Ques Consider the four alternative course of action at the end of 2002

acquisition, internal growth, divestitute and diversification. Did Lord Browne

choose the right ones?
Ans. Merger and Acquisition:

BP Merged with Amoco in $53 billion deal in 1997. Amoco was the United
States 5th largest company.
Benefits:
a. Strong presence in the Midwest, eastern and south-eastern states
with 9,300 gasoline retail outlets
b. Natural gas discoveries in Trinidad and large oil reserves in the Gulf
of Mexico, North Sea and Colombia by Amoco
c. Synergies of at least $2billion were projected from the merger.
d. Amocos strengths were in petrochemical business and U.S refining
and marketing whereas BPs in exploration and production thus
making them largest producer of petroleum and natural gas in US
(15% share of the U.S. gasoline market).
Acquisition of Burmah Castrol for $5 billion in in 2000
Benefits:
a. Enhancement in lubricant business
b. Access to exploration and development capability of reserves in
Deepwater
Join venture with Mobil in refining and marketing that exceeded cost
reduction expectation ($2 billion in savings)

BPs managers believed post-merger size and portfolio of assets would provide it
with the stability, risk management capability and global reach to offer a range
of services with significant gain of new reserves and increase profitability.
Internal growth:

Supply factors included real exploration and production cost, technological

improvement and regulatory environment.
Benefits:
a. Improved technology would make exploration of oil reserves and oil
production economically sustainable.
b. Fuel blending is required to reduce air pollution in various locations
owing to government restriction on access to reserves.
c. Consumers reaction could be averse over the increase in prices and
could lead them to switch to alternative fuels or change in
consumption behaviour, thus improvement in operational efficiency,
R&D and IT infrastructure is required.

Divestitute:

Between 1990-1997 focused their operations on the regions with high

market share and profitability, while reducing branded marketing outlets
by 34%
Focussed on profitable business, vertical integration like obtaining private
equity in China in refineries.

Diversification: -

Focussing on natural gas for low carbon world and environmental and
other aspects of business.
Increasing foothold in exploration and refinery and expansion in Middle
East and Asia.

Yes, Lord Browne chose the right one with acquisition of Amoco, Mobil to
expanding and strengthening foothold in exploration, refinery and natural gas
with increasing operational effectiveness by advancement and implementation of
technology. He believed that the industry structure could not persist as
compared with other industries to deliver returns due to continuous down trend
of crude oil. Post-merger with Amoco, BP was able to significantly reduce the
operating cost, reduction in staff ($1 billion), streamlining of business ($200
million, improved procurement ($250 million), rationalization of operations($250
million). Also it was estimated that $2Billion of savings is achievable by the joint
venture with Mobil. From the above mentioned benefits we can conclude that
Lord Browne took the right decisions.

Could he have done better?

He could have done better in terms of:

Developing more refineries across major markets (Middle East, Asia) would
reduce major transportation cost (major were located in US and UK)
Wider geographic spread would make them less vulnerable to cyclical
downturns
More aggressive expansion in the growing market of low carbon sector of
the economy
Breaking the corporate integration between downstream and upstream

What should he do now?

Continue capital expenditure in technology to improve economies of scale

and efficiency.
Increase foothold in emerging markets such as India, China with Join
ventures, partnerships and acquisitions.
Reduce operational cost by innovative approaches like cut down on
wastage and efficient utilization of human and capital resources
Diversification of revenue system i.e. reducing dependence on crude oil
and refineries and offering broad range of services like renewable energy
sources (wind, solar).
Understanding the customer requirement and their needs for e.g.
governments are moving towards low carbon fuels. Enter into renewable
energy sector for sustainable growth of the company.
Providing B2B services in the field of exploration, production etc.