Business Risk Assessment for BP Company - Case Study Example

Business Risk Assessment for BP Company BP CELEBRATES 1OO YEARS IN UK WITH INVESTMENTS IN OIL BUSINESSES AND COMMUNITY, THE COMPANY HAS A BRIGHT FUTURE Table of contents 1.0 Introduction........................................................................................................................4 2.0 An overview of BP United Kingdom...............................................................................5 3.0 Annual business operations................................................................................................5 4.0 PESTEL ANALYSIS.........................................................................................................7 5.0 SWOT ANALYSIS.............................................................................................................8 6.0 Risk identification and Ranking……………………………………………………………9 7.0 Societal risks-analysis using the F-N diagram..................................................................10-12 8.0 Ticklist..............................................................................................................................12-13 9.0 Common cause analysis...................................................................................................13-14 10.0 Fault tree Analysis........................................................................................................14-15 11.0 Reliability Block Diagram...........................................................................................15-16 12.0 Event tree diagram/ analysis.........................................................................................16-17 13.0 Cost benefit analysis.....................................................................................................17-18 14.0 Allocation of fixed budget........................................................................................18 15.0 Comparison of the different methods of risk assessment...........................................18-19 16.0 Conclusion....................................................................................................................19 List of tables Table 1: forecasted daily operations of the BP UK oil company......................................6 Table 2: statistics of accidental events of BP oil……………………………………………6 Table 3: PESTEL analysis.....................................................................................................9 Table 4: SWOT analysis........................................................................................................10 Ticklist 5..............................................................................................................................15 List of figures Figure 1: Deepwater Horizon explosion at the Gulf of Mexico (The telegraph 2012)...........7 Figure 2: top 10 offshore oil spills in the world......................................................................11 Figure 3: F-N diagram for industrial disasters........................................................................12 Figure 4: the ALARP principle................................................................................................13 Figure 5: Fault tree for fire risk analysis of industrial disasters................................................16 Figure 6: A simple reliability block diagram for an industry.................................................17 Figure 7: Event tree analysis..................................................................................................18 1.0 Introduction Oil companies present a group of business entities that have major risks than most of the businesses. These companies process crude oils to produce fuels that are the source of power of other businesses. Oil companies explore and produce fuel through refining as well as marketing petroleum products. On the other hand, this sector manufacturers and markets gas, chemical and generates power since it also manufactures Photovoltaic cells. Oil sector of the economy accounts to about 13.3% of FTSE and BP has been a major player in the UK’s oil sector (BP Global 2014). BP sits in the top three as a global gas and oil company and operates in areas like Europe, Asia, Africa, Americas. Oil companies have considerate risks to safety of the oil miners, the environment and the public health in general. Therefore, it is imperative to carry out extensive corporate risk assessment on such companies for the benefit of their business operations (Wilson 2012, p.2012). For example, oil companies have been associated to gas leaks, oil spills and industrial disasters that have destroyed the environment in some instances, claimed lives and increases global warming. These risk situations escalate when appropriate measures are not taken to