BP, The British Petroleum Company, is one of the largest international petroleum and petrochemical companies. It is an integrated energy firm involved in oil and gas detection, manufacture, refinement and advertising, and the manufacturing and marketing of petrochemicals. (Bower, 2010, 320) According to Business Week, BP was the third largest public company in Britain and the thirty-first largest in the world. BP was privatised in the 1980s.
The United Kingdom (U.K.) and the United States (U.S.) have active and extensive stock and bond markets, and a primary purpose of financial reporting in both countries is to provide investors and creditors (i.e., suppliers of capital) with information useful for decision making. Generally accepted accounting principles (GAAP) in the U.K. and the U.S. are similar. (Deans, Bob and Peter, 2010, 56) For example, both U.K. and U.S. GAAP require providing for un-collectible accounts and depreciating fixed assets over their useful lives. Nevertheless, differences exist between U.S. GAAP and U.K. GAAP, in terms of accounting standards and financial statement format and terminology.
BP uses historical cost accounting, but its income statement also reports replacement cost information about certain earnings components. BP uses the FIFO inventory valuation method. In the U.K., companies may not use the LIFO method for either tax purposes or financial reporting purposes. Because under LIFO the costs of the latest goods acquired are treated as the costs of the first goods sold, LIFO based cost of goods sold will approximate cost of goods sold computed on a current or replacement cost basis. In turn, this yields a measure of gross margin (or gross profit) under LIFO that reflects the ability of the company to generate revenues in excess of the replacement cost of the goods it sold.
In contrast, because under FIFO the first costs assigned to cost of goods sold are the acquisition costs of the oldest goods on hand, the result is a matching of old (i.e., non-current) costs in cost of goods sold against current revenues, and a measure of gross margin that reflects two components: (a) gross margin on a LIFO basis; and (b) any gains or losses realised over the period from when inventory was acquired until it was sold (referred to as holding gains/ losses or inventory profits/losses). Therefore, gross margin computed under LIFO generally will differ from gross margin computed under FIFO unless changes in inventory costs are small in amount or inventory turns over very rapidly, such that the oldest costs under FIFO approximate current costs.
Following graphs describe BP’s financial statements and accompanying notes. BP’s financial statements, comparative balance sheets, income statements and statements of cash flows are given below. This will build on knowledge of the basic financial statements and of inventory valuation methods.
SWOT Analysis on British Petroleum
British Petroleum is given position of third largest energy company of the world. BP has its headquarter in the UK and it is as a multinational oil company which:
- Functions petrochemical businesses globally with the help of its set of connections of other brands and subsidiaries ( Like ARCO; ampm; Amoco and Burmah Castrol etc)
- Holds prominent position in local Stock Exchange and is included in FTSE 100 Index;
- Holds enormous amount of trade loyalty in the field of oil;
- Possesses well-organised management with a slogan of ‘Beyond Petroleum’ .
- Raised its profit up to 83% for record oil and gas prices.
- Launch of contentious commerce with the Baku-Tbilisi-Ceyhan pipeline;
- Rise of prices of petrol within the UK;
- Outburst of British Petroleum plant in Texas resulted in hundred injuries and fifteen deaths;
- During 2006, Immoral act of spread of 270.000 gallons of crude oil in the Alaskan tundra;
- Poisonous leak of methanol in the oil field.
- Huge amount of investment in the exploration of alternative fuel methods, including natural gas or solar;
- Spreading out of borders which will prove to be appropriate for British Petroleum’s future reserves;
- addition of strategic gas and oil achievement in North Sea area;
- initiating an extra flexible policy of pricing;
- Environmentally unsafe policies may result in toxic spill;
- Occasional plant explosions;
- Oxidisation of pipelines;
- Rivalry with Chevron and Shell
- Stoppage of business in various prospective locations
- Greater than 5.000 shortages in next months;
- More lawsuits due to British Petroleum’s environmental activities.
Analysis of BP Oil Disaster
The footage of oil running unimpeded out of BP’s Horizon rig straight into the Gulf of Mexico properly triggered outrage and dismay by the public. A typical reaction was that BP should pay dearly for its mistakes. Not only should the company come up with a way to cap the well (and quickly, at whatever cost) and shoulder the costs of cleaning up the Gulf, but punitive damages also ought to be so large that no corporation would ever again impose such costs on society. As the oil kept flowing, people looked to President Obama to do something definitive about the mess. He somewhat satisfied that call for action by pressuring BP to set up a $20 billion fund that would compensate workers in the fishing and tourism industries, owners of small businesses with similar losses, and homeowners whose property lost value as a result of the environmental damage. (Deans and Peter, 2010, 55) Although everyone wishes this accident had not occurred, many people were heartened by the knowledge that the $20 billion would help set things back to the way they were and at the same time make BP sorely regret its negligence. The appointment of Kenneth Feinberg to adjudicate the claims added to the sense that the fund would go a long way toward undoing BP’s wrongs.
Ideally, whatever actions our society takes to recoup the costs of such disasters and prevent future occurrences will essentially put us back to where we were before the accident occurred. Anyone who is out of work or lost profits from the spill would receive sufficient funds to make them as well off financially as they were before the oil blanketed the Gulf. And although no one can bring wildlife back from the dead, BP could spend enough to clean up the environment in such a way that the affected species would thrive in the future, and beaches would once again serve as a pleasant natural haven. We hope that policy will be aimed toward undoing these costs to society, but one must recognise that any such efforts involve losses to BP’s shareholders. Because the spill did not generate any new profits for the company, the amount of money available from BP’s operations was fixed once the disaster occurred. Thus, every dollar that leaves BP’s coffers to remedy the problem is a dollar taken from BP’s shareholders.
