British Petroleum: Value Chain Excellence

Forbes’ Global 2000 ranking for the year 2019 ranked British Petroleum (BP) as one of the world’s top five oil and gas companies. This achievement is a not an overnight success. This is the result of BP’s slow and steady development of a sustainable value chain in oil & gas industry.

O&G Industry Value Chains

High Degree of Complexity

Oil & Gas Industry’s value chains exhibit a high degree of complexity. Long-lead time, cross-country operations, political factors, capacity constraints, and limited modes of transportation are the major causes for this complexity. Due to these causes, most of the companies operating in O&G industry fail to expand beyond their core-competencies. But BP is among the few that operate in all the segments of this industry with efficiency and effectiveness.

Focus on Efficiency

Value chains in O&G industry are characterized by functional products, stable manufacturing processes, and low uncertainty in demand and supply. According to Hau Lee’s framework, value chains with these characteristics are categorized as “efficient value chains”. This means that value chains in this industry develop strategies with a goal to create highest level of cost efficiency. This is done through elimination of non value-added activities, focus on economies of scale and long-term contracts, and optimization of capacity across the value chain segments.

Changing Paradigms

Present Global O&G reserves stand at 1.49 trillion barrel and at current consumption rate they are expected to last for the next five decades[1]. The limited nature and high importance of O&G resources have sparked political interests in them. This led towards usage of trade sanctions, political sanctions, wars and quotas as tools to affect the ownership and create pressure on countries and organizations owning the O&G resources.

New Challenges

Globalization along with involvement of multiple behind-the-curtain stakeholders developed new challenges for this industry. These challenges include managing increased uncertainty, costs to stay competitive, volatility in oil and currency exchange rates, and most importantly “meeting the environmental regulations”.

British Petroleum: Value Chain

Even with these challenges, BP maintained a long legacy of more than 100 years of successful operations while being profitable. During this tenure, BP expanded its business across Europe, Australia, Asia, Africa, and North and South America. Currently it operates across 78 countries and employs more than 73,000 people. The company’s assets (as on 31st December, 2018) include proved hydrocarbon-reserves of 19,945 million barrels of oil-equivalent, 63,000 square kilometer of new exploration area, and 18,700 retail sites.

The Success Factors

• Integration — British petroleum used upward and downward vertical integration as a strategy to integrate and diversify itself across all segments of O&G industry. It diversified itself in energy sector to adopt economies of scale and gain control over the supply sources as well as the front-end retail stores.
• Strategic & Collaborative Partnerships — BP successfully created strategic partnerships with its supply and demand sources. Some of these include strategic partnership with the Russian Company Rosneft and Azerbaijan’s state oil and gas company (SOCAR), and strategic alliance with Petrobras in Brazil. This enabled BP to have a greater control over supply sources.

• Organizational Structure — The integration and diversification provided economies of scale and better control over the supply and demand sources. But at the same time, it increased the complexity in its value chain. To handle this complexity, BP strategically divided its value chain into two segments i.e. upstream and downstream. Each segment carries its own chief executive officer (CEO) with separate accountability and performance measurements. Each segment is further separated into various global technical and operating functions.
• Modernization of the Whole Group — BP invested $429 Million in research and development to modernize the whole group. This involves simplification of the processes and enhancement of the productivity through digital solutions. This includes use of cloud-based technologies, Robotic inspection, APEX technology in upstream assets, smart glasses in USA, and digital vests in Oman, etc. All these are intended to manage the operations more effectively with increased productivity and safety.

Key-Take Away

BP is a live example of how to manage and integrate value chain by redesigning organizational structure and using digital technology. It successfully used this strategy to improve critical performance measures such as net cash margin per barrel. The company increased its net cash margin per barrel in 2018, reflecting increased commercial optimization and strong operations. All these measures indicate that British Petroleum earned to be in the top-five companies in the Oil & Gas Industry.

Sources

[1] UBS (2012) and OPEC Share of World Crude Oil Reserves (2018)

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Originally published by Priyanshu Dixit at https://www.linkedin.com.