The UK Oil And Gas Industry

Published Date: 23 Mar 2015 Last Modified: 09 May 2017

The oil and gas industry of UK benefits our daily life by providing energy to power industry, oil to transport and heat to homes. Through its broad supply chain, it employs hundreds of thousands of people and makes a major contribution to the UK economy in terms of tax revenues, Technologies and exports. Since first production in the 1960s, industry operations continually respond to the challenges presented by price unpredictability, maturity, changing regulation and perceptions within society. It takes responsibility with help of government is to make sure the nation achieves the maximum benefit from its oil and gas reserves. The economic and social benefits from oil and gas production must be balance with good, safety of the natural resources and environmental care. The industry is committed to a range of measures and targets with the consultation of supply chain, regulators, government, non-government organizations and the wider stakeholder community that is monitored in a transparent way.

Industrial Analysis

Pest Analysis

Fullen S (2006) Pest factors are external to your business and need to be understood when analyzing the industry as whole. It measures the market potential by indicating areas of growth and decline.

Political Factors

UK Oil and Gas (Press Release: 2010) Government distinguishes the importance of Political stability in the tax system that provides certainty for business. Oil and gas is largest corporation tax payer and industrial investor spending ¿½4.7 billion, it play role in growth and recovery of nation¿½s economy.

Economics and commercial director of UK oil and gas Mike Tholen (2010) said that latest budget June, 2010 provided stability because huge investment built up and ready to go within our industry.

The corporation tax for the industry is 27 % for 2011-12, with further 1 % cuts in each following years and small profit rate will reduced to 20% from April 2011.

Economic Factors

Oil and gas industry provides highly skilled and well paid jobs for 450,000 people across the UK and around 10,000 business including multinationals and small companies are working in supply chain. The reduction in corporation tax will encourage innovation and motivate growth and development in overall industry.

A report on energy and climate change by UK parliament (2009), Employment in the industry is depending on the continuing investment. Oil and Gas UK estimates that the investment of 1 billion pounds can create 20,000 jobs. The fall of 2.5 billion pounds over the next two years, could loss of up to 50,000 jobs.

It increasingly tough for the oil and gas companies to access to credit and equity because of banking crisis has deteriorated an already difficult situation. The only one British bank- Lloyds/HBOS- is lending to oil and gas companies and not lending to new operators. Small companies need debt capital and large companies reviewing their budgets due to recession and banking crisis.

Oil prices were $50-80 per barrel range in 2006- 2007, rise steeply at $147 in 2008. In Feb. 2009 falls to five year low of $32 and increased in May to $60. Short term competitiveness of the industry and price of oil are the key factors determining levels of investment. The oil and gas faces high cost, low prices, global recession and lack of affordable credit.

Legal Environment:

The government ensures the security of supply within the framework of moving towards a low carbon economy while determining UK oil and gas policy. UK health and safety executive explained UK health and safety law protect all personnel health, safety and welfare on offshore installations. Identify hazards, assess the risks and its consequences and follow the suitable procedure and control the risks. According to health and safety act 1974 at work, place duties on employers and everyone must play their role to ensure health and safety.

BBC News 22 August, 2010 Oil and gas industry has to improve safety of workers on offshore because of big rise in injuries and other serious incidents. The average number of injuries for the previous five years was 42.

Environmental Factors

UK oil and gas industry works with government and its stakeholders to reduce the environmental impact of operations. Exploration and production of oil from resources is industrial process that has some degree of impact on environment. The secure energy supply is big challenge that has to balance with the benefits. All operating companies are required to have Environmental Management System (EMS) in place that ensures appropriate control measures on particular location or operations. Regulation and directives by EU and recommendations by OSPAR provides protection for the environment and their goals and targets are given in UK legislation.

Technological Factors

Economic report of UK Oil and Gas 2009, UK oil and gas industry is working in harsh and challenging environment. Investment in innovative technologies is a major factor in achieving maximum recovery from reserves. North Sea takes a position at forefront of offshore engineering in subsea technology to recover oil and gas from complex reservoir and deep waters. UK oil and gas fields are complex, small and economically marginal. Latest technology helps in revitalization of resources from deep water, heavy oil and high temperature

In report 7 Oct, 2010 of Industry¿½s Technology Facilitator (ITF) helps in identifies need and facilitates the collaborative technology innovation and development in oil and gas industry. Technological collaboration deals with volatile prices and mature field production and small field development cycle. It recognizes the country as a technical inventor.

