Case Study Of British Petroleum In Russia

Industry analysis

Discuss about the Case Study of British Petroleum in Russia.

British Petroleum first opened their office in Moscow in the year 1990. Since then, the company is working with collaboration with different leading Russian oil and gas companies. They entered the Russian oil market by purchasing 10% share in Sidanco in 1997, the largest oil company in that time (Spekman and Linetsky 2013). By 2002, they increased their share to 25% plus one share (bp.com 2017). Their noticeable move was in 2003, merging with TNK to form TNK-BP and operating in nearly all the major Russian hydrocarbon region. They made a profit of $55 billion in the period of 2003-12 (bp.com 2017). BP sold their 50% of share in TNK-Bp to Rosneft in exchange of $12.5 billion and 18.5% share of Rosneft in 2012, which was finalize in 2013. BP and Rosenft signed a Heads of Agreement on exploration and possible development of Domanik formation in the Volga-Urals region in May 2014, and signed another agreement with Rosenft in June designing to organize long-term deliveries of oil products and crude oil on pre-paid basis. BP purchased a 20% share of Taas-Yuryakh Neftegazodobycha from Rosneft in 2015. By June 2016, Bp and Rosneft was holding the share of Yermak Neftgaz in a ration of 49:51 (bp.com 2017).

Profitability – Five forces

It is an analytical tool for analyzing different level of competition in the industry. It will be used in the report to gain the idea about BP’s competitors and environmental factors that comes into action in Russia.

Threat of new entrants

This threat depends on the entry and exit barriers in any particular industry. This industry requires a huge capital investment and technical knowledge, which makes it hard for the new entrants to enter the market. The threat of new entrants is very low and reduced through the first mover advantage obtained by making partnership with TNK (E. Dobbs 2014).

Threat of Substitute Products

Coal, solar energy, wind energy, hydroelectricity, nuclear energy, and many other types are considered as the substitute products of oil and gas. The threat for BP in Russian market is low due to an increased cost of production of alternative energy. On to it, the alternative energies do not have the similar efficiency that is provided by oil and gas. Hence, these high cost alternative energies become less attractive for the consumers (Rothaermel 2015).

Profitability – Five forces

Rivalry among the Existing companies

British petroleum is currently facing challenges in operating in Russian oil market. The alliance with Rosneft was accused to be violating TNK-BP shareholders’ agreement by AAR As the Aar believed that BP could not form a new oil and gas exploration partnership with Rosneft without working through TNK-Bp. AAR group sought an interim injunction in an English court to stop BP-Rosneft alliance which was granted by the court.  Bp has to come up with a new plan for the hurdle faced (Aithal 2016; Shuen, Feiler and Teece 2014).

Bargaining Power of Suppliers

Bp has collaboration with AAR in TNK-BP which gains the company a strong base in Russian oil market. Moreover, considering the high number of supplies and maximum size of the supplies and there were high switching cost as BP strong supplier power (Dälken 2014).

Bargaining Power of the Buyer

It depends on the level of control of the buyer has to force down the product price and bargain for higher quality or better service. As the gas and oil is a commodity, which has a low loyalty, the bargaining power is medium. Considering the less number of suppliers in the market makes the price more or less stable, as the buyer will likely to go in favor of low process (Harrel 2016).

Company Analysis – Resource and Capabilities

By resources, it means the assets that the company is holding. On the other hand, capabilities are the complex patterns of skill in utilizing resources to achieve a desired end-result. The company first established its office in Moscow in 1997 and since then they have gained many assets in the market. In 1997, BP entered the Russian oil market by purchasing 10% market share of Sidanko. In 2002, BP purchased 15% more of Sidanko with one market share. Next year Bp invested US$ 6.75 and became 50-50 joint venture with AAR, to be known as TNK-BR (forbes.com 2017). Their joint venture generated $ 19 billion of net dividends for BP’s shareholders, excluding the taxes and duties of $190 billion paying to the Rsuuian Federation. The company had Human resource of fifty thousand employees working in TNK-BP. Moreover, BP had their separate three hundred staffs in Russia. The organization continually invested for their professional development with training of 177,000 days over five year period (undergraduatelibrary.org 2017).

The company had access to a wide range of natural resources. Their production facilities hold around 9.1bn barrels of oil in the reserves. On to it, the company started to exploit the gas reserves in 2005 (Thurner and Proskuryakova 2014). It enabled them to use a more diversified use of their resource base. This highlighted their aim in the changing environment and was recognized as their key aim in strategy refreshment in 2011. This assets of the joint collaborated organization enabled BP to grow their global production (Stepanov and Shrives 2013)

Threat of new entrants

BP had always invested in their research and development division to stay ahead in technology in the oil and gas industry. In Russia, they implemented their high efficient recovery and production process to ensure their long-term competitive advantage. They increased their margin and created competitive advantage in the market with their superior technology. However, the British Petroleum had stronger R&D than their partner in TNK-BP which is important in the context of their breakdown of partnership. It gives BP more information control in the joint venture.

