BP and the consolidation

in the Oil Industry,

1998-2002

Performed by:
Anna Bachurina
Maxim Peskin
Vladimir Maximov
 Agenda

Current situation brief

Analysis

Hypotheses

Strategic opportunities

Strategy as Paradigm

Implementation
 Where we are: brief
British Petroleum, an oil&gas supermajor with almost 100 years history.
130 business across 100 countries, $144 bn assets generate $162 bn sales
Socially and environmentally responsible

Where are we going?

What are the alternatives for continued growth?
How is it possible to expand companys business further?
Is it the right decision to divest to become more profitable?
How attractive will the companys products be in the future?

Lord Browne: We are moving on to productivity and producing profitable

organic growth...
Analysis: SWOT

TAT
 Porters model: Upstream
Force of new entrants:
New companies backed by national governments
Small local producers
Substitutes:
Natural gas

Existing competition:
Stable competition\production
structure (M&A epoch already
passed by)
Suppliers:
Super majors and national Exploration seen as
monopolies part of oil production
All super majors have lower net
margins for upstream than BP

Customers:
Independent refineries/marketing companies emerged
within recent 30 years
Majors share declining
Fund market hedging
 Porters model: Downstream
Force of new entrants: Substitutes:
Entrance barriers much lower than in Ethanol biofuels (for transportation
upstream, both refineries, wholesale and retail agricultural nations)
Coal (for heat and energy coal
producing nations; threat if oil is
expensive)
Renewable (environmental
Existing competition: awareness)
Majors share declining
Independent
refineries/marketing
Suppliers:
companies emerged within
Stable competition\production
recent 30 years
structure (M&A epoch passed by)
BP, national monopolies, other
super majors (?)

Customers:
Oil products are used for heat, transport and electricity production
Same for business use
Brand recognition and loyalty issues gas stations network
Fund market hedging
 Possible scenarios
Negative: Positive:

Oil is cheap, at historic Oil is moderately pricey

90s minimum ($10-15) Prices are at latest big trend
extrapolated ($25-30)

Slowdown in global economy growth, Stable global economy,

strained demand, restoration growth after crisis,
inefficient OPEC attempts to restrain supported by cheap money era
production

Positive is conservative!

Oil market speculations

inflate 25% of the actual price
=> $30-40 as avg estimate
for 2000-2005.
 Strategic opportunity 1: Acquisitions

What: Why:
ENI
How:
E.G., Repsol YPF: 2000 net cash flow of $3,7 bn
Repsol YPF
and promising strengthening
(Other supermajors High refinery capacity => 5-6 yrs. internal reserves
too big; state oil Access to European Debt. Possible due to strong
producers politically market cash and earnings. Leverage
improbable)
is only 14%

ENI and Repsol are

worth $20-25 bn EACH
WHY NOT ACQUIRE CERTAIN ASSETS?
non US&Europe downstream
chemical business, but that's weak focus

What then:
Stronger presence in European markets
Competition increase
Inefficient in terms of internal capital
Too big = too slow
Big investment = cash flow reservations or worsened debt portfolio and
financing options in future
 Strategic opportunity 2: Internal growth
a) Internal efficiency
What: How:
New technologies Why: R&D, quality management
New oil fields IT infrastructure
Increasing assets
Associated gas Organizational culture, finance
turnover!
Ecology discipline, business units
peer groups

b) New markets
What: Why: How:
Downstream Far 2/3 of business is US&UK Joint ventures (e.g. China)
East & South East Asia Franchise gas stations
network roll-out
Strategic opportunity 2: more Internal growth
c) New products

What: Why: How:

End customer Gas stations: convenience
Aggressive positioning
perception as target stores, premium service, non-
Quality, service, price:
Reputation in contact cash payments...
offering triple benefit
audiences Alliances: grocery, fast food,
Focus on brand image
snack...
BP branded goods

What then:
Entering new markets (geography/product)
Brand/customer loyalty
Competitors angry, but have to follow
Business processes might require re-engineering
Level of expertise is crucial
Operating expenses poised to grow
 Strategic opportunity 3: Divestiture
What:
Least efficient units to most How:
willing competitor. Why: Direct sale
downstream (gas stations) to Focus on most profitable Exchange for share in
national state-backed businesses joint venture
companies
rigid rule: 10% least
efficient assets each year
within 5 yrs
chemical business to
ExxonMobil

What then:
Mature markets improved competition
Opportunity to reallocate capital and optimize process chains
Competitors probably gain stronger assets portfolios (even if we get
rid of inefficient assets)
Info networks tighter = easier experience sharing
 Strategic opportunity 4:
Diversification/change of focus
What: Why:
Utilizing benefits and
1) B2B services: How:
expertise
Refinery lending
Moving closer to end Re-engineering product
Finding and exploration
consumer flows controls
2) Development /
Excessive refinery Improving experience
organizational consulting
capabilities and highest sharing circuitry, launching
within the industry
efficiency among internal consulting as first
3) Diversifying into
supermajors we can phase
energy services
offset falling margins Networking and union
business:
Potential emergence of formation
renewable energy
new players in
energy production and
developing countries
transportation

