Joint venture is an agreement between two or more organizations who share ownership, risk, returns with shared governance. In this agreement the companies share resources to accomplish a particular task. The task can be start a new project or improvement in existing operations. In joint ventures the business partners share profit and losses and contribute assets. Numerous factors like technology need, investment need, development tools necessity and capability requirement contribute in formation of joint venture agreement. The companies do joint venture agreement to achieve strategic objective. Joint venture agreement is suitable when companies want to combine complimentary capabilities of each other. Company carefully selects partners in joint venture agreement and selects the partners who are beneficial for it. The companies who enter into joint venture sign the agreement in which all the important details are mentioned related to joint venture (Shuen, Feiler & Teece, 2014). Joint venture agreement is common in oil and gas industry.
Oil and gas industry come into energy sector where risk and investment limits are high. The company which operates in oil and gas industry does joint venture agreement to achieve goals which single company cannot attain without support. There are several challenges and benefits associated with joint venture agreement. The company does joint venture agreement when benefits are greater than challenges. Mainly the companies operating in oil and gas industry take the advantages of joint venture because this industry requires high investment. In joint venture the companies get other benefits like global expansion of operation, risk sharing, new market entry, tax benefits and capabilities sharing (Olaniran et al., 2015). The companies do joint venture agreement when all companies see the agreement beneficial for them. The oil and gas industry is the major example of growth of Joint venture agreement. In this industry almost 71% investment is spent through joint ventures. There are many advantages of joint venture agreement but with the advantages companies have to face challenges too. Most common challenge joint venture companies’ face is management challenge due to cross cultural and cross border relationship. Around 18 months are required to establish joint venture and researches in joint venture depicted that the failure rate is 70% (Inkpen & Moffett, 2011). In oil and gas industry major investment occurs due to pipeline, LNG and refining machineries requirement. The capital investment requirement in this industry is approximately in billions. The companies operating in oil and gas industry handle multiple projects at one time.
One of the famous joint venture agreements in oil and gas industry was BP and Rosneft joint venture. They created joint venture to provide services in east and west Siberia. Both the companies are famous. BP is leading oil and Gas Company. It is a multinational company whose headquarter is in London. Rosneft is the top refinement and extraction company. BP Oil Company did joint venture agreement with Rosneft to bring a fresh stream of Russian gas to European energy sector companies by the end of the period (RT Question More, 2016). Executives from Russia oil and BP oil companies met in St Perterburg to sign a memorandum. The agreement was signed in the presence of president of BP Russia, David Campbell and Rosneft CEO Igor Sechin. The joint venture agreement is done for gas exploration and to get new production projects in Russia. (Rosneft, 2016).
BP and Rosneft did joint venture agreement to fulfill several motives. Major motive behind joint venture agreement is companies find it beneficial to combine assets because it provides greater value to them. Through joint venture companies get advantage of risk sharing and collaboration while maintaining corporate independence. The advantages of joint venture are beneficial for particularly oil and gas industry because the companies handle major capital projects and operate in the uncertain environment. Some major reasons which influence companies to join hands are described in below mentioned points.
Both BP Company and Rosneft Company, handle large and complicated project and companies need high capital investment to complete them. Due to this, companies did joint venture agreement to get support. In joint venture agreement BP committed to invest up to $300 million as its contribution at the exploration stage. The Joint venture agreement also helped to save cost. One company can invest less because of lack availability of fund. When companies do joint venture agreement all the companies involved in joint venture do capital investment for projects (Bradshaw, 2010).
BP and Rosneft companies did joint venture for energy exploration. Energy exploration is very risky process. BP Company did joint venture agreement for gas exploration in Russia Through this joint venture agreement, companies will get more production projects in Russia. The deal will help to give more focus on gas production.
BP Company is very famous in oil and gas industry and using effective technologies. The agreement between BP and Rosneft helped to get support for exploration activities because the companies are using various technologies for regional research and drilling of exploration wells.
Companies do joint venture agreement to take the advantage of technology. Companies which want technology to improve operation do joint venture agreement with other companies which are already using the required technology. Technology provides competitive advantage to companies.