mitigate the risks. Briefly, this paper provides a comprehensive risk assessment on the UK’s Bp oil company with the scope majorly on its headquarters in London. The industry has different sections and subsections that give this report the opportunity to assess the risk by looking at the risk prone areas. For a proper organisation, the paper first gives and overview of the BP oil company and its global operations as well as looking at its business operations. Thereafter, the report uses various tools or methodologies of business risk assessment to evaluate risks this company (Wold &Shriver 2014). For any risk assessment, it is vital to first look at the SWOT and PESTEL analysis that gives a background on the company’s risks and opportunities (Ahmed Kayis & Amornsawadwatana 2007, p.24). On the other hand, the paper also refers to historical risky events that BP oil has undergone that helps in classifying and ranking risk events using the F-N diagram that gives the potential of hazardous situations. The report also gives a deeper risk assessment by using such tools like Fault tree, event tree, cost benefit analysis, a ticklist among others. Finally, the report ends with a fixed budget allocation for mitigation each risk situation and concludes by comparing the effectiveness of the above tools used in risk assessment. 2.0 An overview of BP United Kingdom The company produces over 3.8 million oil barrels daily with 22, 400 stations worldwide (BP Global 2014). In the year 2009, the company had commercial oil reserves equivalent to 18.3 billions of barrels. The name originates from its former names, British Petroleum. The company suits this risk assessment since it has had safety, political and environmental controversies. For instance, the company is known in history for sea GEM event of 1965 and oil spill in the Deepwater horizon of 2010(The Telegraph 2012). Besides, the company has a primary listing in London Stock Exchange thus it has been FTSE 100 Index constituent and lists secondarily at New York Stock Exchange (Corporate Watch 2014). BP is among the leading global oil refinery companies with close to 70% of its profits being generated in Europe and USA though it has extended its operations to Africa, Asia, South America and Mexico (BP Global 2014). The company has 1,525 stations in UK and also supplies petrol stations with fuel. Nonetheless, Castrol lubricants of BP retail in many countries and has been a large marketer in aviation fuel. Besides, it also supplies lubricants and fuels to most shipping industries. Generally, the company supplies 900 sipping ports and around 1,400 airports globally. The following table shows BP business operations that have been analysed since 1996 to estimate its annual business forecast (BP Global 2014). 3.0 Annual business operations Crude oil 1, 928(barrels/day) Gas production 7, 609ft3/day Gas sales 14, 471millionft3/day. Marketing sales 3, 756(barrels/day) Chemical productions 22, 065ton/day Table 1: forecasted daily operations of the BP UK oil company. Disaster date Location casualties cause compensation March 23 2005 Texas City 15 killed, 180 injured Hydrocarbon vapour and liquid release from blowdown stack Over $2 billion legal settlement, 71.6 billion dollars safety violations and 100 million as pollution fines 2006 Prudhoe Bay, Alaska Ecosystem destroyed. Biodiversity of the Alaska community compromised Oil spills, two leaks in the system 12 billion US dollars criminal charges 2009, November 29 Lisburne, Alaska Pipeline leaks, 30, 000 barrels daily April 20th 210 Gulf of Mexico Explosion released 4.9 billion barrels into the waters 7.8 billion US dollars Table 2: statistics of accidental events of BP oil Figure 1: Deepwater Horizon explosion at the Gulf of Mexico (The telegraph 2012) 4.0 PESTEL ANALYSIS Factors analysis Political factors Government policy like degree of intervention, the goods and services that the government compels companies to produce, government subsidiaries Political decisions on workforce education, infrastructure development and health wellbeing of the nation For instance, increase in the importation tax up to 3% in 2010 Economic factors The factors include taxation changes, economic growth, interest rates, exchange rates and inflation Social factors Eminent changes in the global social trend affect oil demand. UK has an ageing population, firms forced to pay pensions to employees who live longer thus increasing their spending. Technological factors Emerging technology leading to the creation of new products Technological inventions like online shopping carts making purchase of products much convenient. Environmental There are various risks associated with oil exploration especially in the North Sea region For example, the damages in the Gulf of Mexico that gave the company a bad image and affected the organisation’s operation costs since it has to compensate those damages. Oil spills have a considerate effect on the biodiversity. Legal Regulations pertaining to oil exploration that compels companies pay dividends to the government. Regulations pertaining to formation of mergers and expansion of the business operations. Table 3: PESTEL analysis PESTEL analysis entails evaluation of external factors that influence business operations. It involves the analysis of such factors like political, economic, social, technological, environmental and legal aspects that influence business operations (Ahmed, Kayis & Amornsawadwatana 2007, p.26). 