Porter’s Five Forces Analysis of BP
|Name||British Petroleum Company (BP)|
|Founded||April 14, 1909|
|Headquarters||London, United Kingdom|
|Revenues||USD 241.39 billion (CY22)|
|Profit||USD -1.36 billion (CY22)|
|Competitors||ENI, ExxonMobil, Marathon Oil, TotalEnergies, Chevron, Shell|
British Petroleum (BP) is one of the largest oil and gas companies in the world, headquartered in UK. The company has total vertical integration in oil and gas chain which includes from upstream (exploration and production) to midstream (refining) and downstream (transmission and distribution/retail).
BP is ranked on 35th on Fortune Global 500 (2022) and 50th on Forbes Global 2000 (2022) lists.The company remains focused on alternative energy like Hydrocarbons, Biofuels driving efficiencies from technology.
BP reported revenues of USD 157.74 billion, up 49% YoY in CY21 on the back of increased volumes as the world moved towards normalcy post covid-19 pandemic. Also, the company reported profit of USD 8.49 billion in CY21 from a loss of USD 20.73 billion in CY20.
BP Rivalry among Existing Competitors
- Perfect Competition
The company engages in exploration, production, refining and selling of oil, gas and related products. The nature of the business involves many large players conducing similar kind of activities with heavy emphasis on building energy reserves. Furthermore, products are highly identical used for the same purpose by everyone which classifies it as a Perfect competition landscape. Although there is some pricing power, most comes from daily fluctuating energy prices (crude/brent) and changes in Fixed and Variable cost structures.
- TotalEnergies SE
TotalEnergies is one of the seven super major oil giants and a European Company that also engages in a wide range of activities from Oil exploration and production to final retailing consumers. The company reported revenues of USD 184.68 billion and a Profit of USD 15.5 billion in CY21. The company owns brands like Bostik, Elf Aquitaine and SunPower. The company has scored first carbon capture storage project in Norway.
- ExxonMobil Corporation
ExxonMobil is a non-government American Oil giant and one of the largest public limited companies in the world. The company ranked 6th on Fortune 500 and 12th on Fortune Global 500. ExxonMobil reported revenues of USD 276.69 billion and profits of USD 23.04 billion in CY21.
- Marathon Oil Corporation
Marathon Oil is another American Oil company engaged in exploration and production activity. The company produces roughly 383k bpd and reported revenues and income of USD 5.60 billion and USD 946 million in CY21. The company has 50/50 weight of Oil and gas mix and has a diverse portfolio across America.
BP Threat of New Entrants
- Extraordinary Investment in Fixed Capital
The Oil business is requires immense Fixed Capital expenditures with leverage and sometimes even requires government financing. According to Spencer (2021), the investment in oil sector was down 23% YoY in CY21 which led to soaring commodity prices and demand shortages as winters approached energy deprived Europe.
- Insanely Regulated
Oil business is highly regulated not just in US or UK but across the globe. The companies also have to comply with international laws. BP faces a lot of risk of penalties due to environmental damages, political litigations or arbitrations. The company is currently subject to various civil, administrative, tax, environmental and corporate legal proceedings. These claims involve substantial amounts of money and other remedies, and the aggregate cost of unfavorable decisions could have a material adverse effect on our results and financial condition. One of the major event was Deepwater Horizon in 2010 in which oil was accidently spill in the sea due to which the company faced around USD 65 billion in fines and penalties.
- High Research and Development Costs
Energy business requires immense expenditures on research and development as the world’s energy reserves are drying up and oil prices reaching all-time highs (taking inflation with it), we expect these expenses in renewal energy and low carbon alternatives to continue. As per the financial books, BP invested USD 266 million in research and development where most is being channeled towards reducing carbon emissions and low carbon business. In January 2022, the company also signed 25Y Purchase and Sale Agreement with New York State Energy Research and Development Authority for 2.5GW of power offtake for US Projects Empire Wind II and Beacon Wind I.
