1. The document analyzes the strategic relationship between BP and Halliburton in developing upstream oil and gas activity in North America. It uses several strategic management tools to examine the companies, industries, opportunities, threats, and tensions they face.
2. BP and Halliburton belong to different but related industries, with BP in exploration and production and Halliburton in oilfield services. The document discusses market conditions, including declining oil prices and increased North American production and consumption.
3. Strategic tensions between the companies include profitability vs responsibility, competition vs cooperation, and exploitation vs exploration. The 2010 Deepwater Horizon spill highlighted BP's responsibility to stakeholders over shareholders alone.
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I hope you'll enjoy the read!
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Deepwater Horizon Oil Spill: A Study of Behavioural Decision MakingJerome Dauvergne
This report analyses the genesis of the Deepwater Horizon disaster from a behavioural decision making perspective. In order to write this original paper I borrowed from the investigative work of the environmental journalist Abrahm Lustgarten, and from concepts developed by behavioural finance and emotional finance academics such as the Canadian Hersh Shefrin, the American John Nofsinger, and the Britons Richard Taffler and David Tuckett.
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OBU – Oxford Brookes University BSc Honours in Applied Accounting.Academic Mania
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Outlook for Energy and Minerals Markets - for the 116th CongressRoger Atkins
TESTIMONY OF KEVIN BOOK MANAGING DIRECTOR, CLEARVIEW ENERGY PARTNERS, LLC
BEFORE THE
U.S. SENATE COMMITTEE
ON ENERGY AND NATURAL RESOURCES
FEBRUARY 5, 2019
Sample_Global Base Oil Market research.pptxkvsreerag096
The base oil market refers to the global industry that produces the primary lubricating components used in the manufacturing of various lubricants, including engine oils, hydraulic fluids, and greases. Base oils are typically derived from crude oil through refining and processing, and they serve as the foundation upon which specialized additives are blended to create finished lubricant products. The demand for high-quality base oils is driven by the need for efficient and reliable lubrication across a wide range of industrial, automotive, and commercial applications. As environmental regulations and consumer preferences evolve, the base oil market is adapting to offer more sustainable, low-emission, and synthetic-based solutions to meet the changing needs of the lubricants industry.
Generally, there are two main classes of naphtha - heavy naphtha and paraffinic naphtha. Paraffinic naphtha is rich in olefins and is suitable for polyolefin and olefin production. Heavy naphtha is mainly used for production of aromatics. The report provides a strategic analysis of the global market for naphtha in terms of volume (MM Tons) as well as revenue (USD Million), for the period 2012 to 2019.
Based on these cues and other global economic and business triggers, GEP has
identified major trends that will shape and drive procurement strategies in 2015
and beyond. We also outline the key focus areas and priorities for CPOs and
procurement teams for the next 12 months.
Oil & Gas in France industry profile is an essential resource for top-level data and analysis covering the Oil & Gas industry. It includes data on market size and segmentation, plus textual and graphical analysis of the key trends and competitive landscape, leading companies and demographic information. Scope * Contains an executive summary and data on value, volume and/or segmentation* Provides textual analysis of Oil & Gas in France's recent performance and future prospects* Incorporates in-depth five forces competitive environment analysis and scorecards * Includes a five-year forecast of Oil & Gas in France* The leading companies are profiled with supporting key financial metrics * Supported by the key macroeconomic and demographic data affecting the market Highlights * Detailed information is included on market size, measured by value and/or volume * Five forces scorecards provide an accessible yet in depth view of the market's competitive landscapeWhy you should buy this report * Spot future trends and developments * Inform your business decisions * Add weight to presentations and marketing materials * Save time carrying out entry-level researchMarket DefinitionThe oil & gas market consists of the activities of exploration, development, production, refining, storage, transportation and marketing of oil & gas. The market values given in this report reflect the total value of oil and natural gas product consumption within a country, calculated using annual average prices in each respective country. Industry volumes reflect the total consumption of oil and natural gas in millions of barrels equivalent (BOE). Any currency conversions used in this report have been calculated using constant 2009 annual average exchange rates.For the purposes of this report, Europe consists of Western Europe and Eastern Europe.Western Europe comprises Belgium, Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, and the United Kingdom.Eastern Europe comprises the Czech Republic, Hungary, Poland, Romania, Russia, and Ukraine.
Strategic Management_Halliburton and BP relationship_Maio 2015
1.
1
A B E R D E E N B U S I N E S S S C H O O L
Master of Business Administration
INDIVIDUAL ASSIGNEMENT
Module 2014/2015 : BSM147 – Strategic Management
Coursework assessment 1: Individual case study analysis and critique
Turnitin
result:
Pedro Nóbrega – student number 1315223
11/05/2015
(3.299 words*, 65 pages)
(*) Without considering tables and figures, subtitles, brackets, bibliography and references, and appendixes
2.
2
01. Strategic Rationale
This report aims to make a strategic analysis of the relationship between BP
and Halliburton in the development of upstream activity in North America.
Since 2014 North America* has been the biggest producer of oil and gas and
also the biggest consumer. Despite the dominance of the Gulf Region in the
chess of oil production some of the most important strategic moves are still
made in United States.
This report will first analyze the framework of both companies and
industries(s). Secondly it will underline some threats, opportunities and
consequences in the context of some strategic paradoxes common in the
business agenda. In the end some recommendations will be made for BP.
Some management tools will be used: PESTEL, Five Forces, Time line,
Industry Life cycle, the Thompson and Strickland Seven Questions and
Stakeholders Map for macroenvironment and VRIO framework, Value Chain,
GE Screen Matrix, Ashridge Portfolio matrix for analyzing internal resources
and capabilities. Finally SWOT analyses will be made as a summary of prior
external and internal analysis, developing it into a TOWS matrix, providing
SAFe recommendations (Suitable, Acceptable, Feasible).
Strategic tensions and paradoxes urge naturally and influence the decision and
orientation of each company. Nevertheless they raise the level of solutions and
strategic development. DeWit and Meyer (2014) highlight that: “At the heart of
every set of strategic issues, a fundamental tension between apparent
opposites can be identified”.
To a certain degree part of the strategic role is to settle the road between
completely different options, most of the times contradictory and irreconcilable.
In the context of this report BP and Halliburton, individually or in combination,
address the following tensions:
3.
3
- Profitability and Responsibility encompass the shareholders and stakeholders
view;
- Competition and Cooperation tackle the dependence and bonds between
companies;
- Deliberateness and Emergence range a deliberate set of plans and decisions
against the view of the imminent or needed change in strategy;
- Exploitation and Exploration confront the current capabilities while exploring
new ones;
- Synergy and responsiveness address the portfolio organization perspective,
and also Globalization and Localization outlook.
Apart from these, more paradoxes can be detected, since the industry
undergoes a permanent transformation, in the course of which companies
need to set dynamic strategies, in a never-ending iterative process.
(*) - United States, Mexico and Canada
7.
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Fig. 6 - Stakeholders map (BP and Halliburton: 1 – Non-Governmental Institutions; 2 –
Government; 3 – Strategic Partnerships; 4 – Society in General; 5 – Other players; 6 – Industry
experts; 7 – Research and Development teams)
However, Rapport (1986) supporting the shareholders perspective defends
that that “business should judged by the economic value that they create for
shareholders”. McAleer (2003) goes further stating, “corporations cannot have
moral responsibilities”.
Due to Macondo accident BP is selling its global assets to compensate victims
of the oil spill in a clear response to an emergence strategy in order to have
money to face the damage.
BP is focused on upstream activity, consolidating its distinctive strength areas,
where it has proven capabilities and experience. BP aims to increase their
distinctive capabilities (e.g advanced seismic imaging capacity to enhanced oil
recovery techniques), improvement of teams’ capabilities (through training and
development), and building and maintaining relationships.
Major BP
competitors
Chevron Corporation Imperial Oil Limited
ExxonMobil Corporation Koch Industries, Inc
TOTAL S.A. Norsk Hydro
Petrobras (Petróleo Brasileiro Occidental Petroleum Corporation.
!
14!
Fig. 6 – Porters Value Chain
Fig. 7 – Stakeholders interest
11.
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ASA TETRA Technologies, Inc.
Weatherford International Ltd.
Complete Production Services, Inc.
Helix Energy Solutions Group, Inc.
