ILM Level 5 Certificate/Diploma

Understanding the Organisational Environment

By Sofiya Yakova

Table of Contents

1. Abstract 2. Introduction 3. Political 4. Economical 5. Society 6. Technology 7. Legal environment 8. Macro-environment 9. Conclusion 10. Appendix 1 11. Appendix 2 12. Reference

Abstract:
BP is a British global energy company and is the 4th largest company in the world. This report is in relation to BPs profitability, product development, market power and placement. The report uses PESTLE analysis to investigate these areas providing an insight to the successes and failures of BP during recent years. It covers the failures of Russia which has been a failure in terms of past successes with western governments. The report also covers BPs market power with the profitability in its products. The report looks at society and our addiction to oil and the technical advances that BP has made. Finally the report covers the Failures of BP on an environmental level which has tarnished BPs reputation as a MNE.

Introduction:
On 14th April 2009, BP celebrated its 100th anniversary of its company. Throughout these years BP has developed into a multinational oil company and is currently the third largest private sector energy corporations in the world, and one of the six super majors (Appendix 1).

Political factors:
BP has looked to grow its oil exploration activities in frontier areas of Russia for its future reserves. In Russia, BP owns 50% of TNK-BP (TNK is AAR, Alfa, Access/Renova owned by three Russian billionaires). TNK-BPs aim is to become a world class oil and gas company and accounts for a fifth of BP's global reserves, a quarter of BP's production, and nearly a tenth of its global profits. However, whilst BP has enjoyed success in other countries on a political level, a crisis surrounding the decision of the Russian owners of the group in an attempt to change the composition of the board of directors and to review the initial agreement outlining how the firm operates has overshadowed the venture. The crisis has involved the Russian secret police with Russian authorities making life difficult for BP senior staff, for example, investigating them for tax evasion, breaking labour laws and ignoring immigration procedures. It is well known that the Russian owners are especially keen on getting rid of the BP appointed chief executive of BP-TNK, Robert Dudley. The Russian government has stated all along that it had no association in the conflict by claiming that the crisis is a private share holder matter within the company. However, Vladimir Putin has reiterated his warning of the risks of a British company setting up the partnership with a group of Russian billionaires. (http://www.telegraph.co.uk/finance/newsbysector/energy/2790882/VladimirPutin-weighs-into-TNK-BP-Russia-row.html Further, former KGB thugs and ex Communist Party apparatchiks are occupying most of the top official positions in the country and that Russian oligarchs are still enriching themselves. The Russian government is now using unacceptable methods to take control of TNK-BP and it would seem that the Russian owners are acting with the backing of the state to try and seize control of TNK-BP and then sell it to some state-owned giant like Gazprom or Rosneft. As the crisis continues, this throws a deep shadow over BPs ability to successfully politically align itself in Russia.

http://web.ebscohost.com/ehost/detail?vid=7&hid=9&sid=31959a78-46f7-46a8-b9fa4ef4bcee14c2%40sessionmgr14&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bwh&AN=113487 19

Economical factors:

BPs Market power is considerable and an example of this can be demonstrated when in November 2009 oil prices fell to US$ 40 a barrel. Such is the market power of BP in its oligopoly (with other major oil producers such as Exxon and Shell), which allowed for oil tankers to sit off the British coastline waiting for the value of the oil that they carried to rise. In some instances, this gave to a 21 % profit for doing nothing except to watch and wait. Massey R (2009), Sharks off the British Coast, daily Mail 19 November 2009, pp.1-4. However, this successful strategy turned to failure when OPEC warned that it would simply increase supply of oil thereby reducing the price if the tankers

continued to remain at sea driving the prices up. http://www.bbc.co.uk/iplayer/episode/p005zyn9/Business_Daily_Is_OPEC_in_Control_of_its_Mem bers/ The recent economic downturn has discouraged BPs near term earnings because of the lower oil and gas prices together with the decline in demand for crude and refined products. This of course has an effect on BPs profitability which will also rely on BPs ability to maximize its assets whilst keeping an eye on operating costs. However, the up side is that BP has enjoyed decades of profitability resulting in nominal debt enabling a healthy payout in dividends. (Appendix 3)

http://www.hemscott.com/news/comment-archive/item.do?id=76608

The astonishing spike in prices in mid-2008 represents the penalty of a brief epoch where global oil demand outran supply. When supply exceeds demand, microeconomic theory says the price should crumple to the marginal cost of production of the most expensive source. As the price drops, the most expensive wells become uneconomical and are shut down, at least temporarily. Price equilibrium is reached somewhere near the production cost of the most expensive source needed to meet global demand. The swing from what the market will bear in the first days of shortage to the marginal cost of the last well in times of surplus can be immense.