Due to growing demand for cleaner energy the oil and gas companies are facing several challenges. BP Company and Rosneft Company did joint venture agreement to reduce the chances of risk. Various types of risk a company can face like technological risk, capital risk, political risk, environment risk and so on. Joint venture companies get benefits because more companies are involved and capabilities of companies are shared which provide strength and overall decrease risk factor.
Both the companies BP and Rosneft agreed to do joint venture to complete resource requirement. Rosneft can use BP’s assets like on shore oil fields and chemical complexes Rosneft Company will get new efficient gas monetization channel and other additional resources by the joint venture agreement with BP (BP, 2016).
For completing large projects companies require many resources. Resources can be human resource, capital resource, input materials and so on. Sometimes companies do joint venture agreement to get support from other companies to fulfill resource requirement. In joint venture agreement companies can share resources and can achieve maximum potential level.
Regularity requirement
BP Company wants to enter into Russian market because Europe depends on Russian gas for completing many projects. Due to diminishing reserves in North Sea the demand of Russian gas is increasing. BP was planning to develop Kara sea fields in Arctic Ocean and Russian government helped in the project. Initially BP will invest $2million for exploration and then $200 million per drill.
In different countries the legal and regularity policies are different. Some countries support trading where as some countries restrict trading. Companies do joint venture agreement to start operation in other country where trading policy is supportive to get benefit. After the introduction of liberalization, globalization and privatization many companies did joint venture agreement because many countries supported trading by introducing various policies.
Supply chain optimization
BP and Rosneft Company did joint venture agreement for supply chain optimization. Through the supply chain agreement more Russian gas can be brought in European market. Through the agreement BP Company will able to get between seven billion and twenty billion cubic meters of gas from Rosneft. Right now for Russia only Gazprom has rights for pipeline gas exports. A large company where the operational capacity is high, proper supply chain management is required. Companies do joint venture agreement to reduce cost for example distribution and procurement cost can be different in different places which can be reduced by using the sources which can provide facility in low cost(Deitz, 2010).
Global expansion and market positioning
BP Company and Rosneft Company did joint venture agreement to expand their operations and through the agreement Companies can provide services in various nations. Rosneft Company was operating in Russia only. Previously the company was not providing services outside Russia. The agreement helped for global expansion. Global expansion give benefits to companies as companies get customers from different nations. Profit and revenue get increased through this. Both companies can improve market position through joint venture agreement because several benefits companies can get through it that can help to enhance the performance. Through global expansion several benefits like low cost, lower tax, low monetary conversion rates can be achieved and risk can be reduced (Abdu, 2013).
Oil and gas industry is very big. The companies operating in this industry do joint venture agreement to get benefits. With the benefits the companies have to face several challenges too. BP Company and Rosneft Company faced several challenges which are mentioned in below given points.
With the above mentioned challenges. BP and Rosneft companies also receive some benefits which are explained in these points mentioned below.
BP Company and Rosneft Company got the benefits of collaborative efforts. The capabilities are shared that can help to achieve goals. Through joint venture agreement now both companies work together and get all required support. The companies can achieve operational efficiency through collaborative efforts (Jacoby, 2012).
The agreement helped BP and Rosneft companies to share risk. Oil and gas companies operate in high risk environment. The risks can financial risk, technical risk, operational risk and project related risk. The companies can control risk by distributing the work like one company can focus on operations and other company can contribute only on funding. Companies can effectively manage the strategy through joint venture agreement (Tordo, Tracy & Arfaa, 2011).
The joint venture agreement between BP and Rosneft helped to deal with political and economic risk. Political and economic factors are important external factors which give impact on the companies. Unfavorable government policies, taxation policy, licensing issues, interest rates, inflation, deflation, recession etc. create barriers for a business. Through joint venture agreement companies deal with these problems. Oil and gas industry take the advantage through joint venture agreement because through this some barriers can be removed easily. Companies of one country can do joint venture agreement with other companies operating in foreign countries to get the benefit of political and economic condition of foreign countries (Moe & Rowe, 2010).
