Week 5 – Individual Project
British Petroleum in the Russian Market
With borders being opened to trade and external investment, Globalization’s opportunities for domestic firms in the emerging markets to improve and innovate ,had been striking for necessary steps to be taken in order for them to deal with this stress and station their position in this dynamic market (Shenkar and Luo, 2007).
Linkages with foreign firms can participate in building some of this stress and opportunities. In fact, “trust and International energy trade” is a notion that requires a deep understanding and a high-powered board to be established in order for a smooth partnership to occur. This notion will be discussed in details with British Petroleum building partnerships in Russia (Ozawa, 2012).
History of BP:
In 1909, BP was known as Anglo-Persian Oil Company and now it’s a British multinational oil and gas company. Their headquarter is located in London-England. Based on its market capitalization and revenue, BP is the 6th largest energy company and the 5th largest company in the world. (www.bp.com)
In 2013, BP operations had been in 80 countries and produced around 3.2 million barrels per day. BP has service stations around the world. BP America is considered the second largest producer of oil and gas in the states and in Russia’s major oil company (Rosneft) BP owns 19.7% of its stake (www.bp.com).
BP started operation in Russia in the 1990, and purchased its first 10 per cent stake in Sidanco (Russia’s fourth largest oil company then) on 1997. Their stake increased in 2002 and reached 25 per cent plus one share. In 2003, BP teamed with Alfa Fropu-Access-Renova (AAR) forming TNK-BP that employed 50,000 people operating in almost all of Russia’s major hydrocarbon regions. Since that merging, TNK-BP became” Russia’s third biggest vertically intergraded oil and gas company”, producing more than $55 billion of net profit from 2003 till 2012 (www.bp.com).
Analyzing the Russian’s environment:
Shenkar and Luo (2007:276) highlighted the importance of choosing a location that will have beneficiary aspects and measured results prior on establishing a venture. They also added the importance of choosing the right partner that will allow a development of mutual benefits. That is what BP’s chief executive John Browne saw in Russia vies versa. Building this venture between Russia and BP had economic and political factors.
From BP side: BP was under pressure from its investors to grow its stagnant level of oil and gas reserves, therefore when Russia removed its political barriers specifically “the emergence of democracy and privatization”, it facilitated the idea of doing business in Russia .In addition, by having the share equally shared, BP will help in developing Russia commercially and socially (Ozawa, 2012).
From the Russian side: BP had so many advantages that couldn’t be found in any other international companies at that time. They provided economic incentives for AAR, and refining facilities to Kovyatka field that was considered one of Russia’s most lucrative markets for natural gas. Kovyatka markets’ location was critical to Russia, it is located in Europe and Asia and the need for technical expertise to construct a pipeline will require a huge financial investment (Ozawa, 2012).
From BP side: Browne’s needed to recover the loss of his assets that was done by Mikhail Fridman, one of the investor’s in Sidanco (a Russian oil company). Fridman filed for bankruptcy to the BP portion in Sidanco after a conflict that rose between BP and AAR when they were trying to establish their first joint venture (TNK –BP) (Ozawa, 2012).
From Russian Side: They wanted to expand their business to Western countries. By earning the trust of BP and its governments, will result in building credibility for a foreign audience in Russia (Ozawa, 2012).
Evaluating BP’s strategies in Russia:
1st International entry:
In 1997, BP acquired a 10 per cent stake in Sidanko (Russia’s fifth largest oil company then) by paying $571m. The work of this step, will automatically impact the oil and gas reserves levels positivity.
In 2003, BP established its first joint-venture, TNK-BP that basically presented the merger of other Russian oil companies and they are: TNK, Sidanko and Onako with the Russian oil assets that belong to BP. The venture was equally shared between BP and group of Russian investors (www.telegragph.co.uk)
In 2006-2007 Russia forced BP to give up some of their share in TNK-BP and Kovykta, to allow only Russian companies to be in charge of exporting their gas (Blank, 2011).
In 2008 conflicts rose between TNK-BP’s shareholders and BP led to Russian immigration services stopping the working visa for the British employees in TNK-BP and Robert Dudley the chief executive of TNK-BP leaving Russia and resigning in December. (www.telegraph.co.uk)
In 2009-2011 BP was trying to make a deal with Rosneft and TNK-BP and court’s rulings are stopping this deal from occurring.
In October 2012 a $27 bn deal finally had been established, allowing BP to seize a 19 per cent stake in Rosneft, conversely Rosneft will pay $28 bn for the “TNK-BP oligarchs” (www.telegraph.co.uk)
2nd Organizing and Structuring BP’s global operation:
Back in 2003 when the TNK-BP was established, the managements of BP and AAR had to set down together to determine the company’s management team. Both parties agreed “a memorandum of understanding to change the board structure” to assign Robert Dudley as a chief executive and consider an initial public offering of TNK-BP shares (Robertson, 2009).
