINESS
There are many factors that play a vital role in the way British Petroleum does its business. Some of the factors are explained below.
POLITICAL RISK
The essential way that governmental issues can influence gas business is in the administrative sense, yet it's not inexorably the only way. Regularly, an oil and gas organization is covered by a wide range of controls and regulations that restricts the location, when and how is the process of extraction done. The understanding of laws and various regulations can likewise contrast in different states for the firm. All things considered, political kind of risk appreciates when oil and gas organizations are taking a shot at the deposits that are on foreign soil.
Oil and gas organizations have a tendency to incline toward nations with stable political frameworks and have in past granted lease for long term without much regulatory hassles. Nonetheless, some organizations just go where the oil and gas is, regardless of the possibility that a specific nation doesn't exactly relate to the preferences of the firm. Various issues may emerge from this, like sudden nationalization and/or moving political winds that change the administrative environment. Based on which nation the oil is getting taken from, the arrangement an organization begins with is not generally the arrangement it winds up with, as government of that particular nation may change its decisions after the capital has been invested, so as to reap in more profits for the country.
Political risk can be pretty obvious in case of countries that are developing and do not have a stable government or defined dictatorship.
A critical methodology that an organization takes to ensure minimization of risk is cautious examination and building maintainable associations with its worldwide oil and gas accomplices, in the event that it wants to stay in there for the long run .
In case of a political blockage in a country, the firm can’t really do much but agree to the terms of the government. After the infrastructure is build, the government generally has an upper hand when it comes to negotiations. Considering the intensity of capital that goes in the business of gas, political risk is one of the biggest for British petroleum. Any change of command in the country can turn the tides for or against the company.
GEOLOGICAL RISK
A hefty portion of the simple to-get oil and gas is now tapped out, or already has been identified and shall be tapped out soon. Investigation has proceeded onward to regions that include penetrating in environments that are less friendly like the middle of a scary ocean. There is a wide assortment of unpredictable oil and gas extraction systems that have crushed out gas assets in zones where it would have generally been inconceivable.
Geographical danger refers to both the trouble of extraction and the likelihood that the available stores of gas in any store will be less than what was assessed and expected. Oil and gas geologists strive to minimize topographical danger by testing every now and again, so it is uncommon that appraisals are misguided . They use words like "possible," "proven" and "probable" before store evaluations, to express their level of trust in the discoveries.
This risk is generally beyond the control of the firm but plays a very important role. This determines risk not just to the firms but also to the lives of people who are working on site. Constant care is taken by British Petroleum to ensure that the safety of the workers is taken care of.
RISK OF PRICE
Apart from the geological danger, the cost of oil and gas is the essential element in choosing whether a potential reserve is monetarily plausible.
Fundamentally, higher the barriers for the factors (geological) to a simple extraction, the more value hazard a given venture faces.
This is on the grounds that unpredictable extraction is a more costly affair than a vertical drill that reaches the gas reserve. This doesn't imply that oil and gas organizations consequently mothball a project that becomes slightly unprofitable because of a value plunge .
Most of the times, these undertakings can't be rapidly closed down and after that restarted. Rather, Oil and Gas firms endeavor to figure the presumable costs over the duration of the project keeping in mind the end goal to choose whether to start the project or not. Once a task has started, risk of price shall always be there.
RISK OF DEMAND AND SUPPLY
Shocks from supply and demand are an undeniable danger for oil and gas organizations. As said, operations take a considerable amount of capital and also take good amount of time to be on track, and they are difficult to mothball even when costs go south, or appreciate production when they go north.
Generation happens in an uneven way and is among the prime reasons that makes the cost of oil and gas so unpredictable. Other monetary factors are also involved, as money related emergencies and macroeconomic elements can reduce capital or generally influence the business autonomously of the general price risks involved.
A large supply compared to the demand is really bad for the health of the firm. Like in current scenario where the prices have plunged over 50%, the going has been tough for British Petroleum and other firms in the business .
RISKS OF COST
These previous dangers sustain into the greatest of all of them - operational expenses. The more grave the control by the government and the more troublesome the drill, the more costly and undertaking gets to be. Couple this with indeterminate costs because of overall generation which is out of scope of any organization's control, and one has some genuine cost concerns. This is not the end, in any case, the same number of oil and gas organizations battle to discover and hold the qualified specialists that they require amid good times, so finance can rapidly ascend to add another expense to the general picture. These expenses, thus, have made oil and gas an exceptionally capital-escalated industry, with less and less players constantly.
As the cost can really not be predicted during the start of expedition, the firm always keeps buffer. It takes time for a project to get in the positive territory.