What then:
Markets are happy
This is an easy switch, so competition may be tight
Probable optimization. Issues with corporate targets alignment
also probable.
 Strategies against target objectives
Key objectives
1) Performance improvement potential: $2.0 bn over 2000-2001, $1.4 bn per year in mid-term
2) Downstream unit cost reduction rate: 2.5% per year, 1.5% per year in mid-term
3) Upstream unit cost reduction rate: 6.0% per year
Upstream volume growth rate: 5,5% per year
4) Chemicals production unit cost reduction rate: 4.0%
5) Earnings: double-digit growth
6) Dividend policy: pay out 50% of income

Acqusition- Internal growth- Divestiture- Diversification-

based strategy based strategy based strategy based strategy
Performance + + - +
Downstream + + + +
Upstream + + + -
Chemicals - + - +
Earnings - + + +
Dividends - + + +
SUM 3/6 6/6 4/6 5/6

Optimal strategic paradigm: internal growth-based strategy plus some

diversification elements.
+ rigid rule of 10% to improve earnings and performance discipline.
 Details of chosen strategy
Internal growth is focused on:
Internal technological and organizational efficiency
Cost chain optimization
New markets and products within our category (lively downstream roll-out)
Attacking pricing and offers for end consumer @ gas stations
Quality of products
Customer service
Sharp, coherently communicated brand image

Diversification is focused on:

Oil products flexible portfolio as a goal @ each refinery
B2B services: exploration, consulting
Energy services: renewables development, energy production/transportation

SUM: aggressive action on all fronts and markets of presence,

basing on our key competencies, along with entering new
neighboring sectors where we can utilize our broad advantages.
 Strategic paradigm
Achieving optimal costs level
while Fragmentation Specialization
Diversifying our efforts in a
mature industry
and Number
Maintaining our core brand of ways
values, and
thus means
Binding cost- and differentiation-
centered approaches. Deadlock Volume

Size of advantage

Advantage matrix: moving from Volume business to Specialized business.

Our plan: broad attack supported by action at flanks.

Therefore aggressive positioning of a coherent value- and
quality-conscious brand.
 Implementing the strategy
HR initiatives
Inducement of risk tolerance and adaptivity into corporate culture
More flexible management style
More result-oriented motivation/compensation systems

Core competencies
Continuous improvement and best practice logics virus for employees, all levels
Forming and improving company's unique competencies, aligned with strategy
Build and enhance strategic partnerships with suppliers of services, equipment etc.
From competencies to structure: maintaining virtual integration!

Organizational structure
Budgeting incentives
Re-engineering, processes reorganizing
Policies and procedures
Target: fit new businesses into global corporate frame!

Metrics
KPIs realigned to strategies
Process-oriented measurements
Region/Division/Product
Margins, turnovers, ROA/ROE, EVA
Thank you for your attention

Performed by:
Anna Bachurina
Maxim Peskin
Vladimir Maximov
 Appendix A. CapEx & Financing
CAPEX
Planned increase in gas stations fleet: 1000 / year
Each capexed @ $1 M, sum capex $1 bn / year
Gas stations: 50% of total capex near-term, 80% mid-term
WORST CASE capex total additional: $2 bn / year
FINANCING
1. Estimate of continuing operations:
2000 net cash flow of $3.7 bn, poised to strengthen
Company is underleveraged (14%), issuing debt possible

2. Estimate of natural growth:

Physical demand worldwide growth rate, y-on-y: 0.5%; Prices average growth rate, y-on-y:
3.7%; Revenues projected natural growth rate: 4.2%. Even next year, +4.2% is $7bn

3. Estimate of growth driven by diversification / internal efficiency in 2001:

Assuming 20% of projected natural rate: 0,8%. Even next year, +0.8% is $1.4 bn

4. Estimate of opex:
Contributed by new projects, +0.8%, prices, of +3.7%, and volume, 0.5%; Opex
projected natural growth rate: 3.2%. Even next year, +3.2% is $4.6 bn

Conservative estimate suggests $2 bn/year add capex and $4.6 bn/year add opex
vs $8.4 bn/year add revenue .
 Appendix B. Codename: Cakemonger
So, how many cakes does BP actually sell? (As of 2000)
Input data:
28 000 gas stations currently, 50% have cake-producing equipment and outlets.
Cake priced at $0,80 (generic)
Avg customer buys 30 liters of gas.

Refined petroleum product sales extrapolated ca. 23 M barrel daily.

Gas consumption proportion 56,7%, so 2,066 M liters of gas.
Then, 74,000 liters of gas daily per station.
This means roughly 2400 customers every day. Of them:
50% care about anything apart from fuel. Of them:
75% buy what they desire to. Of them:
50% are actually interested in food and drink.

Actualized food/drink market is 18,75% of gas customers.

BP branded cakes share estimate: 10% (1,88% of all visitors). That's 46 men/women daily.
Assume sales force efficient (x2). Daily revenue is $74.

Across the globe it's $1,033 K daily, or $358 M yearly.

That's 0,21% of the group's total revenue ($171 bn), or 0,28% of downstream operations
revenue ($129 bn).
 Appendix C. Diversification/Divestiture analysis
framework
Sector attractiveness: market volume, growth and promised profits, competition
intensity, opportunities and threats, influencing factors, entrance barriers.

Competitive capabilities: relative share, relative production costs, products analysis,

bargaining power, strategic alignment, technological capabilities, brand power.

Resource base and productivity analysis: identifying cash cows and leeches, resources
vs needs, synergy effects, emergence of additional advantages, returns and ratios

1) Technologies and experiences sharing

+
2) Brand sharing SUCCESSFUL
+ DIVERSIFICATION
3) Mutual use of resources for
cost-cutting
new competitive advantages