Upon the completion of the JV, BP had offered the following promises to the Russian’s governments:
· enhance in the building of production and services
· Provide the JV with the latest technology and services BP has and will invent.
· Improve corporate governance
· Will be a good corporate citizen to Russia (Robertson, 2009)
BP stood behind their promises, in fact, they contributed to other areas that weren’t part of their deal, like in health, safety and the environment.
In its first 5 years, the crude oil production had been increased to 26% reserves. Their average annual return on the capital was 35% the highest among the other Russian oil companies which also contributed in raising their refining and marketing earnings five folds in these five years (Robertson, 2009).
The company’s structure was containing 600 in properly connected subsidiaries, having around 100,000 employee, now it’s transformed to 400 subsidiaries with 65,000 employees.
The company produces 1.6 million of barrels of oil a day, counting of 18% of the country’s total production and 5% of Europe’s oil demand “making one of the world’s ten privately owned-oil companies in the world” (Robertson, 2009).
Maintaining competitive advantage:
An oil field in the west of Siberia called Smatlor had been discovered in 1960 and neglected afterward due to its decline in crude oil productivity. BP’s engineers and technicians focused on a study that had been invented by them in repairing and renovating dead wells by using “a 3D seismic data” to identify and drill additional locations around that field. The well is producing magnificently and expected to continue in a steady production rate till 2015 (Robertson, 2009).
Also Smatlor’s drilling waste used to be dumped improperly and impacted negatively on the environment. Now it had been supplied to a local brick making factory, in afford of saving the environment. Adding to that, TNK-BP had cleaned 1700 hectares of oil effected area. Last but not least the company had invested in the integrity management program that focused on the use of a new technology to reduce pipeline leakage by half (Robertson, 2009).
BP investing in Russia had economic and political factors that were far stronger than any conflicts. The two companies were partners for 5 years and the outcomes that were established in that period, point to the need of collaboration. Considering the economic factors, BP’s profit was considered high which allowed it to invest around $ 8 billion American dollars in this JV, lead to 14 billion in profit during these 5 yrs and paid the Russian government $80 billion dollars in tax revenues (Ozawa, 2012).BP had contributed in “300 million in social programs” by protecting Russia’s cultural heritage and encouraging a better living style (Robertson, 2009)
Political factors, the Russian economy is dependent on the natural gas industry. BP plans to make future partnership with Rosneft and Gazprom will allow lower share of other JV and play a passive role. Having BP as a partner was better than its rival (Shell) which was forced out of one of JV with Gazpom (Ozawa, 2012). Despite compelling reasons to collaborate, BP decided against it. In that time, BP head office in London stepped in to resolve this conflict and transferred Robert Dudley and replaced him with a Russian speaker (Robertson, 2009).
Russia’s government sometimes aimed to expelling foreigners from owning Russian energy properties and replace them with Russian companies. Therefore, every once in a while Moscow used to cause conflicts with BP and put obstacles on their ways. But what the Russian government didn’t pay attention to be pulling foreign services out of Russia will reduce the oil and gas productivity which will affect the Russian economy.
According to the previous facts, BP had to humor Moscow a lot and find other sources to invest in Russia. Their commitments to Russia expanded to more than extracting oil and gas BP had opened other business segments in Russia, categorized into 4 groups: Lubricants, BP Marine, Air BP and Intergrade Supply and Trading (IST) (www.bp.com).
· History of BP (2014), BP in Russia, [Online]. Available from: http://www.bp.com/en/global/corporate/about-bp/bp-worldwide/bp-in-russia.html (Accessed: June 16th, 2014).
· The telegraph (2014), BP in Russia: a timeline, [Online], Available from: http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8516794/BP-in-Russia-a-timeline.html (Accessed: June 17th, 2014).
· Ozawa M. (2012), “Trust and European-Russian Energy Trade, The Case of Natural Gas Partnerships”, Department of Politics & International Studies, [Online], Available at: http://uaces.org/documents/papers/1201/ozawa.pdf (Accessed: June 17th, 2014).
· Robertson L. (2009), TNK –BP a Russian success story,[Online],Available at: http://www.heraldofeurope.co.uk/Issues/5/Economics/TNK-BP/TNK-BP.pdf (Accessed: June 17th,2014).
· Shenkar & Luo (2007), International Business, 2, SAGE Publications,Inc,[Online],Available at: VitalBook. (Accessed: June 17th, 2014).
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