Fig. 13 – Major Halliburton competitors
Halliburton’s strategic focuses are on deep-water, mature fields and
unconventional exploration. Over the past five years 60 percent of the total
volume of all hydrocarbon discoveries was made in deep-water and the
segment is projected to grow at a pace of 13% per year.
Two recent strategy facts have affected Halliburton operations: the transfer of
the headquarters to Dubai and the acquisition of Baker.
First fact is that Halliburton has decided to transfer the headquarters from US
to Dubai, while maintaining the legal entity in US. It is a clear indication of a
trend, since the major reserves are in the Middle East and Central Asia. From
Halliburton’s point of view “little by little, the oil business will leave, and it's not
coming back”.
Comparing the US with these new regions, a new rig in US can be drilled in 10
days, making the cycle much shorter, and the investment less considerable
(see appendix 13 – Industry Life Cycle).
Secondly the acquisition of Baker Hughes, considered as one of the biggest oil
and gas deals ever, has created an oilfield services company that aims to
compete with Schlumberger. This entity will be dominant in the US onshore
service, namely in hydraulic fracturing and horizontal drilling.
This merger will bring about a lot of advantages, mainly through cost-cutting
elements, fewer competitions and by rising pricing power. Nevertheless this
combined company, resulting from the merger of the two biggest North
America companies in this sector, will increase the risk to this country, tying
themselves to the success of the North American context. To some experts,
this is the opposite of what they should be doing. However according to DeWit
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and Meyer (2014), “diversification into new business areas can only be
economically justified if it leads to value creation.”
Fig. 14 – Top 20 world oil and gas deals. Source: Thomsom Reuters
Fig. 15 – Halliburton SWOT Analysis
e) Macroenvironment analysis
e.1) Thompson and Strickland seven Questions
SWOT ANALYSIS
Halliburton is one of the world’s largest providers of oilfield services to the energy industry. The
company provides fully integrated drilling solutions, which have enabled it to attain regional leadership
in the North American markets and have positioned Halliburton ahead of its peers. However, changes
in, compliance with, or failure to comply with various laws may negatively impact the company’s
ability to provide services in, make sales of equipment to, and transfer personnel or equipment
among some of the countries in which it operates which can affect its operations.
WeaknessesStrengths
Gulf of Mexico Oil spillRegional leadership in the North American
markets
Superior drilling technology
Strong research and development (R&D)
capabilities
ThreatsOpportunities
Law and regulatory requirementsLong-term need for the company’s services
and products Risks attached to having operations outside
its domestic marketStrategic agreements and acquisitions
Seasonality
Strengths
Regional leadership in the North American markets
Halliburton, which provides services typically used to extract oil and gas from wells, offers
pressure-pumping services, drill bits, and integrated project management services which enables
the company to meet the exact need of its customers against the growing complexity of developing
the oil and gas reservoirs. The value in Halliburton's packaged services approach is that it not only
collaborates with various technologies, but it also uses proprietary work flows and input from different
drilling disciplines to build a compelling solution. The company serves the upstream oil and gas
industry throughout the lifecycle of the reservoir: from locating hydrocarbons and managing geological
data, to drilling and formation evaluation, well construction and completion, and optimizing production
through the life of the field.
In addition to the savings that can be realized from offering a fully integrated and optimized drilling
solution, integrated services offer other competitive benefits of retaining customers. These fully
Halliburton Company
SWOT Analysis
13.
13
Fig. 16 – Halliburton SWOT Analysis
These questions can be answered by addressing industry drivers critical issues
and by setting business challenges, business trends and a competitive
landscape.
Appendix 5 – Industry Drivers, Critical Issues, Business Challenges
Competitive Landscape
Demand Demand is driven by economic activity, population growth, and energy
efficiency for residential, industrial, and transportation uses of oil and gas.
Profitability Profitability of individual companies is driven by the success rate of new
wells drilled and the ability to increase production from existing wells.
Capital Large companies benefit from greater access to capital, which enhances
their ability to secure drilling rights and acquire smaller companies. Small
companies compete by focusing on, and developing expertise in, a few
geographic areas
Other energy sources Oil and gas compete with other energy sources (coal, nuclear and
hydroelectric power), for industrial and home heating applications.
Renewable fuels, such as ethanol and biodiesel, and hybrid-electric cars,
which use stored electricity from batteries instead of or in addition to
gasoline or diesel, are emerging alternatives for transportation
applications.
Fig. 17 – Competitive Landscape
14.
14
Fig. 18 - VRIO FRAMEWORK (BP and Halliburton)
f) PESTEL – appendix 6
g) Regional Highlights - Appendix 8
h) Finance and Regulation in United States - Appendix 9
i) International Insights Oil and Gas Industry - Appendix 10
j) BP and Halliburton relationship
Normally Oil and Gas companies turn to service companies to make most of
the work, including building and operating drilling facilities, providing not only
material and equipment, but also expertise and human resources.
The relationship between operator and services companies is full of
challenges, including some drawbacks, and through the times they have
engaged with one another towards common objectives, trying do achieve more
challenging explorations while charring risks and gains.
15.
15
Oil production has been rising in North America and it is affecting oil flows. The
investment trend is very difficult to predict (e.g. - unconventional investment in
North America in 2014 - USD 100 billion).
Such growth and the level of field development required is putting the
relationship between operators and service companies in question, creating
new opportunities for both sides.
BP and Halliburton can identify a series of opportunities bringing real
innovation to oilfield development. Essential to these opportunities, they need
to focus on developing closer and longer-term relationships enabling
themselves to unlock significant value.
Strengths Weakness
Wide geographic presence
Regional presence in North American Markets
Strong R&D capability
Allocation of work based on Halliburton
performance
Gain sharing
Joint Supply Chain Optimization
Gulf Of Mexico Oil Spill
Ambient - Wastewater Recycling at Fracking
Sites
Opportunities Threats
Transparent Contracting Practices
Strategic Agreements and acquisitions
Volatility of the market
Long-Term Oil and Gas Leases
Concentration (Merger and Acquisitions)
Lean Operations
Risks concerning environmental regulations
Highly competitive industry
Exploration, development and production
risks
Fig 19 - SWOT BP and Halliburton relationship
j.1) Strengths
j.1.1) Wide geographic presence
The widespread international operations for BP and Halliburton enable both to
take advantage of opportunities arising in emerging markets and to gain
16.
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access to key markets, increasing the competitive edge and setting the need
for a healthy relationship.
These worldwide strategies address the multi-business synergy versus
business responsiveness tensions. This is one of the main strains that
managers need to face in today’s international and global business
environment. There are definitely advantages of sharing human and physical
resources, but the system must be flexible to respond to market needs.
Nevertheless multi-business responsiveness can add unneeded burrocracy,
require extra coordination, create multi-decision layers of management, create
slow decision-making processes and insert incongruences between parent and
local companies.
j.1.2) Regional presence in North American Markets
Both companies have a considerable market share in North America, as seen
before. Additionally the fully integrated drilling solutions that Halliburton has
offered has enabled the company to attain regional leadership in the North
American markets and positioned Halliburton ahead of Schlumberger.
j.1.3) Strong Research and development capabilities
Both companies have invested considerable money in research and
development, enabling them to be the trend of industry (Halliburton’s
expenditures for R&D activities were $588 million in 2013).
Moreover, Halliburton and BP own a large number of patents covering various
products and processes, providing them with a competitive advantage.
That brings us to the paradox of exploitation and exploration, where the
ability to profit from the current products and services is against a never-ending
pursuit for new technologies, new products, etc.
Above all companies need to focus on the optimization of management’s
procedures, increasing efficiency, reducing costs and being more market-
17.
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driven. This allows companies to embrace the present and the near future, but
not to address the survival of the company in the long run.
Ducan (1976) highlights the concept where firms need to explore current
capabilities in the short-term, while exploring new ones that will be the future
framework. Patrick Baudry (2015), a business developer for TOTAL, states that
"a company that doesn’t innovate is dead in the water".
j.1.4) Allocation of work based on Halliburton performance
Recently BP as operator has been allocating additional opportunities to
Halliburton based on their record of safety, cost, on-time delivery, and quality
performance.
Despite the fact that competition between service providers tends to drive
overall productivity up, finding a suitable service provider can be a challenging
task, mainly when prices of oil are high. Additionally if Halliburton gains a
certain position in a basin or region, BP is unlike to change.
j.1.5) Gain Sharing
The shift to longer-term relationships between BP and Halliburton has brought
the opportunity to collaborate on improving drilling and completion productivity,
and in sharing the resulting benefits. However these incentives need to be
carefully designed and performance rigorously tracked.