TAXES
Taxes is also a big concern for British Petroleum. Every country has its own set of rules with respect to taxes. It has been observed that countries constantly keep changing their tax requirements. This makes the task of the firm difficult. Tax benefits have almost dried up for the firm in all the countries where the firm operates.
Some other risks that are associated with the firm are listed below:
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The inability to be able to expand the reserves or getting some replacement reserves.
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Lack of enough liquidity in hands or capital access.
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Global concerns related to growth of world economy.
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High level of competition in spite of only a handful of major players.
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Extreme weather conditions.
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Natural disasters and the costs involved in getting the rigs back to the stage of functioning.
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Operational hazards like spills, injury to workers, blowouts and blasts or fire on the site.
CLIMATE CHANGE AND ENVIRONMENT ISSUES WITH BRITISH PETROLEUM
British Petroleum has started taking steps towards betterment of climate. The efforts though should be lauded, are very small compared to the amount of lobbying that the firm has historically done over the last few years.
British Petroleum has been Europe's fiercest rival of activity on environmental change, as per a positioning of organizations by their endeavors to hinder carbon-cutting activities.
Almost 50% of the world's main 100 worldwide organizations are attempting to subvert atmosphere approaches by campaigning, publicizing, and impact selling. This was informed by a firm Influence Map which is UK based.
Yet, while all the real fossil fuel firms rank at almost the bottom of the list of the firms, BP comes out as Europe's biggest supporter of polluting energy, contradicting even minor measures to raise carbon exchanging costs .
"BP has been reliably restricted to all the primary types of environmental change control that have been tried," voiced Thomas O'Neill, the exploration chief of Influence Map. "There is almost no signs of positivity and they are among the board members of quite a few obstructionist associations, some of which give an exceptionally questionable record of environment issues"
Oil plays an unfathomable and imperative part in our general public as it is sorted out today. Oil happens to be more than the primary source of energy
Other than being an imperative vitality source, petroleum items serve as feedstock for a few customer merchandise, subsequently playing a developing and significant part in individuals' lives.
However, the oil business holds a noteworthy capability of dangers for the earth, and may affect it at various levels: air, water, soil, and thus all living creatures on our planet. Probably the most dangerous and widespread problem of oil and gas industry exercises is contamination. Contamination is connected with essentially all exercises and is present at every phase of oil and gas creation, from exploratory exercises to refining. Emission in the forms of gases, contaminated water, solid wastes and many more hazardous substances are formed during various phases like drilling, extraction refining and transport. It is estimated that over eight hundred varieties of chemicals are generated in various stages .
Other ecological effects include increasing greenhouse effect, degraded quality of water, contamination of ground water table, chances of acid rain and many more.
The oil and gas industry may add to biodiversity misfortune and also to the annihilation of biological communities that, now and again, might be unique.
Most potential natural effects identified with oil and gas industry exercises are now well documented. It is still important to discover approaches to conciliate industry improvement with sustainable development.
After being extracted and transported, raw petroleum needs to go through the process of refining to convert them into products that have a high business value.
Oil refineries are real polluters and the results are waste waters, discharging risky gasses into the climate and creating strong waste that are troublesome both to treat and to discard.
Then again, regardless of its potential dangers to the earth, the oil business assumes a positive part in the public arena also. Job creation to the tune of millions and producing a critical volume of tax incomes and various kinds of royalties to national governments.
Along these lines, oil organizations like British Petroleum may benefit significantly more and in various ways by executing strategies that are environment friendly .
INTERNATIONAL AND GLOBAL POLITICS
Oil is a nothing less than a curse, it is frequently said, and that sentences the nations delivering it to a presence characterized by war, defilement and tremendous imbalance. No country gets away from the political results of our aggregate reliance on oil. It shapes the legislative issues, both in areas, for example, the Middle East, which depend upon incomes from oil creation, and in the areas where the demand for reliable energy is immense.
At first, Coal was the main source for energy but was so open to interruption that governments in the West were defenseless in front of mass requests for vote based system. In the mid-twentieth century, the improvement of abundant and relatively cheap energy from oil, most prominently from the Middle East, offered a way to lessen this defenselessness to vote based weights. The wealth of oil made it workable without precedent for history to redesign political life around the administration of something now called "the economy" and the guarantee of its unbounded development. The legislative issues of the West were highly dependent on an undemocratic Middle East .
In the twenty-first century, the oil-based types of present day political issues have ended up being unsustainable. Interventions from foreign countries and military rule are prominent in the Middle East, while governments all over the globe seem unequipped for tending to the emergencies.
British Petroleum’s oil spill has shown the high integration of gas industry and politics. The government of United States used the case to project itself as eco-friendly and ensured that the firm is fined in the strictest way possible.
