BRITISH PETROLEUM (BP) EXPANSION IN BRAZIL AND MARKETING OPPORTUNITIES: HOW BP CAN DEVELOP ITS PORTFOLIO IN THE BRAZILIAN CRUDE OIL MARKET?

Transcription

1 BRITISH PETROLEUM (BP) EXPANSION IN BRAZIL AND MARKETING OPPORTUNITIES: HOW BP CAN DEVELOP ITS PORTFOLIO IN THE BRAZILIAN CRUDE OIL MARKET? Renatha Caldeira * EXECUTIVE SUMMARY: The present market study consists in an analysis of the opportunities in the crude oil market in Brazil using the business expansion of a major oil company, British Petroleum. The Brazilian market is experiencing a great growth moment with the recent deepwater discoveries, a scenario which brings the interest of the global energy companies to heavily invest in the potential oil rich areas. As one of the most experienced operators in offshore projects, BP is aiming a successful market entry in the upstream sector and must be ready for the challenges imposed by these projects. The objective is to identify the market characteristics, competitors and understand the potential customers in order to analyse the threats and opportunities BP will encounter. The research was based on marketing literature and national and international references in the oil industry to support the key findings and qualify these opportunities. * The author is an MBA candidate in International Oil and Gas Management at the CEPMLP, University of Dundee, UK. She has worked as an Engineer in Schlumberger in Brazil, Angola and Scotland, delivering services in drilling projects to major oil operators in these countries. She holds a degree in Electronic Engineering in Brazil. renatha.caldeira@gmail.com

2 TABLE OF CONTENTS ABBREVIATIONS...iii 1. Introduction Analysis of the marketplace in Brazil Company profile in Brazil Market and Competition External environment Political Economical Social - Cultural Technological Environmental Legal SWOT analysis Analysis of the customers needs and wants Market Segmentation, Targeting and Positioning Conclusion BIBLIOGRAPHY ii

3 ABBREVIATIONS ANP BP Agência Nacional do Petróleo (National Petroleum Agency) British Petroleum B2B E&P Business to Business Exploration and Production GDP Gross Domestic Product IMF IOC International Monetary Fund International Oil Company NOC PSC National Oil Company Production Sharing Contract iii

4 1. Introduction This marketing study consists in the analysis of market opportunities in crude oil sector in Brazil, considering the business expansion of a global energy company. In the current challenging economic scenario, where energy resources become scarcer and difficult to access, Brazil emerges as the next frontier for energy, since its rich and growing oil and gas industry have called attention from the major operators to enter and develop a profitable business. British Petroleum (BP) is one of the biggest energy companies in the world, dealing across different segments. Traditionally its core business is in exploration and production (E&P) of oil and gas, but BP has been expanding enormously in alternative energy ventures as well, building a diverse energy portfolio to support its strategic vision of a company Beyond Petroleum. In this context, the interest from BP in building a strong position in Brazil is related to its potential in the energy sector, as the oil and gas industry grows together with the renewable energy sector. The study will be based on the principles of marketing strategy with main academic references in the topic and a market case, which will refer to BP s crude oil international business. The analysis of the opportunities comprises the characterization of the marketplace, including scope of competition and the macro environment, which will be considered in determining what the threats and opportunities of the market are, as well as BP s strengths and weakness for this venture. The following section will cover the key aspects of the business customer behaviour related to this market, the aim is to identify the potential segments and discuss possible target and positioning strategy for the market. With the understanding of the market and customers, the conclusion aims to show key findings of what the opportunities are and how BP can be successful in its expansion strategy. 1