Among other things, this will ensure that Halliburton do not compromise safety
or environmental protection in an effort to complete their work faster.
j.1.6) Joint Supply Chain Optimization
(Value Chain - appendix 7)
There are several opportunities to improve the supply chain (e.g. managing the
flow of goods and services in the unconventional exploration).
Also the collaboration can reveal significant opportunities for the optimization of
the design and operations (e.g. a number of rigs might share one water pond
18.
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or certain kinds of equipment) where economies of scale can provide additional
opportunities for performance and efficiency improvements.
j.2) Weakness
j.2.1) Gulf of Mexico Oil Spill
(Macondo Oil Spill – Appendix 16)
Both companies have been having a tremendous impact due to the Deepwater
horizont incident that took place in the Gulf of Mexico in April 2010. Halliburton
provided cementing services to BP.
Though Halliburton has a much smaller role than BP or Transocean, it is to
face at the very least penalties of as much as $1 to $2 billion.
BP is not able to estimate the impact the Macondo well incident will have on its
figures and also cannot predict the outcome of additional lawsuits (many
experts point to a total cost of $50 billion).
j.2.2) Ambient (eg. - Wastewater Recycling at Fracking Sites)
Fracking nowadays requires a large amount of water (as much as 4-6 million
gallons per well) and many companies are working to make the most of it
through recycling.
Nevertheless industry experts project that by 2020, as much as 50 percent of
water used in fracking will be recycled. Companies need to develop and invest
in wastewater-recycling technologies.
j.3) Opportunities
j.3.1) Transparent Contracting Practices
The increased repetition and sheer longevity of activities associated with oil
and gas drilling (for instance Halliburton may drill in a basin for 10 years)
means that there is a prominent need for transparent relationships.
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In conventional oil and gas, BP may favour strategies that deliver savings by
squeezing supplier margins. With relatively short contracts at stake suppliers
may be willing to accept such arrangements, especially during a cyclical
downturn.
They are likely to be far less accommodating when negotiating a multiyear
contract. In that case, the most effective procurement practices will be those
that enhance collaboration and joint value creation between BP and
Halliburton.
In the range of the paradox of competition and cooperation some experts
underline that competition can be more prejudicial than collaboration. But
alliances, joint ventures of any type or a more bound partnership requires a
high level of interorganizational trust and interdependence.
Nevertheless another line of thought defends that interdependence is risky,
since both entities become dependent on each other, meaning that alliances
are only suitable for a certain assignments or job.
Alliances and partnerships flourish in the oil and gas industry and they have
been the main feature of BP and Halliburton, past, present and future.
Despite the fact that relationship tend to be conducted and shaped by the
power of the stronger, DeWit and Meyer (2014) suggest that “the rules of
engagement should involve some level of agreed norms around which topics
are on the agenda, who has a valid claim, how interaction should take place
and how conflicts should be resolved”.
j.3.2) Strategic Agreements and Acquisitions
Halliburton and BP, separately, have in recent years entered in a number of
agreements and acquisitions.
With oil prices plummeted since June 2014, the demand for oil and gas
services is expected to shrink, creating the desire for higher concentration of
20.
20
companies in the same sector (e.g. Baker merger with Halliburton). The
Halliburton CEO (2015) said, “the combined entity would be more resilient and
able to offer a wider suite of products globally”.
j.3.3) Volatility of the market
Volatility in oil and natural gas prices impact BP and Halliburton production.
However these trends therefore provide an opportunity for the company’s
services and products in the US. Halliburton, for instance, can leverage its
technology in efficiency fields to provide value to BP.
Fig 20 – Crude oil prices, 1861 - 2012
j.3.4) Long-Term Oil and Gas Leases
BP is willing to execute long-term contracts to Halliburton to assure a long-term
supply at a stable price. Long-term contracts can support additional
exploration, but also give companies the ability to project costs and revenues.
Nevertheless the tension of profitability versus responsibility needs to be
addressed in a long-term relationship, since companies need to be more
bound.
9/5/2
Crude oil prices1861 2012
USdollarsper barrel,worldevents
7
Aside on Oil Pricing: WTI & Brent
West Texas Intermediate Crude (WTI) & Brent Marker
Crudes are the most commonly quoted oil prices
There are others:
OPEC uses GOM blend
WTI, Brent, and other “marker” crudes (or “baskets” of marker
crudes) are used to value other oil, based on quality and location
WTI crude and Brent crudes are similarly “light” & “sweet,”
which is better than heavy and sour
21.
21
Despite the fact that suppliers can hold a legal contract, that doesn´t mean that
they can’t be squeezed by powerful clients. These circumstances adress the
discussion of what it the best approach for the companies: the shareholder’s or
stakeholder’s view.
In the perspective of the shareholder’s view, Thompson and Strickland (2001)
state that: ”business executives have a moral duty to pursue profitable
management of the owner’s investment”. In this scenario companies only have
responsibilities to those with whom they have a market relationship, where to a
certain degree they are both partners and adversaries, since they want the
cheaper price and simultaneously the best service.
Despite these natural commercial tension, BP and Halliburton need to align
with the stakeholders’ range and philosophy, mainly in terms of corporate
social responsibility, corporate governance, environmental management,
corporate philanthropy, human rights, labour rights, health e safety, community
development and sustainable development.
j.3.5) Lean Operations
For decades the expression “optimization of the cost” was not on the
vocabulary of the industry. Nowadays there is a permanent need to increase
value by reducing cost and waste, and it is very common to see efficiency
gains in every aspect (e.g such as drilling more wells on the same pad). Leans
operations are expected to reduce waste of the system to nearly 20% of drilling
costs.
j.4) Threats
j.4.1) Risks Concerning Environmental Regulations
The unmistakable fact that oil and gas is a risky business to environment puts
companies under a larger obligation of collaboration instead of confrontation.
Industry is based on the principles of governance and self-regulation. It’s
critical to collaborate and confront tough realities.
22.
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The improvement of best practices and self-regulation is crucial to gain the
trust of society (e.g. expansion of IADC’s Knowledge, Skills and Abilities
competency guidelines).
There are excellent examples of collaboration (eg. Joint safety improvement
plans for HSE; Halliburton’s 10 to Zero Life Rules match with Shell’s 12 Life
Saving Rules).
j.4.2) Highly Competitive Industry
The oil and gas industry is highly competitive which in general terms means
that new opportunities are aggressively conquered, where safety and
operational risk needs to addressed.
In a highly competitive industry both companies need to address the paradox
of deliberateness and emergence strategy, in the dichotomy of wanting to
shape the future or adapting to it.
Deliberate strategies try to forecast the future and set a correct strategy at
hand. Mintzberg and Waters (1985) emphasize that deliberation strategies are
only suitable for a predictable environment. Definitely that hasn’t been the
landscape of recent years.
On the opposite side, emergent strategy is viewed as a prompt response to
what’s happening in the market. This doesn’t mean not having a strategy — it
means having an interactive process of strategy setting (for instance the
response of BP to the Macondo incident).
j.4.3) Exploration, development, and production risks
The oil industry is subject to various risks, including spills, ruptures, fires,
explosions, natural disasters, environmental pollution, physical and human
damage. To a certain degree the cost of drilling and other activities is
unpredictable and depends on several factors beyond BP´s and Halliburton’s
control, including availability of equipment and services, equipment shortages
and delays, and lack of adequate transportation facilities.
23.
23
03. Specific Recommendations for BP
Establishing a bridge between the global analyses made in the last section BP
TOWS matrix is undertaken in order to identify strategies for Halliburton and
BP partnership in North America.
Nevertheless it is important to bear in mind that BP remains vulnerable to a
takeover (BP shares have lost 33 percent of their value since the accident) and
that Halliburton attained regional leadership but difficulties in compliance with
the operators may negatively impact the company’s results.
1. BP needs to set in place a dynamic cooperation model with Halliburton,
developing in aspect of relationship bound, education, science,
environment and industrial development. This will in the long run increase
competences and skills, creating a competitive advantage (the sum of both
companies creates more value than the two separate halves).
2. BP and Halliburton need to embrace the emergence strategy as the main
value for today’s environment. Market are always mutating so the
strategists need to be aware and account for the change.