The introduction of new novel underwater cutting device sponsored by BP, CoP, and Shell is cost effective and cutting speed is comparable with sharp water jet cutting in air.

Socio-cultural factors

http://www.pwc.co.uk/eng/industries/oil_and_gas_industry_issues.html

http://peakoiltaskforce.net/download-the-report/2010-peak-oil-report/

http://www.duke.edu/web/soc142/team9/SEF.html

http://en.wikipedia.org/wiki/Oil_and_gas_industry_in_the_United_Kingdom#Health_and_Safety (waisay he

SWOT Analysis

Kern R (2001) SWOT analysis helps you understand the product attributes, the competition, opportunities and determines the current state of the market and outline challenges that lie ahead.

Strengths

Leading Market position

British Petroleum has a strong position in market. The company is one the largest in production of oil and second largest in gas production. BP is largest producer of hydrocarbon in the UK and Largest producer of oil & gas in North America.

In addition, BP is largest global supplier of fuels to the aviation businesses and supplying fuel in 64 countries and has marketing sales of more than 25 billion liters. The company is one of the largest suppliers of Marine Lubricants to the marine industry and has globally presence in over 850 ports. Moreover, BP is largest blender and marketer of bio-fuels and has robust brand image over 100 years of operations across the globe. The bargaining power of company is high due to its dominant market position in the global oil industry.

Vertically integrated operations

British Petroleum involved in upstream, midstream and downstream of oil businesses. The company has two segments for operations: exploration and production; and refining and marketing.

The exploration of oil and gas is upstream and midstream involves ownership and management of crude oil and natural gas pipelines. BP¿½s downstream activities involve refining and marketing of oil & gas and related products. At the end of FY2009, BP owned 16 refineries worldwide and 22,400 retail sites and 500 sites outside Europe and the US.

BP¿½s vertically integrated operations improve operational efficiencies and give it competitive edge in the global market.

Wide geographic presence

British Petroleum is operating in over 80 countries across all major energy markets like Europe, US, Middle East, and China. The company has diverse revenue stream and is not dependent on a single market. In FY2009, The US is the largest geographical market accounted for 35.1% and non US countries accounted for 64.9%.

Weaknesses

Oil spill in the Gulf of Mexico

Oil spill in Gulf of Mexico is big environmental disaster in the US. In April 2010, 11 workers are killed in an explosion and $500 million sank in an oil spill in the Gulf of Mexico. The US government estimated oil flow is between 35,000 and 60,000 barrels per day that affect fishing and tourist industry at a time of high unemployment. The company is liable for economic loss and the recovery costs. The heavy financial penalties affect BP¿½s profit margins significantly.

Violation of tax laws in Turkey

The Finance Ministry of Turkish government charge tax fine of $275 million on BP in March 2009 for cross-border duty-free petrol sales between 2006 and 2008. Government imposes a tax because retailers broke a legal limit of duty free fuel. The violation of law can make the environment tightened and affected the BP¿½s operations in the country

Explosion in the Texas refinery

Opportunities

Investments in the alternative source of energy

The company is focusing on investments in an alternative source of energy like wind and solar power. The advanced bio-fuels and low carbon energy technologies such as hydrogen power and carbon capture and storage.

BP restructures its facilities in solar business and entered into various agreements in FY2009. In May 2009, BP solar announced a joint agreement with Solar Edge to explore commercialization of a PV module-integrated power harvesting system. BP Solar do partnership with RGE Energy to plan of the world¿½s largest solar project.

BP's bio-fuels business is investing in advanced technologies. The investment in alternative businesses will diversifying its product offerings and enhances its image as environmental friendly.

Oil and gas exploration projects

British Petroleum growing it production and exploration business through development in technology and building of strong mutually benefitted relationships. The company has made several oil discoveries at different places in FY2009. In Feb ¿½09 BP made oil discovery in Angola Deepwater and announced giant discovery in deepwater of US Gulf of Mexico, in Sep¿½09.