5 2. Analysis of the marketplace in Brazil 2.1. Company profile in Brazil As a global company, BP is already present in some energy segments in Brazil i.e. aviation fuel (Air BP), lubricants (Castro Lubricants) and more recently in biofuels, where BP Biofuels is the latest business unit to arrive in Brazil. There BP employs over 400 people and in the past had a minor participation in partnerships with Petrobras, Shell, ENI, TFE and Exxon in exploration projects (BP, 2010a). This year with the acquisition of ten exploration blocks in Brazil from the Canadian oil company Devon, BP is also starting the expansion of its E&P activity by strongly entering in the important and growing upstream segment, particularly interested in the potential rich resources of the pre-salt fields (BP, 2010b). This will open different business opportunities for BP, especially in commercialization of crude oil by BP Crudes unit Market and Competition The Brazilian oil industry is dominated by large oil companies. The main industry operator is Petrobras, which is the only operator or has a significant participation in all major fields in exploration, development and production. Petrobras has its own refinery facilities that serves as the main customer market for oil produced. Although most of its production is consumed in the national market, Petrobras also export the excess to international markets. In 2008, the main importers of Brazilian crude were South and Central America (40.9%), United States (31.4%), Europe (14.2%) and China (12.8%) (ANP, 2009). Since the opening of the Brazilian market to international oil companies (IOCs), many major operators worldwide have come into the country, such as Shell, the first IOC to start E&P activities in Brazil and ExxonMobil which started exploring in 1999 (BBC, 2010a). Now, other IOCs such as Chevron, Repsol, British Gas and Statoil are competing in the market as well and BP was the only major oil company that did not have exploration licenses in Brazil. Besides, a minor stake of the market is also taken by independent oil companies; however most of fields are small and still in development. 2

6 Considering the E&P market distribution between existent participants, it is possible to conclude that the crude oil market is very concentrated in the national scope and gradually is expanding to the international market. With the greater participation of IOCs in the industry, the possibilities for more international business for oil extracted in Brazil will increase and attract more customers abroad External environment In order to develop a strategy for entry into a market, it is important to understand the macro environment that can influence the industry and consequently its participants. A PESTEL analysis can be carried out looking at each aspect related to the industry Political The Brazilian market was recently open to IOCs and the industry is regulated by the National Petroleum Agency, (Agência Nacional do Petróleo - ANP). Since the main company in the market is a state-controlled company (Petrobras), many political factors influence the industry. Presently, Brazil is considered a politically stable country with a democratic government, but with the approaching presidential elections, there are some political uncertainties that can arise. Therefore, a private company aiming to establish a good position in the country must be aware of the need to evaluate the relationship level with the government and the regulator as part of its market strategy, in addition to the possible changes with the new government Economical Brazil is enjoying a moment of economic stability and rapidly recovered from the impacts of global recession, reassuming the Gross Domestic Product (GDP) growth trend which is projected to 5.5% in 2010 (IMF, 2010). Also, the oil industry is very economically important for the country, but differently from other resource rich countries, its economy is diversified. This scenario also suggests an increase in national demand for energy, which becomes a potential sector to invest. 3

7 Social - Cultural Socio-cultural aspects can affect marketing strategy of companies that seek to do business in international markets. In this context, BP must adapt to the fact that lot of the business in Brazil is done in Portuguese and it must overcome language barriers. Also, Brazil is still a country in development and a lot still has to be done in social aspects such as investment in basic and higher education. This leads to a challenge of dearth of necessary skilled professionals to work in an industry that demands high technical knowledge Technological The oil and gas industry is extremely dependent in technology and many technical challenges in exploration for new oil reserves promoted the development of high technology equipments for the various needs and contributed for the great expansion of the industry. Brazilian exploration activities mainly take place offshore, where 93% of proved reserves are located (ANP, 2009) which impose considerable technological barriers to oil companies Environmental Environmental aspects are very important to companies working in the natural resources business, since any industry impact to the environment is potentially catastrophic. Brazilian environmental requirements are still in constant change and adapting to new scenarios and a close follow up of this process is imperative. BP is particularly in a very delicate moment with a huge oil spill case in Gulf of Mexico (BBC, 2010b). Suffice to state that this event demonstrates how serious the environmental impacts from exploratory activity are. Hence, considerable amount of time and money need to be spent to solve environmental issues Legal The regulatory framework for the sector is currently changing in respect to tax regimes and more importantly the Brazilian contract regime is migrating from Concessions to Production Sharing Contracts (PSC), which, in effect, transfers oil ownership to the 4