5.0 SWOT ANALYSIS This involves assessment of strengths, weakness, opportunity and threats of a business entity (Ahmed, Kayis & Amornsawadwatana 2007, p.26). The table below shows a SWOT analysis of BP oil Company. SWOT analysis basically looks at internal as well as external factors that may influence a company’s efforts of achieving its set goals and objectives. Weaknesses and strengths presents are the organisation’s internal factors while threats and opportunities are rather external factors. Strengths Increased fuel prices thus demand for oil has been shooting up Opportunities Acquiring of new assets like Devon Energy, US Gulf of Mexico Weaknesses Gulf of Mexico disaster Tax law destruction especially in Turkey Texas plant outburst Threats Environmental risks associated to the exploration of oil Diffusion that has been occurring in the North Sea Volatility of the oil exploration regions Global Competition from other oil refinery companies especially from UAE. Table 4: SWOT analysis 6.0 Risk identification and Ranking BP Company as an oil refinery company faces criticisms on the various risks that it imposes on the environment. Risks therefore are accident events that may have an adverse influence on the company’s goals and its business operations (Wilson 2012). Being a global company with its headquarters in London, BP experiences risks that may be categorized as individual or societal risks. Individual risks by definition measures an individual’s probability of experiencing risk situations in an organization within a particular period, usually a year. Therefore, individual risk is an annual indicator for its occurrence (Ahmed, Kayis & Amornsawadwatana , p.30). The possible risks in BP involve oil spills and gas explosions. For instance, the year 2010 events put the company into limelight when there was an explosion at the Deepwater Horizon that caused 11 casualties and left 27 injured (Mother Jones 2010). On the other hand, there have been many cases of accidental oil spills and gas leakage in the company. However, the occurrence of these oil spills within BP can be traced back the ten major offshore oil spills that are known in history today as shown in the figure 1 below. The circles represent amount of oil spillage which can be useful in estimating the probability in occurrence of such individual risks. Figure 2: top 10 offshore oil spills in the world (Hazards magazine 2010) 7.0 Societal risks-analysis using the F-N diagram Societal risks are reflections of how the general public views the situation (HSE 2014). It can be assessed using F-N diagram. The diagram gives an inference into risks that have highest impact. This is measured by looking at the casualties that the situation leaves and the value or property destroyed in the event. On the other hand, the tool assesses events that trigger risks. In the case of BP oil, the most risk situations are oil spillages and fire explosions. Figure 3: F-N diagram for industrial disasters (Ahmed, Kayis & Amornsawadwatana 2007, p.29). Figure 4: the ALARP principle (Ahmed, Kayis & Amornsawadwatana 2007, p.27) 8.0 Ticklist Also known a checklist, ticklist checks the systems current conditions against certain criteria that are preset (Ahmed, Kayis & Amornsawadwatana , p.30). The list is therefore filled by experts through interviews, inspection, field analysis as well as document analysis. # Risk Yes No Risk assessment 1. Are the storage tanks frequently checked any defaults?  Frequency Severity 1 2 3 4 1 2 3 4 2. Are the horses properly inserted within the storage tanks?  Frequency Severity 1 2 3 4 1 2 3 4 3. Are the throttles properly inserted within the barrels that contain volatile compounds so that that the horse power cannot break them and throw these chemicals into the sky incase of an explosion?  Frequency Severity 1 2 3 4 1 2 3 4 4. Is there sufficient awareness within the engineering personnel on how to use the safety and hazards management in the firm?  Frequency Severity 1 2 3 4 1 2 3 4 5. Are there personal safety measures that may prevent individuals from incurring personal injuries? For instance, the BP oil company allowed its workers to walk around with coffee cups without leads thus putting them to much risk.  