BP-and-the-Consolidation-of-the-Oil-Industry--1998

9-702-012REV:JANUARY20,2010________________________________________________________________________________________________________________ProfessorForestReinhardt,AssistantProfessorRamonCasadesus-Masanell,andResearchAssociateDavidJ.Hansonpreparedthiscase.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2002,2003,2006,2010PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.FORESTREINHARDTRAMONCASADESUS-MASANELLDAVIDJ.HANSONBPandtheConsolidationoftheOilIndustry,1998–2002AstheboardofdirectorsmeetingendedonNovember29,2001,LordBrowne,BP’sgroupchiefexecutive,reflectedonthechangesthathadoccurredwithintheoilandgasindustrysinceBPannounceditsmergerwithAmocoCorporationinAugust1998.LordBrownebelievedasearlyas1995thatthethen-currentindustrystructurecouldnotpersist,givenitsinabilitytodeliverreturnscomparabletootherindustries;however,mergerdiscussionsbeganonlyin1998,whenabeliefthatoilpriceswouldcontinuetotrenddowntoward$10to$15perbarrelforcedcompaniestotakedramaticaction.BP’sfirst-moveradvantagewastheopportunitytopickitspartners.1Browneoutlinedtherationaleforthemergers:ThestartingpointwasthedesiretomoveBPonfromitsmiddlerankedpositionintheoilsector.Wehadputinplacethefinancialandorganizationaldisciplinerequiredtosecureshort-termperformanceimprovement,butwewereacutelyawarethattherewereanumberofmissingpieces,whichweneededtofindtobearealcompetitorwiththebestinthesector.Wecalledthesethestrategicgaps.Themostimportantofthesegapswereinadequatenaturalgasreserves,poorreturnsandweakcompetitivepositionsintheUnitedStatesandEurope,insufficientaccesstogrowthmarkets,toonarrowaportfolioinchemicals,limitedexposureintheFarEast,andlimitedhydrocarbonrenewaloptionsbeyond2005.Overall,wealsorealizedtheneedforgreaterscale—tobeatrulyglobalplayer.2Theboardhadjustfinisheddebatingthemeritsofcompetingoptionsforcontinuedgrowth.Mostofthelikelyacquisitioncandidateshadfoundpartners,andcompetitionauthoritiesworldwideworriedthattheleadersoftheconsolidatingindustrymightenjoyconsiderablemarketpower.WasitnowtimeforBPtofocusonefficiencyandinternalgrowth?BPstillparticipatedinallaspectsofoilandgasoperations,includingexploration,production,refining,andmarketingofhydrocarbons,butwasthislevelofverticalintegrationnecessarytobecompetitive?Manyregionalandsegmentspecialtycompanieswerechallengingthatassumption.AsBrowneheadedbacktohisoffice,heknewthecompanystillhadsomechallengingdecisionstomake.FortheexclusiveuseofS.ILThisdocumentisauthorizedforuseonlybyStudentILinInternationalMergersandAcquistionstaughtbyJosephACloughertyfromJanuary2014toMay2014.702-012BPandtheConsolidationoftheOilIndustry,1998–20022OilandGasIndustryThemodernpetroleumindustryissaidtohavestartedin1859,whenColonelEdwinDrakestruckoilinWesternPennsylvaniaatadepthof70feet.Incompletemarkets,transportationshortages,andunstablerelationshipsbetweenfirmsgaveoilcompaniestheincentivetointegratevertically,matchingthecapacitiesoftheirproduction,refining,andmarketingoperations.ThelargestoftheseintegratedfirmswasJohnD.Rockefeller’sStandardOilTrust.Itseizedsuchalargemarketsharethatin1911theU.S.SupremeCourtdeclareditamonopolyandbrokeitinto34separatecompanies.(Overtheremainderofthetwentiethcentury,thosecompaniesslowlyreunited.In2001,StandardOilwasonlythreedealsawayfrombeingre-formed.IfExxonMobil,BP,ChevronTexaco,andUSX-Marathonweretomerge,StandardOilwouldbefullyreassembled,althoughthisseemedhighlyunlikelyduetoregulatoryconcerns.3)TheoilindustrybeganintheUnitedStates,butthecountry’sshareofworldcrudeoilproductiondeclinedfrom60%in1934to10.6%in2000.4Bytheendofthetwentiethcentury,oilhadbeendiscoveredinmorethan80countries.ThemajorityofthesefindshadoccurredintheMiddleEast,theformerSovietUnion,SouthAmerica,NorthAfrica,Alaska,theGulfofMexico,andtheNorthSea.Originally,privatecompaniesinpartnershipwithhostnationgovernmentsdevelopedthemajorityofoilproduction.Inthesecondhalfofthetwentiethcentury,mostnationswithsignificantreservesnationalizedproductionandconfiscatedprivatecompanyassets,oftenwithlittleornocompensation.Attheendofthecentury,thestate-ownedpetroleumcompaniesremainedsomeofthelargestintheworld(seeExhibit1),butmanyoftheoilfieldswerestilloperatedbypartnershipsbetweengovernmentsandprivatecompanies.Governmentsvaluedthemanagementskills,accesstocapital,andtechnologicalexpertisetheprivatecompaniesoffered,andthefirms’skillsbecamemoreimportantasoilandgasfieldsbecamemorechallengingtoaccessandtodevelopefficiently.Dependingonthecountry,privatecompanieswereallowedtoparticipateasshareholdersofthestate-runcompanyorasindependentoperators.Privatecompanieswereusual