“BP and consolidation of oil industry”
1. Why are the big oil companies so big & vertically integrated?
Due to the enormous oil demand, the scale of the oil companies has to be big.
Global oil consumption was 75.6 million barrels a day in 2000 and an enormous
supply base is required to meet such enormous demand. In addition, there are
separate activities handled by oil companies, such as the upstream division, which
is responsible for discovering oil and gas and also creating reserves. The refining
of crude oil is the responsibility of the downstream division of the oil firms, which
is accompanied by various processes and marketing. The tremendous merger
operation is another significant factor. These factors suggest that the oil companies
are large in scale.
The oil companies are facing a variety of challenges that are mentioned in the case
study, and these problems help the oil industry move towards vertical integration
Owing to the dysfunctional relationships between them, the oil companies should
be vertically integrated. The number of sellers and buyers that generated bilateral
oligopolies is reduced, enabling companies to combine vertically to reduce players
and act more rationally. Vertical integration can minimize transport costs and can
solve regional constraints. Supply chain management would become effective and
price discrimination could be enforced. Finally, vertical integration would put big
oil firms in a better position to negotiate with governments and diversify their
portfolios in order to protect against the risks.
2. How favorable were the economics of the oil and gas industry before the
BP-Amoco merger? What were the effects of the recent mergers on
industry structure and on BP’s profitability?
Economics of the oil and gas industry before the BP-Amoco merger were very
much in favor of this merger
3. How will the structure of the industry evolve? Do you expect more
mergers among the largest oil companies?
The structure of the industry has changed dramatically with the emergence
of a wave of merger activity. Set at the end of 2001, BP chief executive,
Lord John Browne, looks to the future of the company. BP went merger
activity in 1998, with its combination with Amoco. Other major oil concerns
quickly followed suit. Several large and dominant firms, called
"supermajors", separated from the other competitors. Despite the large
number of independent firms, there are also a specialty, supermajor firms do
not consider them direct competitors.
4. Consider the four alternative courses of action that Lord Browne was
contemplating at the end of the 2002 case: acquisition, internal growth,
divestiture, and diversification. Did he choose the right ones? Could he
have done better? What should he do now?
For continued growth, BP has four alternatives open, which are business
diversification, divestiture, internal growth, and acquisition. The company
had merged with Amoco so that it had acquisition experience, but lack of
quality opportunities and competition authorities could prevent
development. Consequently, BP had to explore other options and Browne
considered alternative for divestiture.
We believe he choose right and based on the transformation of the industry
and the challenges that oil companies and BP face, it is recommended that
BP diversify into a new sector and start a new, transparent energy production
company. The business could lose money from the oil supply in near future
It is also recommended that BP invest in the renewable energy sector as
green energy demand grows in future years.