Frequency Severity 1 2 3 4 1 2 3 4 6. Are the hydrocarbons properly enclosed within steel pipes or steel tanks?  Frequency Severity 1 2 3 4 1 2 3 4 7. Does the company have a good corporate culture for forecasting and responding to risks in the company? BP has been criticised over the years for corporate negligence  Frequency Severity 1 2 3 4 1 2 3 4 8. Are the drill pipes properly fitted into the ocean’s floor?  Frequency Severity 1 2 3 4 1 2 3 4 9. Is the carbon steel that aligns the drilling hole in good condition?  Frequency Severity 1 2 3 4 1 2 3 4 10. Is the pressure within the tanks and pipes maintained within its normal level? The pressure should not be negative or rise above its optimal levels.  Frequency Severity 1 2 3 4 1 2 3 Table 5: Ticklist 9.0 Common cause analysis This methodology identifies general causes of various autonomous scenarios or events (Ahmed, Kayis & Amornsawadwatana, p.30). For instance, the methodology is applicable in assessing the system of BP Oil Company for its vulnerability that can trigger oil spills or fire explosions. Therefore, the oil company has a risk management system that seeks to find out vulnerability in the whole oil exploration system or the plant (BP Global 2014). In this case, the common cause analysis provides incentives for identifying risks with first hand solutions to such situations. In this company, the common causes to risk events in the BP oil company include Improper installation of plant appliances like hose pipes and rigs. This was determined to be the cause of fire explosion in the Deepwater Horizon(The guardian 2010, p.1) Poor maintenance of the whole plant system. For instance, BP was blamed by the American government for negligence that caused the great oil leakage at the Gulf of Mexico. The company was blamed for inadequate check up on the system’s functionality. 10.0 Fault tree Analysis This methodology has a spectacular use in risk management as either risk identifier or for risk analysis (Ahmed, Kayis & Amornsawadwatana, p.30). The tool measures two risks that have hazard potential. In the BP scenario, the tool may used to measure and identify risks like fire explosions, gas leaks and oil spills. For instance, the fault tree diagram may be used fire risks that have been characteristic of BP disasters. The causes of fires may be corporate negligence or system failures. Figure 5: Fault tree for fire risk analysis for industrial disasters (Ahmed, Kayis & Amornsawadwatana , p.32) 11.0 Reliability Block Diagram This analysis tool looks at the consistency of events, processes using block diagrams that normally reflect the relationships of certain risk situations (Ahmed, Kayis & Amornsawadwatana , p.30). It is simply an inference into to inputs or causal factors and the out puts or the consequences. The block diagram always indicates that events are exclusive which means that one is enough to cause a risk. For instance, there are many independent factors that may cause fires in the BP oil company that the figure below presents using Reliability Block Diagram of industrial disasters. Figure 6: A simple reliability block diagram for an industry (Ahmed, Kayis & Amornsawadwatana 2007, p.27) 12.0 Event tree diagram/ analysis This tool enables risk quantification and assessment (Ahmed, Kayis & Amornsawadwatana, p.30). The diagram resembles a tree with branches which represents decisions and the possible occurrence of such choices. Briefly, the tree indicates how a particular decision or choice give rise to next comprehensive choices. Moreover, each branch is a representation of an independent choice. In BP oil for instance, the figure below can be a tree diagram that assesses uncertainties, their probability of occurrence of fire explosions from gas leakage or oil spillage. Figure 7: Event tree analysis for industrial disasters (Ahmed, Kayis & Amornsawadwatana , p.30) 13.0 Cost benefit analysis The analysis gives a real value of the risks that a company is willing to undertake so as to minimize hazards (Ahmed, Kayis & Amornsawadwatana , p.30). In case of any risk event, the company therefore associate costs which amount to a certain value, usually monetary value of mitigating risks and compensating the damages. BP oil therefore needs to carry out a cost benefit analysis since the company has led to the loss of both ecosystems and human as well as effect of the toxic chemicals especially the sludge that comes from the plant. A cost benefit analysis will enable the company mitigate these risks for the benefit of its operations. The costs that the company has incurred is the clean up of the whole system that involves investing a considerate amount of money into the whole process. For instance, the company allocated 41 billion dollars for the compensation of recent Gulf of Mexico disaster (BP Global 2014). Though the amount was criticised by the US president, the company has developed a great deal from rehabilitation of the affected area. On the other hand, the management estimated a 20 billion dollar compensation for the Texas explosion that also managed to put the company on track (The Telegraph 2012). 