Investment support
Both the companies got investment support through joint venture agreement. Oil and gas companies require high investment to complete projects. Companies require money to continue project development. The investment is approximately in millions. Oil and gas companies handle upstream, mid-stream and downstream projects which are capital intensive. The companies need to build pipelines to transport oil to refineries which require high investment. Companies have to pay high tax also. To expand the operations companies need to invest money. Through joint venture agreement companies get investment support from other companies (Flyvbjerg, 2014).
Effective integration
BP and Rosneft joint venture agreement solved the problem of resource limitation and technology requirement. The Rosneft Company has committed to contribute operational excellence and licenses in Yenisey-khatanga and West Siberia. Initial drilling will be done by Rosneft Subsidiaries. In joint venture agreement Companies get resource support and technical capabilities from other companies. Company can effectively manage the work by dividing the work and assigning to functional experts team. Cross functional teams give collaborative efforts to improve things. Oil and gas companies get integration support through joint venture agreement (Rui, 2017).
Both the companies wanted to get growth but due to decrease in oil prices the companies were facing problem to achieve the objectives. BP and Rosneft joint venture agreement helped to refocus on petrochemicals and refining strategies in Germany. Rosneft Company will expand the level of operations in Europe. The agreement helped to combine objectives and strategies. When the companies do joint venture agreement they work to achieve common strategic goals which can be beneficial for them. Joint venture agreement helps to execute strategy easily.
BP and Rosneft joint venture agreement will give major focus on the onshore exploration in two areas like in Yenisey-Khatanga basins and West Siberian and will cover the complete area of 260,000 square kilometers. The exploration activities will include drilling of exploration wells and regional research (Aljazeera, 2012). The agreement helped to face the problem of low oil prices and both the companies work together and did several production projects. Rosneft subsidiaries performed initial drilling function and Rosneft Company contributed through operational excellence (Energydigital, 2016). Mainly the companies join hands for Russian oil exploration. The deal helped both companies as Rosneft can provide services in European markets and BP can take advantage of Russian market. Through the deal the output production capacity of oil and gas of the companies also increased. Russia is an important place and quarter of oil production work of BP also done in Russia (Hellenicshippingnews, 2016).
With the above mentioned challenges it is clear that joint venture agreement is not a simple task some points which should be considered while doing joint venture agreement are described below. BP Company and Rosneft Company can apply these methods to improve conditions in the agreement.
Although joint venture agreement gives many benefits to companies but some challenges also come with it. Oil and gas joint venture companies handle multiple projects and companies need to manage accounting and financial sheets. Financial reviews help to formulate future plans. Companies also need to have proper audit system so to accomplish this proper financial committee and risk management committee should be formed (Oh, Pang & Chua, 2010).
The most common reason of failure in joint venture project is poor planning. Companies should make future plans properly to lower risk factor.
Negotiation is a right method to avoid conflict. Without negotiation all partners cannot be satisfied. Many researches have depicted that in joint venture project people invest 20% of their time in negotiating specific deals. The partners spend more time in negotiation to generate more value in future (Killing, 2012).
Conclusion
Energy projects are mainly expensive, big, complicated and risky in nature. Joint venture method helps to spread risk and gain support. Joint venture agreement helps companies to get resource and capability support to deal with complexity of energy projects. In the given report some motivations behind BP and Rosneft joint venture agreement are explained. Joint venture helps to expand operations by getting support from companies. Some challenges and benefits of BP and Rosneft joint venture are also explained in the report. Oil and gas companies have to face challenges in getting approval of joint venture. Companies face problem in getting infrastructure facilities. Companies need global pipeline network for global expansion. The benefits oil and gas companies get through joint venture agreement can be capital support, risk minimization, resource fulfillment and capability support. The problem of joint venture agreement can be solved by establishing financial committee, risk management committee. The partners should communicate their strategic intent at the time of joint venture formation. The partners should focus on their roles and responsibility to reach strategic objectives.
References
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