BP Bargaining Power of Suppliers
- Global Demand Supply Mechanics
The overall oil industry is dominated with a few major countries like US, KSA, Russia and Canada controlling large percentage of global output. The overall demand and supply is highly sensitive to interest rates as with the rise interest rates to counter soaring inflationary pressures in the wake of Russia-Ukraine conflict, demand is expected to drastically drop which decreased the future expected price for crude energy. Currently, FED is expected to hike the rate by another 25bps after 50bps hike by Bank of England and European Central Bank which led to decline in international energy prices.
Source: Statista (2021)
- Supplier Risks
The company has a network of around 4000 suppliers is targeted towards creating a more sustainable supply chain. The company is keen on spreading the supplier base with reducing impact and risks from a minimal suppliers who take a significant chunk of the business. Moreover, The Company also estimates bribery and corruption risks when it comes to suppliers and removes those who are involved in such practices.
BP Bargaining Power of Buyers
- Complex Pricing Mechanism
Fuel and Energy is the most easy to pass on to end users as the prices fluctuate on daily basis with international commodity prices (Crude, Brent and Arab lite). However, the prices charged by BP and other oil players are a factor of exchange rate fluctuations, global aggregate demand (bpd), global political and economic scenario, regulatory restriction on prices, and inventory management (inventory gains and losses).
- Ability to pass on Cost-push inflation
BP has the ability to control prices of its product due to giant reserves and large global presence. In this respect, the company can manage its inventories with respect to demand and supply factors of global oil considering the geological situation at hand.
- Perks of Vertical Integration
Most global oil players benefit from vertical integration from exploration to refining to final transportation and distribution of oil. The end user has zero control over the prices as it is mostly government regulated. Upstream business gives significant control over pricing due to exploratory activities while downstream are price takers and have little to no pricing power.
BP Threat of Substitute Products or Services
- Low Switching Cost
Since the product is absolutely identical, there is little to no switching cost. Also, there is extremely low perception in the mind of customers when it comes to loyalty with a single brand of fuel. As fuel is a necessity good for daily consumption, people don’t bother much about from where they get their fuel needs. Also, most employers these days provide for employees fuel costs which further decrease the need for product differentiation.
- A thrust for better alternatives
There is growing focus towards environmental protection and compliance with health and safety standards. Large oil giants are responsible for deterioration of environment on a large scale and the world is shifting its focus on reduced carbon emissions and renewable energy resources. Some better and environment friendly alternatives are hydro, nuclear (to some extent), and fossil fuels.
- Moving toward Electric cars
Most modern countries are moving towards electric cars to become eco-friendly. Many governments are introducing new laws to incentivize shift towards sustainable mobility. According to Cornet, the European Union presented “Fit for 55” program, which aims to reduce greenhouse gas emissions by 55% till 2030. Governments are also introducing reduced taxes on EVs and installing energy stations to achieve global compliance.
- Annual Financial Statements, Reports and Presentations (CY21 and CY22), Company Website [Online], Available at: BP
- Fortune, (2023), Topic: BP [Online], Available at: Fortune
- Forbes, (2022), BP [online], Available at: Forbes
- The Wall Street Journal, Topic: BP [online], Available at: Wall Street Journal
- Adam Lashinksy, (2020), Is BP really going ‘beyond petroleum’ this time around? [Online], Available at: Fortune
- Sönnichsen, (2022), Distribution of crude oil export value worldwide in 2021, by country [Online], Available at: Statista
- Ben Gaunt – Chief Talent Officer at BP, (2022), Why BP’s head of talent thinks the energy transition is a human capital issue [Online], Available at: Fortune
- Andreas Cornet, (2021), Why the automotive future is electric [Online], Available at: Mckinsey
- Tristan Bove, (2022), Fossil fuel companies like Shell and BP are raking in massive profits, and this could be just the beginning [Online], Available at: Fortune
- Dan DeLorenzo, (2023), Russia’s War on Ukraine Changed Global Oil Trade. Here Is What It Looks Like Now [Online], Available at: The Wall Street Journal
- Mason Bissada, (2022), BP Drops Nearly 20% Stake In Russian-Owned Oil Firm After Invasion Of Ukraine [Online], Available at: Forbes
- International Energy Agency (2023), World total final consumption by source [Online], Available at: IEA
- International Energy Agency (2023), Total energy supply outlook by fuel and scenario, 2000-2040 [Online], Available at: IEA