BP operates about 10,000 miles of pipelines, making them the second-largest liquids pipeline company in the US. At sea, a fleet of BP-owned and chartered tankers move their products around the globe.

Society:
"We have a serious problem, said George W. Bush in his 2006 State of the Union Address, America is addicted to oil, which is often imported from unstable parts of the world. although not capturing the extent of the problem, Bush was correct, the US is in front of a huge difficulty in the form of its dependence on oil. The attitude was echoed in Obama's first address as President, when he said America's dependence on oil is one of the most serious threats that our nation has faced. It bankrolls dictators, pays for nuclear proliferation, and funds both sides of our struggle against terrorism. It puts the American people at the mercy of shifting gas prices, stifles innovation and sets back our ability to compete. http://americanaffairs.suite101.com/article.cfm/us_oil_dependence. The USA consumes 20.8 million barrels of oil a day, or around a quarter of the world's daily oil use. The cost of a barrel of oil at around $50, American daily oil consumption is worth around $1 trillion on the global market. This is an enormous expenditure, but, bearing in mind that the price of oil

topped $147 a barrel in July 2008, the prospect of greater spending for oil is likely as the US is greatly exposed to fluctuations in the price of oil. A great deal of this oil is enthusiastic because the US has oil inefficient infrastructure. While other world countries have high density urban areas with good public transport links, the USA has embraced the concept of urban sprawl and use of the car. This has led to the average citizen of the US using 250% more oil (11 litres per day) than their counterparts in Germany (4.7 litres) or the UK (4.6 litres). In recent years the gap between demand and supply has lessened. Last year the gap all but disappeared. The penalty of a shortfall would be colossal. If consumption begins to exceed production the price of oil could soar above $100 a barrel. A global recession would follow. Most oil analysts agree that exhaustion of oil fields follows a predictable bell curve. This has not changed since the Shell geologist M King Hubbert made a mathematical model in 1956 to predict what would happen to US petroleum production. The Hubbert Curve shows that at the start production from any oil field rises sharply then reaches an area of stability before falling into a fatal decline. As the filling stations run dry in the UK, and protests build up all over the world, people are starting to find out just how much they rely on oil. In the short term, public services like ambulances, fire-engines and public transport are all put in jeopardy when fuel supplies run low. The developing countries used to account for 26% of oil demand in the early 1970s. Now their share is close to 40% and likely to continue to grow

Technology:
Since 2004, BP has invested over $35 billion in the United States to boost existing energy sources, extend energy supplies and develop new low-carbon technologies. Their main areas of R&D are Wind, Solar, Bio Fuels and Hydrogen Energy with Carbon Capture & Storage (CCS), Gas Fired and Meeting Transportation Challenges. The BP Alternative Energy division has made key investments in solar, wind and hydrogen power. Through a sequence of acquisitions in the solar power industry BP Solar became the third largest producer of solar panels in the world. In August 2008 BP announced a $90million investment and tactical alliance with Verenium Corporation, US to develop lignocelluloses bio ethanol, a highly developed bio fuel. Lignocelluloses ethanol is expected to have many advantages over first-generation ethanol with the use of non-food feedstock, such as miscanthus and energy cane, greater acquiesce per acre of feedstock and potentially greater greenhouse gas emissions reductions compared with conventional fuels.

BP has been working with DuPont since 2003 to explore new approaches to the development of bio fuels. The first product from this partnership will be a new fuel molecule called biobutanol. Biobutanol can be blended at advanced concentrations than bio ethanol, potentially providing further reductions in GHG emissions. BP has also partnered with ABF (British Sugar) and DuPont to

construct a $400 million world-scale bio ethanol plant in Hull, UK. The plant will use some of the UKs surplus of feed-grade wheat as its feedstock.