3. BP and Halliburton need to discuss mistakes as a process of evolution.
Managers and employees need to fell free to talk about them, instead of
hiding them. The corporate value of truth needs to be established.
4. BP needs to reinforce its Corporate Social Responsibilities. However
since CSR is about practices and values sometimes it is difficult to
transform philosophical values into real actions. BP needs to implement the
Carroll Golden Rule (1990): “do unto others as you would have them do
onto you”. Additionally, the triple P (People, Planet and Profit) needs to be
reinforced. CSR is voluntary and goes beyond the legal frame but is crucial
to gain the trust of all stakeholders.
24.
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5. Strategy is mainly about making choices and pointing them towards a
certain path. Innovation is a vague word and can mean a lot of things. As a
rule, BP should focus more on certain innovations and technological
breakthroughs in detriment of others.
6. BP strategies should reinforce coordination and communication with
Halliburton. If strategies need to be aligned that is only possible with a
clear, transparent and bound communication. Coordination is extremely
important in the new reality.
7. Increasing feedback on BP and Halliburton can add value to business,
where the information needs to circulate free of problems and barriers.
8. BP and Halliburton need to design its organization to generate results
and successfully adapt when circumstances change. Managers should
know and understand what really works. The implementation of
performance-based service strategies will create a win-win situation for all
parties and lead to a better return on investments.
9. Simplification is the path for this partnership (form Hills framework: Value
not Volume), since “simplification of work is a rich source of reduction in the
waste of motion“.
10.BP should focus less on organization and more on it business networks.
Successful corporations are adopting models based on virtual integration,
where ownership of the means of production is not the critical factor, but
rather the access to them via networks and partnerships. Above all the
value chain is what is most important.
11.BP need to reinforce the link between strategy definition and execution.
This is the main feature of strategic frameworks, particularly in high-
performance companies, such BP and Halliburton. Even if all strategic
tensions can be solved (profitability versus responsibility, leadership versus
management, profitability versus growth, short term versus long term, etc.),
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implementation will define the success of the partnership. From Porter’s
(2008) point of view, “execution without strategy is pointless, even
dangerous”.
TOWS MATRIX
Strengths
Wide geographic presence
Regional presence in North American
Markets
Strong R&D capability
Bundling over time and across basins
Allocation of work based on Halliburton
performance
Gain sharing
Joint Supply Chain Optimization
Weakness
Gulf Of Mexico Oil Spill
Ambient - Wastewater Recycling at
Fracking Sites
Opportunities
Transparent Contracting Practices
Strategic Agreements and
acquisitions
Volatility of the market
Long-Term Oil and Gas Leases
Rig Ownership
Invigorating Declining Wells
Concentration (Merger and
Acquisitions)
Lean Operations
(IDENTIFY STRATEGIES FOR
ADVANCEMENT)
- BP need to bound a more win-win
movement in new contracts. –
Dynamic cooperation model
- Provide more market information and
field development plans
- Embrace Halliburton difficulties
- Implement combined growth strategies
(e.g. horizontal integration)
- Bet more in certain innovations in
detriment of others
- Designing the company to achieve
individual and global results and to be
change driven
(IDENTIFY STRATEGIES TO
OVERCOME WEAKNESS)
- BP need to increase the Corporate
Responsibility
- BP need to develop more education /
workshops
- Building and promoting local
competence and resources
- Ensuring the use of environmental
technology and logistics
- Define from the start stakeholders
interest
- Implement a value “learn with your
own flaws / mistagues
Threats
Risks concerning environmental
regulations
Highly competitive industry
Exploration, development and
production risks
(IDENTIFY STRATEGIES TO AVOID
THREATS)
- BP need to increase communication
- Established common parameter for
Emerge Strategy, more precisely in
each partnerships
- BP and Halliburton need to address
new alliances and networks, in order
to increase their expertise (find
partners that could cover the “black
spots” in the companies competence
or technology)
- Promoting and assisting regional
suppliers and subcontractors to the oil
(IDENTIFY STRATEGIES TO AVOID
AND OVERCOME)
- BP need to work on administrative and
political level
- BP needs to work on investment
climate and information services
- BP needs to work on education and
environment corporation
- Develop existing networks, unite these
and help them onwards to new
markets
- Increase knowledge of small and
medium enterprises’ ability to
participate in business and
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and gas industry
- Increase coordination from the minor
to the major detail
- Geographic diversification
- Simplify process, documentation and
reducing complexity
- BP need to question the configuration
of work flow
- Reinforce the link between strategy
and execution
- Increasing feedback
- Create a common agenda
technological development and
operation tasks
- BP needs to improve its safety culture;
- Increase environment friendliness
- Face cost reduction in each project
- Reinforce Corporate and Social
Responsibility
- Produce more correct information and
data
- Virtual integration
- Human Resources in the base of
strategy
Fig 21 – TOWS MATRIX
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27
Bibliography and references:
BP Deepwater Horizon Accident Investigation Report
BP Energy Outlook 2030 (version 2013)
Carroll, B. 1990. Principles of Business Ethics: Their Role in Decision Making and
Initial Consensus’, Management Decision
Crane, 2008. Corporate social responsibility, Oxford: Routledge
Downey, M. 2009. Oil 101, Woonden Table Press
Duncan, Robert B., 1976. The ambidextrous organization: Designing dual structures
for innovation
DeWit, B. and Meyer, R., 2010. Strategy: Process, Content, Context: An Internacional
Perspective. Fourth Edition
DeWit, R. and Meyer, R., 2014. Strategy: An international perspective, 5th Edition,
Cengage Learning. Hampshire
Freeman 2006. The Wal-Mart effect and business, ethics, and society
Gordon G., 2010. Oil and Gas Law: Current Practice & Emerging. Dundee University
Press
Grant, B. and Jordan, J., 2012. Foundations of Strategy, Chichester: John Wiley &
Sons.
Grant, B. 2012. Contemporary Strategy Analysis. Seventh Edition, Chichester: John
Wiley & Sons
Hilyard, J. 2012. The Oil and Gas Industry - A nontechnical guide. 1st Edition.
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Inkpen A.C. and Moffett M.H., 2011. The Global Oil and Gas Industry: Management,
Strategy and Finance, PennWell Books
Johnston, D., 1994. International Petroleum Fiscal Systems and production sharing
contracts. PennWeel, Oklahoma
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Kumar, R., Tore Markeset 2007. Development of performance-based service
strategies for the oil and gas industry: a case study
Kotter P., 1995. Leading Change, Why Transformation Efforts Fail. HBR
Lock, D. 2013. Project Management. 10th Edition. Aldershot. Gower. Market Line –
BP
McAleer, Sean, 2003. Friedman's Stockholder Theory of Corporate Moral
Responsibility." Teaching Business Ethics 7
Mintzberg and Waters, 1985.
Of strategies, deliberate and emergent. Management
Journal
MarketLine Report (BP and Halliburton 2014)
Parker, B., 2005. Introduction to globalization and business, Sage
Porter, Michael. 2008. On Competition. Harvard Business Review
Oil and Gas 2015 Industry Report. First Research
Rappaport, A. 1986. Creating shareholder value: A guide for managers and investors.
New York: The Free Press.
Rainbird, M. 2004. A framework for operations management: the value chain
Robert Johnston, Panupak Pongatichat, 2008. Managing the tension between
performance measurement and strategy: coping strategies
Smith E., 2010. International Petroleum Transactions, Third edition, Rocky Mountain
Mineral Law Foundation
Slack, N. and Lewis, M. 2011. Operations Strategy. 3rd Edition. Harlow. Pearson
Education Limited
Slack, N. Chambers, S. and Johnston, R. 2013. Operations Management. 7nd Edition.