BP achieved a good will of $9.1 billion in 2003. This value helps the company boost it downstream sales for the business as it is recognized as a quality petroleum offering. On the other hand, ethical business operation can help the company to improve the efficiency of the business and yeild advantage over competitors

Company Business Strategy

Business strategy of British Petroleum in Russia will be discussed in this part of the report. Evidence of a number of incompatible strategies has been spotted in the case. BP in the Russian market was tie up with TNK, a local oil company to do their business in the industry. The TNK-BP wanted to promote high standards of corporate governance, which required a developed operational structure and procedure that make their management accountable. However, the majority of the board positions were filled with a large number of western BP-sponsored who were not tied up with Russian corruption. Internal division and cultural clash in the organization became inevitable due to this reason (Peng 2013).

On the other hand, an advanced technological advancement was necessary in the business that was supply by BP. However, this give BP the upper hand in the company, which again contributed towards cultural division This also has a positive outcome as the company was able to extract maximum amount of oil that kept their investors happy.

Another incompatibility can be seen in the organization, which is the investor’s desire. TNK-BP was just a Russian business for BP, whereas their Russian partner visualizes it as the scope to expand internationally. These incompatibilities led to the demise of TNK-BP (Verbeke 2013).

The incompetence of the business strategy was evident during the attempt to form partnership with Rosneft. The situation occurred, as the companies did not established strategic fit. TNK-BP was bias towards BP due to the formation of an unhealthy organizational culture within the organization. After overcoming the drawbacks, BP is now doing their business in Russia by making Rosneft their partner. It is a state owned Oil Company. To avoid the previous misconducts, agreement was do between the two companies with a degree of equity swap. An integration committee was form to avoid possible cultural conflict. BP’s new business strategy with Rosneft can be sum up as follows:

• Maximum use of technological expertise in deep-water operations to recover reserves in the Arctic Circle.
• Use the projects of Rosneft as a supply source to Asia and provide energy to the emerging markets.
• Maintain balance of due-diligence to prevent all possible corruption interference with business activities.
• Involvement in the board of the Rosneft in order to manage the political risk in Russia.

Threat of Substitute Products

If the company can maintain the business strategy opted, they will be able to gain a long term profit out of this joint venture (bp.com, 2017).

Strategic leadership can be refer as the ability to influence others to make decision that enhance the prospects for the organization’s long-term success. Clearly, BP in Russia lacked a proper leadership strategy that became the prime reason for their fall. As discussed in the company business strategy, the culture clash became the primary reason in their failure. Despite of their significant growth in Russian oil and gas market in collaboration with TNK, their different business strategy resulted in cultural clash within the company cornered the company resulted into breakdown of the partnership. The joint venture of TNK-BP appointed approximately fifty thousand skilled people. BP alone stationed around 300 staffs in Russia. This led to the acquisition on BP hiring western people for significant post of the company. This resulted in cultural polarization. A proper strategic leadership could have foreseen the situation and take necessary steps in advance in which the company failed (House et al. 2013).

There have been many changes over past few years since 2011, when the Stockholm Arbitration Tribunal formally stopped BP’s effort to ally with Rosneft for Arctic oil exploration. On 2012, the company sold 50% of his TNK-BP share to Rosneft. Later, the company got approval from the Russian Federation for acquisition of 5.66% of Rosneft. The deal was finalized in the year 2013 where received US$ 12.5 billion in addition to 18.5% of Rosneft in exchange of its 50% stake in TNK-BP . 18.5% combining with 1.25% pre-deal holding resulted in 19.75% holding of BP in Rosneft. Rosneft sold 20% of its share of Taas-Yuryah Neftegazodobycha to British Petroleum, thus creating a new joint venture in East Siberia (bp.com 2017). Recently in 2017, these two companies signed final binding agreement to create a new joint venture, Yermak Neftegaz LLC that will be focusing on the onshore exploration of two major AMIs in West Siberian and Yenisey-Khatanga basins. It will cover a combining area of approximately 260,000 square kilometers (bp.com/en 2017).

Conclusion

Based on the above discussion and the current situation of the company, a conclusion can be drawn that British Petroleum has high chances in developing in the Russian oil and gas market due to their alliance with Rosneft. Rosneft is not in the oil and gas business for long, but shows ambitious growth plans, which include, its first liquefied natural gas plant. On the other hand, BP has a lot of complementary skills and ambitions and possess the most competitive LNG plants. Moreover, they have most mature assets such as water flood fields. Russia has the most number of water flood reservoirs in the world and BP has the experience in managing water flooding. This can come out as a great deal in future. The aim of BP in Russia is to build a business in which BP has quotable, material production that is separate from the production comes through Rosneft. BP is looking forward to build around 200,000 barrels a day in Russia. They need more investments and bigger plans for that. BP wants to go more in the Downstream or venturing for low-cost and the gas potential.

References

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