If the matter were decided simply by a democratic vote, BP shareholders would lose out, and all of the company’s obligations to society would be settled. Shareholders, through managers, control the assets and therefore the actions of BR If we do not like Tony Hayward’s verbal blunders, as members of the public we have no right to sack him, whereas BP’s board of directors could and did jettison him. The actions of the board of directors are motivated by its fiduciary duty to its shareholders. Thus, the decision to fire Hayward must have been based on a calculus with a strong emphasis on how it would affect near-term profits, not on whether it was fair or satisfied a sense of outrage. Having a fiduciary duty means the board has a legal obligation to make money for the shareholders, which means they will try their best to minimise BP’s share of the costs of the cleanup.
Most people have not read the fine print accompanying the $20 billion recovery fund, and thus they typically have not noticed that $20 billion is neither a cap nor a floor on BP’s legal liabilities. If BP is successful in showing that the company was not at fault, perhaps laying the blame with Halliburton, Anadarko, orTransocean, the $20 billion will revert to the company. If it is found liable for cleanup costs and damages that exceed $20 billion, then BP would pay more than $20 billion. (Bower, 2010, 345) A recent calculation by The Wall Street Journal indicated that stock market participants expect the incident ultimately to cost BP shareholders more than $50 billion. Thus, while the $20 billion fund helps President Obama appear to have successfully held BP responsible for its negligence, and helps convince society that BP has done some sort of penance for its sins, the fund has no I legal teeth when it comes to making BP pay. The $20 billion figure is merely a vague cost estimate that lies between zero and infinity and that mainly serves as good PR for both the government and for BR The only benefit of the fund is that it helps expedite the payment of small claims, which are undoubtedly important for people with limited resources.
Shareholders are often able to extract value even when creditors have not been paid in full, often with the greatest expense being borne by unsecured claimants, because shareholders have substantial bargaining power. Management represents shareholders and therefore is much more knowledgeable and organised than a dispersed class of litigants who may not even know, let alone be able to prove, the size of their claims. A major issue with asbestos-related claims is that the pool of affected persons is unknown at the time of the bankruptcy. (Broder and Zeller, 2010) It could be years into the future when lung problems appear and years after that before the costs of medical care are completely known. Likewise, we might have to wait decades before the true environmental impact of the oil spill is known and paid for. This uncertainty makes it even easier for shareholders to argue that the costs are smaller than they really are and therefore to extract value for themselves.
Furthermore, the management of BP has substantial flexibility in determining what constitutes a company for the purposes of a bankruptcy filing. The board of directors can manage the filing on two fronts: It can reduce BP’s empire by selling off assets in advance of a filing. (William and Robert, 2010, 125) By separating the pieces of the negligent company and calling into question, which parts of the corporate entity have legal obligations to pay, BP can reduce the pool of assets available for negotiation in bankruptcy. This line of thinking undoubtedly spurred the boards of Philip Morris and RJR Nabisco to shed their food businesses as they faced increasingly unfavorable tobacco litigation outcomes. (Gilis, 2010, 01)
US bankruptcy rules favor continuation of the company, which means that a firm like BP with strong operating profits should continue to engage in business. Although this increases the amount of money available to victims of the Gulf spill, by definition it also means that the firm would not be liquidated and sold for cash. Historically, claimants at the bottom of the priority structure have not received cash as a settlement in bankruptcy, but rather equity or warrants to purchase equity. Although these securities are by no means worthless, they are only a little more appealing to class action litigants than receiving coupons for future services.
In thinking about how to make this disaster right, pragmatism requires that we consider the legal obligations of firms like BP as much as fairness to the rest of society. If we try too hard to make the company pay for every dime of damage, our actions will cause a bankruptcy that results in lower compensation for victims. We might offset this incentive by making environmental claims higher in the pecking order of claim priorities. (Marketing Communications, 2010) Or we could consider going back to a Superfund structure where, in advance of their planned offences, we tax likely polluters. In comparison, if we do not push at all, these “accidents” can occur too often due to lack of care. MADD convinced us that these incidents were not entirely unpreventable. More money spent on monitoring oilrigs and enforcing existing regulations has the potential to reduce damage to the environment. Unfortunately, when captive regulators play golf and dine out with their industry peers, this may also literally lead to more government employees without a concomitant increase in protection.
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- Bower, T (2010) Oil: Money, Politics, and Power in the 21st Century, Grand Central Publishing; 300-350.
- Broder, J. M and Zeller, T (2010) Gulf Oil spill is bad but how bad? Retrieved from http://www.nytimes.com/2010/05/04/us/04enviro.html?ref=science =1&contentId=7052055 on May 29, 2010
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- Deans, Bob and Peter L (2010) In Deep Water: The Anatomy of a Disaster, the Fate of the Gulf, and Ending Our Oil Addiction, Experiment, Pg 50-60.
- Deepwater Horizons Accident Investigation Report (2010)
- Gilis, Justin (2010) ‘Giant Plumes of Oil forming under the Gulf’. Pg 1-5.
- Marketing Communications. (2010). Retrieved from http://www.businessdictionary.com
- McCarthy, (2010). Crisis Communication Plan in Case of Emergency. Retrieved May 29, 2010, from http://www.lansingstatejournal.com/article/.com
- Nichols, R., & Stevens, L. (2004). Listening to People. Harvard Business Review, 35(5), 85-92.
- William. F and Robert. G (2010) ‘Blowout in the Gulf: The BP Oil Spill Disaster and the Future of Energy in America’ The MIT Press; New edition Pg 100- 150.
- Yahoo News, Retrieved from http://news.yahoo.com/s/ap/20100530/ap_on_bi_ge/us _gulf_oil_spill_bp On May 30, 2010.