Harlow. Pearson Education Limited
Yergin D., 2003. The Prize – The epic quest for oil, money and power, Free Press,
London
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Appendix 1 – Oil and Gas production industry (Five Forces)
Appendix 2 – BP Overview
Appendix 3 – Oil and Gas service industry (Five Forces)
Appendix 4 – Halliburton Overview
Appendix 5 – Industry Drivers, Critical Issues, Business Challenges
Appendix 6 – PESTEL
Appendix 7 – Value Chain
Appendix 8 - Regional Highlights
Appendix 9 - Finance and Regulation in United States
Appendix 10 - International Insights Oil and Gas Industry
Appendix 11 – Facts and Figures BP and Halliburton
Appendix 12 - Recent Time Line BP
Appendix 13 – Industry Life Cycle
Appendix 14 – GE Screen Matrix
Appendix 15 – Ashridge Portofolio Matrix (BP and Halliburton)
Appendix 16 - Macondo Oil Spill
Appendix 17 - Oil Spills
Appendix 18 – BP Past and Present
Appendix 19 – The Economist “The Shrunken Giant”
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Appendix 1 – Oil and Gas production industry
Five Forces analyses
The global oil and gas market is characterized by the presence of large,
diversified international companies with highly vertically integrated operations
throughout oil exploration, production, refining, transportation and marketing.
The need for substantial investment in facilities such as drill rigs reduces the
threat of new companies establishing in the market. However the North
America market is characterized by the United States policies and by
traditional small drills activities, with a considerable number of players.
Substitutes in the oil and gas market can be considered in terms of increasing
the production of alternative energy sources, although this can result in high
switching costs. High fixed costs and exit barriers intensify the competition
level within the market.
Fig. 22 - Five Forces driving completion in the global oil and gas market. 2015
FIVE FORCES ANALYSIS
The oil & gas market will be analyzed taking companies engaged in oil and gas exploration and production as pla
The key buyers will be taken as end users (individual and institutional) and independent retailers, and suppliers of oi
gas field services as the key suppliers.
Summary
Figure 6: Forces driving competition in the global oil & gas market, 2014
SOURCE: MARKETLINE M A R K E T L I
Oil and gas companies are typically large, integrated players that benefit from the scale of their operations. The pres
of such incumbents intensifies rivalry in the market.
Despite declining prevalence of oil in favor of natural gas, crude oil is still the main commodity used in the world.
share of oil in the global consumption of energy from primary sources declined in the last decade from 38.7% to 34.8
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As figure shows, since the Deepwater Horizon Oil Spill in 2010 BP’s market
capitalization relative to its assets has been below that of its rivals and way
down on the comparative March 2010 value, which saw BP replace Royal
Dutch Shell as Europe’s largest oil company by market value for the first time
in more than three years, following reviving output growth and faster cost-
cutting.
BP is targeting focused investment and a managed portfolio BP plans to focus
on upstream projects. It is clear form BP’s sales, purchases, and areas of
investment that the company is focused on consolidating its distinctive strength
areas, where it has proven capabilities and experience. Among these are
exploration, where BP intends to double its investment; operations in deep
water ventures (as seen by its investment in the Shetland area of the North
Sea); the management of giant fields; and building gas value chains.
BP will also aim to continue developing its competitively strong downstream
businesses while maintaining its focus on upstream projects, with the company
having been issued 67 new exploration licenses in 11 countries. The
completion of major deals to enter new markets such as Brazil and India are
also pending.
To a lesser extent BP will attempt to establish alliances with major resource
holders and apply advanced technologies to its upstream activities, although it
is moving away from operations in which it has minority or junior status
shareholding.
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Appendix 3 – Oil and Gas service industry
Five Forces analyses
The volatility of crude oil prices continue to have an impact on this market, with
price hikes increasing demand for specialist services.
The oil and gas services market is rather fragmented with the top four
companies accounting for 18% of the market (Halliburton, Schlumberger and
Baker Hughes hold significant market share). Their presence within the market
boosts the competition level significantly.
Typical buyers in this market are large, which grants them greater bargaining
power. Suppliers to the market are quite varied and depend on the specific
structure of the drilling rig or equipment in question. In this sense, suppliers are
those who provide the raw materials used in the construction of rigs.
The level of technology required and the high costs of production as well as
government regulation constitute a strong barrier to entry and thereby reduce
the threat of new players establishing themselves in this market.
Currently, the majority of the world’s energy production takes place with the
use of non-renewable sources, primarily oil, gas and coal. However, in order to
fight climate change, it is widely considered necessary to shift to renewable
energy sources. Substitutes in the oil and gas equipment and services market
can be considered in terms of increasing usage of alternative energy sources.
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Appendix 4 – Halliburton Overview
Document adapted from Halliburton official site http://www.halliburton.com
Halliburton is one of the world’s largest providers of oilfield services to the
energy industry. The company serves the upstream oil and gas industry
throughout the lifecycle of the reservoir – from locating hydrocarbons and
managing geological data, to drilling and formation evaluation, well
construction and completion, and optimizing production through the life of the
field. The company operates in the Americas, Europe, Africa, the Middle East,
and Asia Pacific. It is headquartered in Houston, Texas, and employed 77,000
people as on December 31, 2013.
Revenue Analysis Halliburton
Halliburton recorded revenues of $29,402 million during FY2013, an increase
of 3.2% over FY2012. The US, Halliburton's largest geographical market,
accounted for 48.7% of the total revenues in FY2013.
Halliburton generates revenues through two business segments: completion
and production (59.5% of the total revenues in FY2013); and drilling and
evaluation (40.5%).
Revenue by segment
In FY2013, the completion and production segment recorded revenues of
$17,506 million, an increase of 0.7% over FY2012.
The drilling and evaluation segment recorded revenues of $11,896 million in
FY2013, an increase of 6.9% over FY2012.
Revenue by geography
The US, Halliburton's largest geographical market, accounted for 48.7% of the
total revenues in FY2013. Revenues from the US reached $14,311 million in
FY2013, a decrease of 5% compared to FY2012.
Other countries accounted for 51.3% of the total revenues in FY2013.
Revenues from other countries reached $15,091 million in FY2013, an
increase of 12.2% over FY2012.
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Appendix 5 – Industry Drivers, Critical Issues, Business Challenges
Document adapted from Oil and Gas 2015 Industry Report First Research
Energy Prices Change in crude oil and related energy prices
Technology Innovation Advances in science and technology, including information technology
Government
Regulations
Changes in federal, state, or local government regulations or business-
related policies
Commodity Prices Changes in prices for commodities, such as crops, metals, and other raw
materials
Fig. 29 – Industry Drivers - (economic changes that positively or negatively affect industry growth)
e.1.2) Critical Issues
Volatility of Oil, Gas
Prices
About 40 percent of the world oil supply comes from OPEC, which
includes member states subject to political instabilities (nations in the
Persian Gulf, Venezuela, Libya, and Nigeria). Given the fragile balance of
supply and demand, perceived threats to the supply can cause large price
disturbances. Capital availability and investment decisions are driven by
estimates of future prices and probable production levels.
Environmental
Concerns
Petroleum and natural gas well blowouts in the past have caused oil and
natural gas well drilling to be associated with toxic spills and site
contamination. High-visibility accidents have occurred despite
requirements for well safeguards and restrictions on drilling in populated
and environmentally sensitive areas. Environmental restrictions and
regulations limit exploration opportunities for companies and add cost to
drilling operations. Techniques such as hydraulic fracturing have drawn
concern because of potential effects on groundwater.
Fig. 30 – Critical Issues
e.1.3) Business Challenges
Forecasting Petroleum
and Natural Gas Prices
Exploration and production investment is a long-term gamble on
petroleum and natural gas prices. As prices increase, the amount of
capital available for drilling increases and the size of reserves required for
a well to be profitable decreases. Since a well can take two years to bring
into full production (in US this time can be reduced to 10 days, but in
smaller wells) and most are expected to have a productive life of about 20
years, company management requires a good sense of the long-term
market.
Regulatory Shifts Exploration and production companies are often subject to the laws of the
nations in which they operate. Even in areas of political stability,
government regulations can change quickly and significantly impact future
exploration plans and company profits.
Fig. 31 – Business Challenges
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e.1.4) Business Trends
Increased Use of
Horizontal Drilling,
Hydraulic Fracturing
New drilling techniques have expanded the available supply of oil and
gas. Vertical drilling has gradually been replaced by horizontal, which
uses a flexible pipe with a steerable drill bit on the end. Multiple horizontal
holes can be drilled from a single vertical shaft, allowing production of
more petroleum or gas from a single hole. Hydraulic fracturing is often
used in conjunction with horizontal drilling. Hydraulic fracturing involves
blasting a mixture of water, sand, and chemicals into rock formations to
fracture the rock and release oil and gas.