The exploration and discoveries of new oil and gas projects could help the company to increase its production.

Acquisition of Devon Energy's assets in Brazil, Azerbaijan, and the US deepwater Gulf of Mexico

Threats

Environmental regulations

The various environmental laws and regulation govern the disposal of wastes and pollutants. The rising awareness and regulatory standards on human health and impact of environment are improved in recent years. In 2007, the European Union make polices and strategic objectives to change in climate. They adopted a sustainability strategy to reduce CO2 by 20%, 20% increase in the penetration of renewable energy and reduce demand by 20%. The substantial cost may incur in comply with these regulations but it can enhance company earnings and margins.

Threat of a Takeover

British Petroleum faces the threat of take over because company had payment in August, 2010 of $400 million to manage claim of oil spill in the Gulf of Mexico. BP made a $3 billion initial deposit of the $20 billion escrow account to develop trust. The investor trust has been affected due to repeated failure of company in deep-sea well. BP faces administrative actions and huge penalties from the regulatory authorities.

The market capitalization is declining more than half and could take over by other bigger energy companies such as chevron (cash reserves: $8,716) and Exxon Mobil (cash reserves: 10,693) . The high valued assets of company can be takeover due to undervalued price owing to the damage caused by the oil spill.

Instability in some oil-producing regions

BP has operations in many regions of world that includes South America, Africa and the Middle East. The political instability or inability to cope with risks can impair its operations and affects the output in these regions.

Saturation of resources in the North Sea

The reserves in the North Sea region are maturing and getting saturated because of extensive offshore exploration operations in the past. Company is taken as a key challenge because exploration activity is far more localized and highly invested.

Risks related to exploration and production activities

The hazards and risks involved in exploration and production of operations such as disasters, unexpected pressure, explosions, fires, spills, pipeline ruptures and blowouts while drilling well. It can cause of death, damage of property, environmental pollution, claims, fines or penalties.

In April 2010, 11 workers were killed in an explosion on the Transocean¿½s rig on an exploration well. The oil spill in the Gulf of Mexico has caused multi-billion dollar damage and company is liable for the economic loss and recovery costs.

Strategic Option for British Petroleum

Ansoff Matrix

Lester A (2009) A well known tool for helping analyzing various growth opportunities is the Ansoff matrix. The matrix helps focus the mind on how each opportunity fits with the business strategy in terms of product or markets. It is simple to use and very effective in driving clear strategic thinking around growth.

Market Penetration

Whittington R, Scholes K and Johnson G (2008) Organization increased shares of its existing markets with its existing product range, is on the face of it the most obvious strategic direction. It builds on existing strategic capabilities and does not require the organization to venture into new territory.

Strategic Options for British Petroleum

Background: The liability of economic loss and recovery cost of Gulf of Mexico oil spill make the British Petroleum financially week. In report of BBC July, 2010: British Petroleum sells its assets in Texas, Canada and Egypt in $7bn to fund oil cleanup cost of the Gulf of Mexico oil Spill. The company deals with US based oil production firm Apache Corp in New Mexico. The company sells its assets in Pakistan and Vietnam to recover the liabilities and penalties that imposed by US government and other regulatory bodies.

According to Reuters June, 2010, British Petroleum may take over by the Royal Dutch and Chevron because of fall in share price of company. These companies are not big companies like BP Plc but they are financially strong enough to buy it. Antitrust issues can be arise if BP Plc is taken over by these companies.

Strategic Option: British Petroleum needs to penetrate in its current market. Market Penetration will be suitable strategic option for the BP Plc. The company needs to concentrate on its current market by minimize its weaknesses and overcome threats. It needs to develop the trust of investors by improving the operations of the company.

Strategic Option 1:

Liquidation of Assets:

In the light of current facts and figures, British Petroleum not has enough cash to recover its debts and liabilities. The selling of assets can be one option for the BP Plc to generate cash for the business. The selling off old plants that are not profitable for the company and downsize the unnecessary staff can cut some operational cost. The improvement in the operations by adopting proactive approach rather than reactive can remain competitive in the business.

Strategic Option 2: The collaboration with