A White House commission moreover reprimanded BP and its accomplices for a progression of cost-cutting choices and lacking security framework. Additionally they reasoned that the spill came about because of "systemic" main causes and "lack of significant reforms both in the policies of the government as well as industry standards"
In the month of November in 2012, BP and the United States Department of Justice settled government criminal allegations with BP confessing to 11 checks of manslaughter, two misdeeds, and a lawful offense of lying to the Congress. BP additionally consented to four years of government observing of its morals and safety practices. The Environmental Protection Agency reported that BP would be banned from any and upcoming new contracts with the government of America. British Petroleum and the Justice Department of USA consented to a record-setting of amount $4.525 billion in fines. As of February 2013, criminal and common settlements and installments to a trust store had taken a toll on the organization to the tune of $42.2 billion.
Among America's most outspoken, straightforward and powerful opponent of environmental change control got contributions for elections that can be followed all the way back to senior BP staff, including CEO Bob Dudley.
Jim Inhofe, a Republican congressperson from Oklahoma who has energetically crusaded against Carbon tax, got $10,000 (£6,700) from the kitty of British Petroleum's Political Action Committee (PAC). There was a widespread criticism for the same. This shows the amount of integration and connection that the roots of politics have with the oil and gas industry. The firms are no doubt taking some steps towards a greener planet but on the other hand are doing the best within their power to avoid any kind of restrictions or monetary compliance on them or their businesses.
REGULATIONS BY GOVERNMENT RELATED TO THE INDUSTRY
The oil and gas industry is perceived as one of the vital part of the global economics in both the long-and the short-term. In late decades, they have been liable to investigation on the premise of natural issues including air and water quality control, regulations related to offshore activities and handling and management of chemicals. This has happened in conjunction with different measures used to support energy generation and setting up the infrastructure especially in the United States.
For example, there is no national oil and gas organization in the United States. Rather, there are various organizations working in this particular sector, including huge global firms.
The working of these organizations are regulated at both state and the federal level. To start exploration, the business must get a permit for development, permission for drilling and a permit for conducting the operations. The requirements for obtaining these grants are stipulated at the state level. There must also be an open public audit period. All grants must be acquired before starting the process of exploration, or the candidate may confront delays and punishments- both monetary and legal.
Environmental control can be seen as positively affecting the gas drilling part specifically. Existing measures targeted for reduction in the greenhouse gas emissions principally impact the established coal power units in a negative way .
The monetary effects of this have prompted an artificial acceleration in the sector of natural gas. The government of US is inclined towards further investigation of shale gas and has taken measures, for example, the Natural Gas Pipeline Reform Act, to speed up the government survey process for applications for gas pipelines that run from one state to another.
The impacts of the Clean Air Act have chiefly been positive for the gas boring industry. The main agenda of this particular act is to ensure reduction in emission of greenhouse gases, with a long haul objective of 95% decrease. The act mentions that firms must take measures to trap gas that escapes into the air (green culmination), and there are great incentives for organizations to actualize this innovation ahead of the stipulated deadlines.
The innovation takes into account the gasses to be trapped and treated, and afterwards sold as opposed to being discharged as waste. The assessed incomes are required to surpass the expenses of consistence. The U.S. Natural Protection Agency (EPA) proposes that there will be savings to the tune of $11 million to $19 million when the standards are totally executed.
While usage of this innovation should be basic for vast, multinational organizations, smaller organizations will most likely be unable to cope up with the initial start-up expenses. 80% of the household oil and gas organizations in the U.S. are small, frequently with less than 10 workers on their payrolls. These activities may severely affect the ability of these firms to stay afloat.
British Petroleum has been able to comply with these regulations. Blessed with deep pockets, the firm was able to ensure that they have no major hiccups in any part of the entire process-ever.
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It has been observed that the business of gas and oil is a highly complex, capital intense and risky business. With many external factors to look at, it is an industry with constant changing dynamics. The close proximity and integration between politics and the sector has been widely explained. With norms related to environment getting stringent by the day, British Petroleum has to also ensure that it falls in line on every parameter.
The fact that the business is highly regulated makes it an easier field. As explained using the example of America, almost all nations have their own set of regulations and permits that are required for the company willing to enter the game of oil and gas.
APPENDIX
British Petroleum (BP) is a multi-national gas and oil organization headquartered in the United Kingdom. Considering the net income, BP ends up being among the five biggest organizations in the field of energy on the planet. Working in the field of the gas and oil industry, the enterprise does an extensive variety of operations, specifically exploration, refining, oil production, trading, generation of power, production of renewable energy and so forth. BP has presence in more than 80 nations throughout the world.
The organization was established in 1909 as the Anglo-Persian Oil Company and in 1954, it was known as the British Petroleum Company. It merged with Amoco in the year 1998.
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