More Deep Sea Drilling Drilling companies, searching for major oil and natural gas finds, are
drilling in deeper waters and to greater depths through the use of
drillships. Drilling in the Gulf of Mexico has been successful at 25,000 feet
from an ocean floor under 10,000 feet of water; new deep water drillships
will be capable of 40,000 feet under 12,000 feet of water. Geologists
believe that reserves in the Gulf of Mexico of as much as 15 billion barrels
may lie in older rock formations known as the lower tertiary. But
environmentalists remain concerned about the impact of deep sea drilling.
Climate Change
Concerns
Exploration and production companies are increasingly concerned about
how the US government and individual states will choose to address
climate change. Devon Energy says that natural gas may become the
preferred fuel due to its status as the cleanest of available fossil fuels.
Arctic Drilling
Investments Decline
The Arctic has been touted as the next frontier in oil exploration; however,
technological challenges have put most Arctic production on hold for the
next 10 to 20 years, according to World Oil. The Arctic is believed to
contain as much as 30 percent of the world's undiscovered gas reserves
and 13 percent of undiscovered oil reserves, primarily beneath the ocean
floor.
Fig. 32 – Business Trends
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Appendix 6 – PESTEL
The importance of knowing the macro-environment on an industry such as
important like petroleum industry is crucial in the modern economy, because
these factors represent the opportunities and threats of this economic sector.
Political factor plays a major role in any organizations business expansion in
new markets. The political condition of the country, region or the market has
direct effect on the companies (BP and Halliburton) outcome. US government
policy changing from time to time and depends on the state (for instance:
taxes). Government usually changes several policies after election in the oil
and gas industry such as petroleum revenue tax.
Economical conditions impinge on how easy or difficult it is to be successful
and profitable at any time. Supply of money has adverse effect on US
economy. The economy has recently come out of the recession, so all the
banks are trying to avoid funding higher resources. For instance most of oil
industry projects are stopped due to insufficient supply of fund. Higher inflation
and recession has major effects on people income.
Social environment demonstrates collective trends. In the next years the
population of the US will increase in the near future. This will have a
considerable impact in to the oil and gas industry in the US, since more
population consumes more regional energy.
Technological factors play an important role in the evolution and competitively
of oil and gas industry. US oil and gas industry is going through very
challenging environment due to innovative technologies to gain maximum
resources. The best example is that of Gulf of Mexico to recover oil from
complex resources by utilizing innovative techniques.
Appendix 7 – Value Chain (Technology)
Environmental is probably the main concern of society, since Macondo
accident. The industry is adapting to new ways of production, without
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disregarding safety procedures. Goverment and regulatory institutions have
been setting new rules to the market.
Legal
Health and safety is the major concern with the people linked with oil industry.
UK health and safety policy is regulated by the government which helps to
protect the personal health of the workers in oil exploration, drilling, distribution,
consumer disposal and industrial factors. Product safety is another important
factor in oil and gas industry, because the leakage of resources from the outlet
can create havoc impact on the environment.
North America, more precisely USA, has several economic Advantages, where
for instance the America's attitude to corporate bankruptcy is designed to put
economic resources back to productive use.
Appendix 9 - Finance and Regulation in United States
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Appendix 7 – Value Chain
Document adapted from Smith book and Marketest Annual Report
Fig 33 – The Petroleum Value Chain
Fig 34 – Porters Value Chain
Products, operations and technology in United States
Product Segmentation by Revenue
Crude oil and natural gas are found in underground basins that meet certain geologic
conditions. All exploration companies have staff geologists, and many hire companies
specializing in geological research to identify areas with high potential for petroleum-bearing
The Petroleum Value Chain
Source: Christian O.H. Wolf, The Petroleum Value Chain, The World Bank Group (June 2009) 4
However, organizational plan is also about resource allocation in the course of
which companies try to align the available resources to various uses, by
scheduling activities through a time line. BP needs to allocate the resources
by market and by central planning or in a combination of both interests.
Porters value chain can be useful for breaking down an organization’s
capabilities. Additionally stakeholders need to map the interests in order to
consider their interest in the project.
Fig. 6 – Porters Value Chain
Fig. 7 – Stakeholders interest
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formations. Since the first US oil well was drilled in 1858, there have been hundreds of
thousands of drillings. Geologists use the data from these drillings to identify areas with
promise. To further improve the probability of finding petroleum, geologists can create 3D
maps of underground rock formations using seismic waves from controlled explosions or
sound generators (vibroseis).
Once a company selects an area to explore, it must obtain a lease on the mineral rights. Most
companies hire a land services company to research the ownership of mineral rights. In most
states, the mineral rights can be separated from the surface rights and owned by different
parties.
Land services companies employ landmen to present lease proposals to the mineral rights
owners. The leases are for a fixed period, typically two to five years, and pay the owner a fixed
fee for the right to drill during that period. The lease also defines access rights and rights to
install and operate a well, along with royalty payments to the mineral rights owner for any
hydrocarbon products extracted.
The exploration site is cleared and leveled and a drilling rig and crew brought in. Rotary rigs
consist of a derrick and power source (usually two or more diesel engines), along with ancillary
equipment, such as desanders and desilters, mud pumps, stacks of pipe, and living quarters
for the crew. A typical land-based oil well costs over $700 per foot to drill, and many wells cost
more than $4 million to bring to production; gas wells generally cost more than $600 per foot to
drill. The majority of commercial oil fields have been found at depths of 2,000 to about 15,000
feet. Natural gas fields are generally between 2,000 and 25,000 feet. As a well is being drilled,
geologists examine the cuttings evacuated from the borehole to evaluate the type and content
of rock at each depth. Most exploration companies use a combination of their own rigs and
crews and third-party drilling companies.
Offshore drilling can be done in the shallow waters of the continental shelf or in deep seas. In
shallow waters up to 500 feet, a drilling rig, such as a jackup rig, is towed to the drilling site and
part of the platform sunk to the bottom. Legs are lowered from the upper platform to the
sunken platform and the upper platform is then jacked up to the desired height above the
water.
Drilling is then conducted in a manner similar to onshore drilling. In deeper waters, submersible
rigs or deepwater drillships may be used. Wells require periodic workovers to maintain
production levels. During service, a workover rig or a smaller service unit is used to raise and
lower equipment into the well. Sand, rock, and other debris can be removed from the well
using oil or water-based mud or a nitrogen foam pumped into the well under high pressure. In
some instances, wells can be drilled nearby and water or a gas (carbon dioxide or nitrogen)
can be pumped in to drive the petroleum or natural gas toward the production well. Gas flowing
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from a well has to be treated onsite to remove liquids and corrosive gases before it can be
moved through a pipeline to a treatment plant.
Technology
Companies rely on IT systems to create the seismic 2D and 3D subsurface maps of potential
drilling areas. To monitor production, companies operate supervisory control and data
acquisition (SCADA) networks, which connect sensors and other equipment at each production
site to a staffed central control facility. The communication network may be older legacy
wireline, microwave connections, or a modern wireless system.
New drilling techniques have expanded the available supply of oil and gas. Vertical drilling has
gradually been replaced by horizontal, which uses a flexible pipe with a steerable drill bit on the
end. Hydraulic fracturing is often used in conjunction with horizontal drilling. Hydraulic
fracturing, or fracking, involves blasting a mixture of water, sand, and chemicals into rock
formations to fracture the rock and release oil and gas.
Fracking technology can also increase production from existing wells and extend their service.
Fracking can be used to extract another 15 to 20 percent of the estimated reserve from a well.
Another emerging technology, integrated gasification combined cycle (IGCC), can be used to
recover oil trapped underground.
Sales & Marketing
Crude oil is sold to either major integrated oil companies or to crude oil gathering companies
that then sell it in bulk to refiners. Crude may be sold at the wellhead or at the refinery, with the
seller responsible for transportation. Most oil in the US is moved through more than 85,000
miles of crude oil gathering pipelines. Once a well is brought into production, it's either
connected to a nearby pipeline or crude is aggregated at the site and trucked to a pipeline or
refinery. Pricing depends on the specific grade of crude, the location in regard to pipelines and
refineries, and the local market price.
Most domestically produced natural gas is moved to market by pipeline. Gas may be sold at
the wellhead to an end-user (who pays the pipeline company for transport), or to an aggregator
(which may be the pipeline company), which then resells to gas processing plants that make
the gas acceptable for transmission on interstate pipelines. In the US there are more than 200
natural gas pipeline systems and about 215,000 miles of interstate gas transmission pipelines.
Price is determined by spot prices, which fluctuate seasonally, and regional index prices.