14.0 Allocation of fixed budget BP gave out 41 billion US dollars for compensation of the Gulf of Mexico spillage (BP Global 2014). The allocation of this fixed budget may also be the same for other risks that has occurred in the company’s history. For instance, the 41 billion dollars may have been allocated as below: 3. 5 billion can be allocated for fines as stipulated under the Clean Water Act 15 billion dollars can be allocated for claims and litigation charges. This includes item compensation under the country’s compensation fund. Charges of responding to oil spill amounts to 13billion US dollars 15.0 Comparison of the different methods of risk assessment The business risk assessment of BP oil has utilised different tools for assessing risks. Though the comparison of these tools may be difficult due to their application in different contexts(Ahmed, Kayis & Amornsawadwatana , p.34), this assessment provides the background of critical evaluation of the strengths and weaknesses of these methods. Firstly, the PESTEL analysis provides an incentive for assessing factors beyond the scope of the company and the internal factors that influences business operations in the company. The same applies to SWOT analysis. However, the tools may have limitations owing to the ever changing business environment. Conversely, ticklist is simple to use without personnel training but is very tedious in its initial preparation. F-N analysis identifies both individual and the social risks. It has an advantage of tying risks previous events therefore giving the probability of their occurrence. On the other hand, the tool gives an inference into events’ causal factors and points out at the risks with high chances of occurrence. However, past events may not give the exact pattern of future events. Fault Tree Analysis combines valuable information on the events that brings about risks. However, the tool may be faulted for its coverage of unimportant events. Nonetheless, Common Cause Analysis gives a clear coverage that majorly cause potential risks thus giving room for systematic approaches in risk assessment. The same applies to RBD tool that draws up processes that leads to major events and their consequences as well as the magnitude or value of risks. The only weakness of RBD is that misinterpretation of this systematic approach may occur. 16.0 Conclusion In summary, oil refinery industries pose risks to the environment that needs proper mitigation. On the other hand, technical failures in these industries have claimed lives of many industrial workers. For any business, the organisation must ensure risk management that ensures the prosperity of the business operations. However, risk management first needs a clear corporate risk assessment that provides the information on the areas that need much emphasis. The report above presents a risk assessment of BP oil Company that has its headquarters in London and has been faced with various criticisms for its effects on the environment and human safety. The company has been in the history for some of the fatal industrial disasters that has also affected its corporate image. Therefore, this report has used different business risk assessment tools to bring out a clear picture of risk situations in the company. The assessment is instrumental for the company since it provides BP with mitigation procedures for such risks. Among the risk assessment tools include PESTEL and the SWOT analysis that evaluates both external as well as internal factors that affect the business operations. Besides, F-N diagram, fault tree, event tree and Reliability Tree Diagram are useful in assessing risks. Finally, the paper does a cost-benefit analysis of BP with allocation of fixed budget and concludes with comparison of the adopted tools of assessing risks. References Ahmed A, Kayis B & Amornsawadwatana, S 2007, ‘A review of techniques for risk management in projects’, Benchmarking: an International Journal, vol. 14, no.1, pp.22 – 36. Corporate Watch 2014, BP Plc overview, viewed from Hazards magazine 23 September 2010, BP may emerge unscathed after Gulf deaths, viewed from HSE 2014, five steps to risk assessment, viewed from Mother Jones September 2010, BP’s Damage Control: A timeline. BP’s Deep Secrets, viewed from http://www.motherjones.com/environment/2010/08/bp-ocean-timeline-damage-control BP Global 2014, viewed from The guardian Thursday 22 July 2010, BP oil spillage timeline, viewed from The Telegraph 15 Nov 2012, A history of BP’s US disasters, viewed from Wilson, R 2012. 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