8 State. In addition, the government is imposing a legal requirement that Petrobras must be the operator on all production sharing agreements with a minimum of 30% participation (MME, 2009). Therefore legal aspects will have a greater impact in the auctioning process of new fields, as more power will be directed to the national oil company (NOC), creating more challenges to IOCs such as BP (Petroleum Economist, 2009) SWOT analysis An essential part of this analysis is to identify BP s strengths and weaknesses, which can make it a potential strong player in the Brazilian market, and the opportunities and threats that market may present. BP has a recognized experience in offshore projects, as the leading deepwater IOC globally (as Figure 2.1 shows). This strength can also be supported by BP group chief executive Tony Hayward s statement This strategic opportunity fits well with BP's operating strengths and key interests around the world, offering us significant additional long-term growth potential with an emphasis on high-margin oil" (BP, 2010b). Also BP is a strong energy brand, with presence in most of the emerging markets such as West Africa, China and Russia. Figure 2.1: Net production 2009 for deepwater fields (>500m water depth) (BP, 2010c). 5

9 Although recognized worldwide, BP must face its weakness concerning this expansion such as the lack of knowledge and experience on the Brazilian E&P market and its specific and local business requirements. Also, its late arrival into this market means that it must build all the structure for its operation, from its own personnel to supply chain partners, an effort that will take time till it can achieve a strong position. As seen in the macro environment analysis, there are threats presented by different sides from technological to political. First, the high cost and risk operation due to deepwater and geological challenges will require a large amount of investment to extract oil profitably. Similarly, threats imposed by the political side on local content and dominance of Petrobras, may create barriers for the expansion plans of BP. However, a recent study analysed that Brazil would lose approximately 30 billion dollars per year in production delay with Petrobras as a single operator (FGV, 2010), thus, a competitive market which encourages the presence of IOCs would be considered more favourable to the economy. The oil industry potential and the country s overall growth makes Brazil one of the most attractive regions in the world with great opportunities for business development. The pre-salt area is seen as the biggest focus and as identified, the upstream sector is in growing expansion, having different areas for investments. Brazil is already the seventh consumer of oil in the world (MME, 2009) and national demand for energy is growing creating more areas for companies to expand in the market and meet customers needs. Finally, there is opportunity in sharing offshore expertise with Petrobras, which is also a major player in such projects, therefore important to gain more experience in the local market. 6

10 3. Analysis of the customers needs and wants The business markets involve people responsible for the purchase decision to satisfy company s needs. However, they have peculiar characteristics which differentiate them from consumer markets such as market structure and demand, buying unit, type of decisions and decision process (Kotler and Armstrong, 2010, p.193). As a business to business (B2B) market, the crude oil market is composed of large buyers, which are the national and international refineries. The business demand is derived demand which means that demand varies according to the consumer of oil products, such as fuel and petrochemicals. This was seen when worldwide demand for energy decreased with the recession, it affected directly all oil business markets. Also demand is considered as fluctuating when it reacts more quickly to changes. The purchase process is dependent on a group of professional buyers in the customers side, with technical expertise to find, evaluate and choose the supplier of oil to the refineries. Also the buying process is more complex, requiring a careful evaluation, formalized by several steps for the purchase approval, and suppliers and customers are more dependent on each other since their product is the input for customers production process (Kotler and Armstrong, 2010, p.194). Therefore it is crucial to build a strong customer relationship, developing long term partnerships with clients. Since BP Crudes trade in a commodity business, the market is product driven, the product is much less differentiated and the factors that can influence buyer behaviour are more related to the buyer. Looking at the major influences on buyers from BP crude products, as previously analysed, the economic environment determines much of the demand for oil. When facing economic uncertainties, customers tend to cut purchases and attempt to reduce costs. Similarly, political and technological factors influence business needs. 7