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Appendix 8 - Regional Highlights
In the US, oil is produced in 31 states; leading oil-producing states include
Texas, North Dakota, California, Alaska, Oklahoma, and New Mexico. New
rock fracturing technology has increased exploration and production activity in
many US regions, especially in North Dakota (in the last 3 has increased
177%).
The US government permits oil and gas drilling in the deep waters of the Gulf
of Mexico. Oil and gas are also produced in state-controlled coastal waters.
About 20 percent of US petroleum production comes from offshore wells and
80 percent from land-based wells.
Shell Oil President John Hofmeister, noted that several major energy
companies, including his own, are making major investments in Houston.
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Appendix 9 - Finance and Regulation in United States
Document adapted from First Research Annual Report
Gross margins on net sales are typically about 70 percent; net income, about 8 percent. Gross
margins may be lower if the company is drilling aggressively and a large number of projects
are incomplete at year’s end. Many companies try to reduce debt and finance new drilling and
capital from cash flow. Long-term debt can be fairly high for companies expanding through
acquisitions, but most reduce debt quickly as acquisitions are consolidated and placed in
production. The industry is capital-intensive: average annual revenue per employee is about $2
million.
Some companies enter the exploration and production industry as services firms, providing
geological support, performing drilling, or functioning as a land services company. In many
services contracts, a company may negotiate royalties while accepting a lower payment for
services. Royalties may be aggregated and sold or used as collateral for loans to provide funds
for acquiring producing properties. Revenue from producing properties in turn can be used to
fund additional exploration.
Limited liability corporations may convert to publicly held corporations by selling stock to raise
funds for additional acquisitions and exploration. One unique method of attracting funds is to
combine a group of producing properties into a royalty trust and sell the shares to the public.
The selling company may retain a portion of the trust as an asset and operate the properties
on a fee arrangement.
The oil industry isn't regulated at the federal level as a business, although federal tax policies
are important to the industry. Many tax policies, such as oil depletion allowances and
amortization of drilling costs, affect both the profitability of the industry and its ability to attract
capital investment necessary for additional exploration.
Drilling and service operations are subject to numerous federal, state and local laws and
regulations including the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA); the Clean Water Act; the Clean Air Act; and similar state statutes.
These laws and regulations require permits for drilling wells, the maintenance of bonding
requirements to drill or operate wells, and also regulate the spacing and location of wells, the
method of drilling and casing wells, and the cleanup and restoration of drilling sites. While
companies maintain some insurance against costs of cleanup operations, they're usually not
fully insured against all such risks.
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Appendix 10 - International Insights Oil and Gas Industry
Document adapted from First Research Annual Report
The global oil and gas exploration and production industry produces about 90 million barrels of
oil per day and about 120,000 billion cubic feet (Bcf) of natural gas annually. Rising demand for
oil and gas will drive future production increases. Despite higher prices, worldwide oil
consumption is expected to increase 30 percent between 2010 and 2035. Natural gas
consumption is expected to increase 45 percent by 2035, according to the US Energy
Information Administration (EIA).
The largest oil-producing countries are Russia, Saudi Arabia, the US, Iran, and China. The
largest natural gas producers are the US, Russia, Iran, Algeria, and Canada. Major oil and gas
companies outside the US include LUKOIL and Tatneft (headquartered in Russia); Saudi
Aramco (Saudi Arabia); Royal Dutch Shell (The Netherlands); BP (UK); National Iranian Oil
Company; China National Petroleum Corporation; and PETROBRAS (Brazil).
Global Oil Production - Energy Information Administration, 2012
Russia accounts for about 13 percent of global oil production and about 16 percent of the
global oil export market. Russia produces about 18 percent of the world's total natural gas and
accounts for about 20 percent of global gas exports, according to BP's 2014 Statistical Review
of World Energy.
Saudi Arabia and Iran, two of the largest oil producers and exporters, are part of a group of 12
countries known as the Organization of the Petroleum Exporting Countries (OPEC). OPEC
members are the world's richest oil nations and control about three-quarters of the world's
proven oil reserves and account for about 40 percent of production, according to the EIA.
Other OPEC nations include Algeria, Angola, Ecuador, Iraq, Kuwait, Libya,

Nigeria, Qatar, the United Arab Emirates, and Venezuela. OPEC nations significantly effect
global oil production and prices.
OPEC's share of world oil production is expected to remain steady over the next 20 years,
however significant production growth is predicted in non-OPEC regions. Russia, the US,
Brazil, and Canada will account for about 50 percent of the oil production increase between
2010 and 2035, according to the EIA. Western Africa is also a new region of interest for oil
exploration and production.
The development of new drilling technologies to access shale gas and coalbed methane
resources could significantly boost gas production in Canada and China. Liquefied natural gas
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(LNG) is expected to account for a larger share of global gas production, with the Middle East
and Australia driving much of the production increase.
OPEC's control of much of the world's oil supply can significantly influence multi-national
company operations. OPEC members have national companies that operate as government
agencies. Depending on the government's objectives, these national companies may or may
not support foreign investment, although most allow international investor-owned companies to
operate within their borders. Most OPEC nations have production quotas that are used to
influence the amount of available oil. An OPEC member can reduce its quota and restrict
production opportunities for foreign companies operating in that country. Political instability in
many OPEC nations can also affect the global oil and gas industry.
Companies continually seek overseas exploration opportunities to secure future production,
often outside of OPEC countries. Other than availability of reserves, foreign investment
opportunities depend on country relationships, investment restrictions, and financial and
environmental regulations. Asian companies are investing heavily in Canada's oil sands, but
will need to adapt to local laws and environmental regulations.
Large reserves have been discovered along Africa's west coast, but political instability and
corruption may deter investors. Venezuela has large reserves of extra-heavy crude oil, but the
country has restricted foreign investment in hydrocarbon resources. Policies that have limited
Venezuela's new oil production could be relaxed in the next several years, according to the
EIA.
Change in Dollar Value of US Trade - US International Trade Commission
Imports of oil and gas to the US come primarily from Canada, Mexico, Saudi Arabia,
Venezuela, and Nigeria. Major export markets for US oil and gas include Canada, Mexico,
Japan, Brazil, and Dominican Republic.
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Appendix 11 – Facts and Figures BP and Halliburton
Fig 35 – Halliburton figures
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Appendix 12 - Recent Time Line BP
BP has had many problems over the years with accidents, safety issues and
corporate governance (Troubled Past)
June 1995 – An Era Begins – John Browne becomes chief executive of British
Petroleum. During his tenure, he renames the company BP and adopts a
sunburst logo.
September 2003 – Partnering with the Russians – TNK is formed as a 50-50
joint venture between BP and Russian partners. Under the deal, announced in
June 2003, BP agreed to invest 6,15 billion to produce oil and gas in Russia.
Septem 2004 – Accident in Texas City – an accident at BP´s Texas City, Tex,
refinery kills two workers and injures a third. BP is fined $ 109,500 for safety
violations.
March 2005 – Texas City Blast – a blast at the Texas City refinery kills 15
workers and injures more than 170. BP is fined 21.3 milion for safety violations.
July 2005 – A Hurricane Rocks Thunder Horse – The Thunder Horde offshore
platform nearly sinks in the wake of Hurricane Dennis in the Gulf od Mexico.
March 2006 – Oil spill in Alaska – A rupture in a BP-owned pipeline in Alaska
leads to the largest oil spill ever on the North Slope, over two acres of snow-
covered tundra.
April 2006 – An Early Warning – The Labor Department fines BP $ 2.4 milion
for “unsafe conditions” at its refinery near Toledo, Ohio.
May 2007 – Under new leadership – Tony Hayward takes over as chief
executive after John Browne resigns in a personal scandal.
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October 2007 – BP admits manipulation of propane market – BP agrees to pay
$303 million to settle charges by the Commodity Futures Trading Commission
that it unlawfully manipulated and attempted to manipulate the price of
propane.
March 2008 – Russian Offices Raided – Russian government raids the local
offices of BP and TNK-BP, arrest some employees and begins investigating
the company´s operations.
September 2008 – BP Cedes control of TNK-BP – BP announces a deal in
which it cedes operating control of TNK-BP to its Russian partners.
October 2009 – Another record fine for Texas City – The federal occupational
safety and health administration proposes to fine BP a record $87.4 miilion for
709 new safety violations at its Texas City refinery.
