Analysis Of Bps Operational Risk Management Management Essay

Analysis Of Bps Operational gamble prudence focus establishBritish Petroleum PLC (BP), one of the globes largest oil and gas companies, is headquartered in London, United Kingdom. It provides its customers with fuel for transportation, energy for heat and light, retail services for gasoline and petrochemical products for incessantlyyday items (About BP, 2011). The Companys operations primarily include the exploration and production of gas and crude oil, as well as the marketing and trading of natural gas, power, and natural gas liquids. At present, BP employs over 80,000 people and operates in more than 100 countries. It produces approximately 3.8 million barrels of oil per day and has 22,400 service stations worldwide (BP, PLc Swot Analysis, 2010).In 2010, the Company incurred incredible losses from the Deepwater Horizon oil colour Spill Incident in the Gulf of Mexico due to lack of oversight and control of running(a) guesss (McDonald, BP Oil Disaster Breaks Records, Puts S potlight On Risk Management Failure, 2010). The Incident has caused disastrous biological environment, 13 peoples deaths and 17 others injuries (McDonald, BP Oil Disaster Breaks Records, Puts Spotlight On Risk Management Failure, 2010). Immediately after the Incident, the Companys risk forethought practices were investigated. The scrutiny at last led to the dismissal of its CEO, Tony Hayward (McDonald, BP Oil Disaster Breaks Records, Puts Spotlight On Risk Management Failure, 2010).In this deal, we will explore how BP unsuccessfully managed its useable risks prior to the Incident, and the strategic steps that have been taken in order to mitigate the losses and anticipate a similar crisis from happening again.Reasons that Led to bps Exposure to the IncidentAccording to McDonald, the Incident was mainly attributable to the poor operational risk management of the corporate executives who placed a low priority on the safety issues (McDonald, BP Oil Disaster Breaks Records, Puts Sp otlight On Risk Management Failure, 2010). McDonald also mentioned that Hayward appeared to chouse nothing about the front-line operations in the Company (McDonald, BP Oil Disaster Breaks Records, Puts Spotlight On Risk Management Failure, 2010).Furthermore, BPs history of oil crepuscule incidents demonstrated its poor operational risk management in the past years. These previous tragic incidents included the U.S. refinery explosion in 2005 and the Prudhoe Bay oil spills in 2006 and 2007 (Fineberg, 2007). Since the Company continued to ignore the safety issues and risk management even after these incidents, a more serious Incident in the Gulf of Mexico has occurred.Finally, BP failed to shoot the breeze the oil rig on a monthly basis as prescribed in the government regulation (Strickler, 2010). A government inspection report revealed that BPs Deepwater Horizon oil rig had missed 16 inspections in total since January 2005(Strickler, 2010).Financial Losses and Reputational Damage f ollowing the IncidentFollowing the Incident, BP was require to reduce planned capital expenditures and increase asset disposals in order to provide surplus liquidity (BP p.l.c, 2010). Moreover, a total pre-tax charge of $40.9 billion was acknowledge during 2010 (BP p.l.c, 2010). However, BP is still uncertain about the total amount that will ultimately be paid. The Company is currently being charged in a tour of lawsuits that could lead to substantial costs (BP p.l.c, 2010). These costs may include the amount of pending and future claims, the potential expenses of implementing remedies sought in the various proceedings, and the amount of fines ultimately levied on BP (BP p.l.c, 2010).As seen in Appendix A, Moodys Investors Services and Standard Poors have downgraded BPs credit ratings immediately after the Incident. Although there have been slight improvements ever since, the current credit ratings are still lower than they were immediately before the Incident. The lower credi t ratings prompted a large number of investors, who were holding BPs US Industrial Revenue/Municipal bonds, to exercise their option to tender the bonds for repayment (BP p.l.c, 2010). This caused BP a total repayment of $2.5 billion (BP p.l.c, 2010). The lower credit ratings could also delineate the Companys access to unseasoned financing.In addition, the Incident has led to a significant drop in BPs share footing. On June 25 of 2010, the share price went down to the lowest point of $27. 02, as compared to $60.48 on April 23 of 2010, the day of the Incident (BP plc (ADR) (Public, NYSEBP) ).Along with the financial losses, the Incident has damaged BPs reputation, which may have a long-term impact on the Companys ability to build business relationships with new counterparties and access new opportunities (BP p.l.c, 2010). Moreover, the current counterparties, concerned about the additional financial and business risks following this Incident, may require the Company to provide col lateral or other forms of financial security for its obligations (BP p.l.c, 2010).Risk and Liquidity ManagementAfter the Incident, BP has taken preventative measures to mitigate future unexpected events related to poorly-managed operational risks (McDonald, All Road Lead to CEO, 2010). On September 29 of 2010, the new CEO, Bob Dudley, announced a plan to establish a new safety division with sweeping powers to oversee and monitor the Companys operations around the world (BP Creates New Safety and Risk Division, 2010). The new division has been given the authority to intervene in all aspects of BPs technical activities. The divisions experts will be plant in BPs operating units, including exploration projects and refineries. These experts have the responsibility to ensure that all operations are carried out in compliance with government regulations and auditing standards (BP, 2010). In order to further reinforce this new practice, Dudley has requested the head of the safety division to report directly to him so that all information regarding the Companys current operational risk status can be conveyed in a timely manner (McDonald, All Road Lead to CEO, 2010).BP has also reinforced its accountability of risk management by restructuring its exploration and production segment from a single business into three separate endures-exploration, development and production (BP, 2010). This makes it easier for BP to monitor each function separately.To increase available liquidity, BP cancelled the ordinary share dividends in the first three quarters of 2010, secured additional bank lines totaling $12 million and announced its object to sell up to $30 billion of assets (BP p.l.c, 2010).ConclusionPrior to the Incident, BPs executives overlooked the necessity of operational risk management. This made the Company vulnerable to operational risks. Even after the two oil spills between 2005 and 2007, BP still did not take effective measures to improve its risk management practi ces. Fortunately, the problem has finally been recognized by Dudley, who has initiated constructive plans to enforce operational risk management across all divisions in the Company.AppendixAppendix A A comparison of BPs Credit Ratings before and after the IncidentBeforeImmediate AfterCurrentMoodys Investors ServiceAa1 (stable outlook)A2 (negative watch)A2 (stable outlook)Standards PoorsAA (stable outlook)A (negative watch)A (negative outlook)Source BP p.l.c. (2010, December 31). Annual chronicle and Form 20-F 2010. Retrieved March 20, 2011, from BP Global http//www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Form_20F.pdf