11 4. Market Segmentation, Targeting and Positioning As discussed, the market for crude oil are the refineries based nationally which are expected to grow in number and improve production capacity in the next few years. In the end of 2008, there were fourteen refineries operating in Brazil as listed below (ANP, 2009). From these, eleven are owned by Petrobras and only Manguinhos, Ipiranga and Univen are privately owned. R efinery C ity (State) Start o f Operatio ns N o minal C apacity m 3 / day T o tal 325,050 Reman - Refinaria Isaac Sabbá M anaus (AM ) ,300 Lubnor - Lubrificantes e Derivados de Petróleo do Nordeste Fortaleza (CE) ,300 RLAM - Refinaria Landulpho Alves São Francisco do Conde (BA) ,950 Regap - Refinaria Gabriel Passos Betim (M G) ,000 Reduc - Refinaria Duque de Caxias Duque de Caxias (RJ) ,500 M anguinhos - Refinaria de Petróleos de M anguinhos S.A. Rio de Janeiro (RJ) ,200 Recap - Refinaria de Capuava M auá (SP) ,500 Replan - Refinaria de Paulínia Paulínia (SP) ,000 Revap - Refinaria Henrique Lage São José dos Campos (SP) ,000 RPBC - Refinaria Presidente Bernardes Cubatão (SP) ,000 Repar - Refinaria Presidente Getúlio Vargas Araucária (PR) ,000 Refap - Refinaria Alberto Pasqualini S.A. Canoas (RS) ,000 Ipiranga - Refinaria de Petróleo Ipiranga S.A. Rio Grande (RS) ,200 Univen - Univen Refinaria de Petróleo Ltda. Itupeva (SP) ,100 Source: ANP/SRP Table 4.1 List of Brazilian refineries by the end of Even in a concentrated market, marketing segmentation is an important step in this study to differentiate customers and determine which segment to deliver the right value proposition. Possible industry features to be considered in the segmentation are location, company size, operating characteristics, purchasing approaches, situational factors and personal characteristics (Kotler and Armstrong, 2010, p.222). In the case of crude oil, the market can be segmented starting with geographical location i.e. national and international customers. With this differentiation, BP can allocate marketing effort, sales force, logistics for transport and financial requirements accordingly. Then segment by the customers size, considering the number of refinery they own, their size and their production capacity. Related to this are the operating characteristics, where customers can be segmented into capacity levels, type of crude they are able to process and resultant products from the refinery process. Based on the data about 8

12 national market refineries, this could be allocated in three segments: small with a capacity up to 10,000m 3 /day, medium with a capacity between 10,000 and 30,000m 3 /day and large with a capacity above 30,000m 3 /day. Also the segmentation by type of crude is relevant as certain refineries are configured to process light differently to heavy oil type. Another segmentation type related to purchase profile for this case is considering the two groups, private owned and Petrobras refineries. These are two clear market segments with particular characteristics to each. Most of oil produced by Petrobras is processed in their own refineries, therefore their capacity is already met by one supplier (ANP, 2009). Conversely private owned refineries are able to deal with different suppliers of crude. Looking at the market segments, it is possible to evaluate which ones BP should target considering factors such as segment size and growth, attractiveness and BP s own objectives and resources. The important fact is that BP must enter in a segment that add more value and where it can overcome competitive forces (Kotler and Armstrong, 2010, p.225). In a national scale, the largest segment would be Petrobras medium and large refineries, but it would be less attractive due to Petrobras dominance. Therefore, private owners are an attractive market since they are not necessarily connected to Petrobras, which presents more entry opportunities for BP s crude oil. In addition, this segment is expected to grow, since these refineries have the plan to expand capacity in the next years and this would match with the planned production period from BP s projects. Univen plans to expand its capacity to 20,000 barrels/day (equivalent to 3,100 m 3 /day) and build a new refinery aiming to supply fuel and oil products to the northeast (Abramo, 2008). Conversely, the international segment is broad and BP already has a strong brand presence in different continents. Thus, current clients in consumer locations such as South America and China would be the strategic target market that BP should invest more efforts. South America has a geographical advantage for logistics and China due to increased demand. In this case, as opposed to the Brazilian case, BP should focus on 9