BP is investing in a number of research programmes to develop advanced bio fuels. These include: * A $500 million investment over 10 years in the US-based Energy Biosciences Institute (EBI), at which expert biotechnologists are investigating many applications of biotechnology to energy, including advanced fuels. * A $9.4 million project in India to examine the possibilities of using jatropha, an inedible oil bearing crop which can be grown on marginal land, as a bio fuels component. * A research partnership with Arizona State University and Science Foundation Arizona to develop a renewable source of bio fuel. One of the feedstocks being investigated is algae. * A collaboration with Mendel Biotechnology to develop energy grass feedstocks for the production of cellulose bio fuels.

Legal environment:

To create an authentic internal market for energy is one of the European Union's priority objectives. The continuation of a competitive internal energy market is a strategic implement in terms of giving European consumers a choice between different companies supplying gas and electricity at reasonable prices, and of making the market available for all suppliers, particularly the smallest and those investing in renewable forms of energy. Further is the issue of setting up a construction within which the mechanism for CO emission trading can function properly. Making the internal energy market a reality will depend on having a reliable and coherent energy network in Europe and an infrastructure investment. A truly integrated market will contribute to diversification and thus to security of supply. http://ec.europa.eu/energy/index_en.htm Accessed on 02/02/10 The Copenhagen Climate Council will create global awareness of importance of the UN Climate Summit (COP15) in Copenhagen, December 2009. The Copenhagen Climate Council works on innovative yet achievable solutions to climate change. It also accesses of what is required to make a new global treaty effective and seeks to promote constructive dialogue between government and business. This will enable political leaders and negotiators to meet at Copenhagen armed with the best arguments for establishing a treaty. The Copenhagen Climate Council aims to demonstrate that achieving an effective global treaty is not only possible but necessary. The strategy is built upon the following; * Creating international awareness of the importance of the Copenhagen UN Climate Summit and the successor treaty to the Kyoto Protocol. * Promoting constructive dialogue between government, business and science.

* Inspiring global business leaders by demonstrating that tackling climate change also has the potential to create huge opportunities for innovation and economic growth. http://www.copenhagenclimatecouncil.com/ Accessed on 02/02/10

Macro-environment:
BP is responsible for 1.376 million tonnes of greenhouse gas emissions, 6 per cent of the world total output. http://www.guardian.co.uk/environment/2006/feb/12/oilandpetrol On 16 October 2007 Alaska Department of Environmental Conservation officials reported a toxic spill of methanol at Prudhoe Bay oil field managed by BP. 2,000 gallons of mostly methanol, mixed with some crude oil and water, spilled onto a frozen tundra pond and a gravel pad from a pipeline. Methanol, which is poisonous to plants and animals, is used to clear ice from the insides of the Arctic-based pipelines. One of BP's largest refineries at Texas in the USA exploded in 2005 causing 15 deaths. The accident continues to shade BP's corporate image because of the mismanagement at the plant. There have been numerous investigations of the disaster including, U.S. Chemical Safety and Hazard Investigation Board which was preceded by the Baker report and BP's own internal investigation. On October 30, 2009 the US Occupational Safety and Health Administration (OSHA) forced an $87 million fine on the company for failing to correct safety hazards revealed in the 2005 explosion. The fine was the largest in OSHA's history.

Conclusion:
Western oil companies are trying to expand through acquisitions and investment, but the opportunities are becoming scarcer. Exxon Mobil, the biggest listed oil company, says that exploration and capital spending hit $27.1 billion in 2009, 4% higher than in 2008. The company expects to spend $25 billion to $30 billion annually to the same end over the next five years. BP intends to spend some $20 billion this year on investment in new projects and drilling, roughly the same level as last year. Ap|pendix 2 The BP Group PLC With fuels and stations, Aral is one of the most trusted brands in Germany. A regional leader, Arco brings cleaner, low-cost fuels to the US west coast. Castrol is one of the world's top motor oils and specialist lubricants brands. High-concept cafe offers affordable and fresh coffee, foods and meal.

Reference

http://ec.europa.eu/energy/index_en.htm http://finance.yahoo.com/q/ks?s=BP http://www.bp.com/bodycopyarticle.do?categoryId=1&contentId=705205 http://www.bp.com/productsservices.do?categoryId=37&contentId=2007985 http://www.bp.com/sectionbodycopy.do?categoryId=6931&contentId=7051661