March 2010 – A history of safety lapses – The occupational safety and health
administration proposes to fine BP $3 million for 62 safety violations at its Ohio
refinery.
April, 2010 – Spill in the Gulf – The Deepwater Horizon explodes in the Gulf of
Mexico, causing a continuing gusher of oil that already ranks the largest
ocean-based spill in American History.
May 2010 – Alaska Pipeline Leak – A power failure causes 5,000 barrels of oil
to leak from the Trans-Alaska Pipeline System, principally managed by BP.
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Appendix 13 – Industry Life Cycle
a) World Production (Source EIA)
Fig 39 – World Production
Fig 40 – World Production
Fig 41 – World Production
9/5/2014
8
15
What About “Peak” Oil
16
“Peak” Oil (2003)
9/5/2014
8
15
What About “Peak” Oil
16
“Peak” Oil (2003)
9/5/2014
17
“Peak” Oil
IEA to 2035
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b) Example of a Well Production
Fig 42 – Production Forecast
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Appendix 14 – GE Screen Matrix
Fig 43 – GE Screen Matrix
BP
Halliburton
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Appendix 15 – Ashridge Portofolio Matrix (BP and Halliburton)
Fig 44 – Ashridge Portofolio Matrix
BP (downstream)
BP (midstream)
BP (upstream)
Halliburton
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Appendix 16 - Macondo Oil Spill
Source Oil and Gas Contract Law 2015. Pedro Nobrega Assignment
BP Deepwater Horizon occurred on March 2010, and from BP point of view
(BP Report, p. 181), in this accident several things went wrong, including well
integrity being compromised (due to cement failure and mechanical barriers
failure), hydrocarbons entering the well bore undetected / well control lost (due
to pressure testing problems and response problems), hydrocarbons ignited on
platform (surface containment problems and fire and gas systems problems),
and complete failure in the emergency operations (Blowout Prevent (BOP)
failure).
BOP is the equipment of last resource - when you press it the equipment below
will be lost, and in the Macondo case it didn´t work the way it was supposed to
have worked.
The commission responsible for analyzing this accident reached the following
conclusions:
Fig 45 – Events in the incident
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Source: BP Deepwater Horizon Accident Investigation Report
BP was found guilty of gross negligence.
Several experts were surprised at this decision since in USA law it is typically
difficult to prove gross negligence (it takes a lot to find an entity accountable for
gross negligence). On top of that, in the Oil and Gas history only a few
companies were ever considered accountable for gross negligence.
There is an argument over the fact that each of these failures, when taken in
isolation, is never enough motive for gross negligence, but the combinations
have put BP in a fragile situation since sequential simple acts of simple
negligence can lead to gross negligence. Yet, there are experts that defend
that these combinations of breaches must be judged in isolation and not in
combination, and this has resulted in a recent attempt by BP to get a different
court resolution. In addition BP appeal to conscious disregard of the facts,
since the company didn´t know about well integrity.
In sum, BP didn´t know but they didn´t test or follow Halliburton / Transocean
recommendations on cement requirements and spacers.
Recently it was found that BOP was repaired not by original equipment and not
by the original company, which implied losing the warranties of the job.
Human error was also present due to the misreading of the instructions.
In these sorts of accidents some direct costs (loss of rig, containment, cleanup,
lost oil, litigation costs and investigation) and some indirect ones (loss of life /
injuries, clean up, lost royalties/incomes, public reaction and investor reaction)
must be pointed out.
In the first place the contractual relationship between entities must be closely
analyzed:
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Fig 46 – Entities involved in the incident
Source: BP Report
As far as USA government is concerned, BP, Andarko and Moex are the
entities accountable if something goes wrong with this exploration. So, in
theory, Andarko and Moex are as liable as BP.
JOA (Joint Operating Agreement) was signed between operator and non-
operator and this specific element now protects operator from negligence.
BP is the operator and makes several service contracts, Transocean, Smith,
Halliburton, Cameron and Weatherford being the main ones. Each of these
contracts will have several risk allocations, liabilities and indemnities.
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Appendix 17 - Oil Spills
The following world’s largest oil spills can be pointed out:
1) Arabian Gulf Spills, Persian Gulf 1991, 520 million gallons, acts of war
2) Deepwater Horizon, GoM, USA 2010, est. 205 million gallons, well
3) Ixtoc I, GoM Mexico 1979 , 140 million gallons, well
4) Atlantic Empress, Trinidad and Tobago 1979, 90 million gallons, tanker
5) Fergana Valley/Mingbulak, Uzbekistan 1992, 88 million gallons, well
6) ABT Summer, 700 n.m. from Angola 1991, 82 million gallons, tanker
7) Nowruz Field Platform, Persian Gulf 1983, 80 million gallons, well
8) Castillo de Bellver, Saldanha Bay, South Africa 1983, 79 million gallon, tanker
9) Amoco Cadiz, Brittany, France 1978, 69 million gallons, tanker
10) MT Haven, Mediterranean Sea near Italy, 1991, 45 million gallons, tanker
Most of these accidents have changed the industry forever.
The Santa Barbara Spill, which ocurred in 1969, is now the third largest (after the Exxon
Valdez and Deepwater Horizon) and led to a moratorium on offshore oil drilling, which helped
fuel environmental movement of 1960s and 70s.
In 1982, the Ocean Ranger accident (1982), in the Canadian Atlantic, a semi – submersible
drilling for Mobil, sank killing all 84 crewmembers. This accident let to much tougher Canadian
safety regulations.
In 1988, the Piper Alpha spill, in the North Sea (UK), where a platform operated by Occidental
was destroyed by explosion and fire, killed 167, leaving 59 survivors. This led to much tougher
UK safety regulations and resulted in important UK judicial decisions on indemnity law.
In 1989, there was the Exxon Valdez Oil Spill, in Alaska, where a tanker struck Bligh Reef,
spilling nearly 11 million gallons. This led to an oil pollution act (1990).
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Appendix 18 – BP Past and Present
Source Oil and Gas Strategic Operations Oil and Gas 2014. Pedro Nobrega
Assignment
BP is one of the largest vertically integrated oil and gas (O&G) companies in the world. It main
operations areas are the exploration and production of O&G, as the activity to sell it. Employs
nearly 90,000 people, and is present in 80 countries, with the production in only 28.
In the last 3 years the revenue has been around $400,000 million, with an operating margin of
7,5%, despite some ups and downs.
BP has 3 segments defined: upstream, downstream and corporate.
The upstream focus on finding, accessing and extracting O&G through three divisions:
exploration (access), developments (execution of wells) and production (ensures operations).
Nowadays, BP hydrocarbon reserves amounted for nearly 12,000 million barrels of oil
equivalent (mmboe), with a production of 900 thousand barrels per day (mb/d).
BP attempts to be a safety leader, an outstanding operator and a responsible corporate
organization.
BP exceptional competences include among others, exploration, operations in deep water,
managing giant fields reinforced by technology and relationships focus.
In 2010, Golf accident has changed BP, with a significant weight on cash flow ability and since
then, BP has been positioning many of its assets to concentrate more on its strengths. As the
divestment program began, BP sold nearly half of upstream installations, and 1/3 of his wells,
retaining 90% of reserves/production. Economists consider to be the “Shrunk of a Giant”.
BP aims to concentrate on core areas, directing the available resources for them, with a focus
to become a simpler business, paying attention on what it does best.
BP’s global supply and trading represents a competitive advantage, delivering value across the
overall supply chain.
The research and development (R&D) imply a competitive advantage, permitting to be in
industry trends, technologically ahead, while ensuring safety and reliable operations.
Investment in R&D is a commitment to future business, and in the last years amounted to
nearly 6% of net profit.
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For that reason, Group strategy requires continued technological advances and innovation.
Also, the ability to analyze the data covered from explorations allows BP to be at front of
industry.
This industry is highly competitive, and BP position could be affected if players bid superior
terms for the rights or licenses, or if operating costs is not controlled, or if fails to sustain,
develop, and operate efficiently the assets.
BP as defined four strategic areas: the Gulf of Mexico, Azerbaijan, North Sea and Angola.
After Gulf incident, BP introduced a more powerful safety and operational risk procedures.
Contractors provide half of BP’s workforces, so it needs to be rigorous and consistent
managing them.
Many of BP operations, including deep-water drilling, rely on the expertise of contractors.