13 medium and large refineries to get more market penetration and meet the growing demand from these customers. Different targeting strategies can be chosen based on segments evaluation as undifferentiated, differentiated or concentrated (Kotler and Armstrong, 2010, p.225). BP could adopt the concentrated marketing strategy to target private owned refineries and international markets as they are identified as potential and attractive segments for the oil extracted in Brazil for an IOC. Once the target is defined, positioning strategy must be evaluated with the aim to create competitive advantage in such specific markets. The value proposition is the full mix of benefits that the company positions the product (Kotler and Armstrong, 2010, p.238). For crude oil market, the differentiation would be related to the quality of the product, security of delivery and commercial advantages clients would get from purchasing with BP. Therefore, the technical aspects of the product are important, since it must fit with the customers requirements. 5. Conclusion As discussed above, there are real opportunities for a market expansion by BP in the Brazilian crude oil market in a national and international level. First, in line with increasing demand and possibilities of exploring new resources in the country, the scenario is very favourable for a global company with extended investment capacity. Secondly, the opportunity to bring the Brazilian oil to an international market looking for new resources is attractive for a company that already has an international position and BP can use this advantage to meet this goal. Moreover, these opportunities come with different challenges imposed by technological requirements and political and social interests, and by overcoming them; BP would be able to become a strong player in the Brazilian E&P market. At this point, a key strategy will be to seek alliance with Petrobras not only for sharing participation in the blocks, but as partners to grow nationally. Also, BP must focus on prioritizing the national market in the first place, build a reliable position and relationship with customers and partners, then thereafter consider meeting 10

14 the demand from abroad. To acquire market share, BP must look at the new and independent refinery developments and targets with a differentiated approach. In conclusion, Brazil was the missing part of BP s global portfolio and E&P is just one of the first big opportunities on the way. 11

15 BIBLIOGRAPHY Abramo, V. (2008) Petroleo Caipira em curva ascendente. [Online] Available at [last visited on 22 April 2010]. Agência Nacional do Petróleo - ANP (2009) Anuário Estatístico [Online] Available at [last visited on 20 April 2010]. British Petroleum BP (2010a) BP in Brazil. [Online] Available at sectiongenericarticle.do?categoryid=453&contentid= [last visited on 20 April 2010]. British Petroleum BP (2010b) BP Enters Deepwater Brazil and Strengthens Core Portfolio. [Online] Available at categoryid= &contentid= [last visited on 20 April 2010]. British Petroleum BP (2010c) Strategy update - March [Online] Available at /I/IC_bp_strategy_presentation_march_2010_slides.pdf [last visited on 20 April 2010]. BBC (2010a) BP in $7bn deal to explore for oil in Brazil. [Online] Available at [last visited on 20 April 2010]. BBC (2010b) Oil rig blaze off Louisiana leaves at least 11 missing. [Online] Available at [last visited on 30 April 2010]. Fundacao Getulio Vargas FGV (2010) Pré-Sal: Potenciais Efeitos do Operador Único. [Online] Available at 409A-9067-C3AF55F60DCA}&Team=&params=itemID={44C78C92-0AD5-4C1A- A633-E367DEF202FE}%3B&UIPartUID={D90F22DB-05D A8F2- FAD4803C8898} [last visited on 4 May 2010]. 12

16 International Monetary Fund - IMF (2010) Brazil and the IMF. [Online] Available at [last visited on 30 April 2010]. Kotler, P. & Armstrong, G. (2010) Principles of marketing. 13 th Pearson Prentice Hall. ed. New Jersey: Ministério de Minas e Energia - MME (2009) The Regulatory Framework of the Pre- Salt. [Online] Available at Salt_-_English_Version.pdf [last visited on 30 April 2010]. Petroleum Economist (2009) Pre-salt legislation puts Petrobras centre stage [Online] Available at &SID=722591&ISS=25486 [last visited on 30 April 2010]. 13

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