TNK-BP THE RUSSIAN VENTURE

Tithvisal Keng Sotiris Pashos Asad Khurshid Ben Kankipati

Table of Contents
Situation Analysis ................................................................................................................................................................ 2 Key Issues ............................................................................................................................................................................ 2 Company Breakdown ......................................................................................................................................................... 3 External Forces ............................................................................................................................................................... 3 Internal Forces ................................................................................................................................................................ 4 Stake Holders .................................................................................................................................................................. 4 Potential Risks ..................................................................................................................................................................... 6 Strategy ................................................................................................................................................................................. 8 Recommendation ................................................................................................................................................................ 8 References ............................................................................................................................................................................ 9

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Situation Analysis
Producing the largest amount of natural gas and only second in oil production, the fuel industry is the cornerstone of the Russian economy. Hence when British Petroleum (BP), a British company formally known as Anglo-Persian Oil Company and founded in 1909, first ventured into the nation of Russia, in 1997, to capture a market share and increase their own oil and gas production, they met significant opposition and after a failed joint venture with the Uneximbank group, BP embarked into another 50-50 joint venture with Tyumen Oil Company (TNK). Now after 10 years of carefully balanced business operations the TNK-BP cooperation is facing new troubles surrounding its expansion and employment policies. Essentially, the Russian shareholders of the company wish to expand and have greater control over operations through the employment of more Russian nationals at higher levels. Meanwhile, BP shareholders, who already have large stakes in the global oil and gas wells, are content maintaining the status quo. This environment has created a state of unrest that has caused the Russian and British government to get involved, with the Russian president Vladimir Putin instituting laws that required Russian majority ownership of any investment venture made by a foreign company, and the British prime minister offering his services and the backing of the British government in any negotiations made in the future. Therefore it is critical that BP insure the right long term strategy is put in place to counteract and mitigate any current and future risk that may arise.

Key Issues
The core issue facing TNK-BP is not that of employment or expansion, though those are valid areas of concern, but that of differing long term goals. This has manifested itself in small skirmishes for control such as the employment and expansion disputes, overflowing into the public domain and media. Therefore to mitigate the core issue it is vital to investigate the external and internal forces effecting operations and long term goal planning. Also the risks associated with operations in Russia must be considered ultimately concluding in long term stratagem that will insure BPs continuous success into the future.

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Company Breakdown
External Forces
Through a STEEP analysis the exact forces affecting the decisions made by TNK-BP and BP in general can be identified.

S T

ocial Forces

There are currently over 100 million people in the working age range of 15-64, the vast majority of whom are well educated, hardworking and have access to specialist training, generating a stable workforce and incentive for BP investment. echnological Forces TNK-BP

Though Russian technology is relatively advanced, most of the equipment used in the oil rigs hail from the Soviet Era, and therefore need extensive upgrading and investment. A significant cost when also considering the $200-300 million already written off in previous ventures.

E E P

nvironmental Forces Russia is very rich in natural resources, which is a substantial incentive for future exploration, however this incentive must be balanced with the need for environmentally safe operations to avoid costly mistakes such as oil spills. conomical Forces Contributing to over 50% of Russias national GDP, the oil and gas industry is the corner stone of the Russian economy, and though loss of national control due to foreign investment will mean a definite reduction in production and revenue, it is not a situation that the Russian government, people and shareholders find favorable.

olitical Forces

Politics is as prominent a force in Russian business as economic market movements, and as Russia seeks a greater footing in world politics and a more substantial role in the oncoming global world. As such any resources that can be exploited to achieve this will be, and unfortunately this factor computes into a play for control over the worlds most scarce resource, oil, highly circumventing BPs ability to maintain and profit from day to day operations.

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Internal Forces
A SWOT and stakeholders motivation analysis will further indicate the forces affecting TNK-BP operations, however this time from the inside. Strength Vertically integrated business Strong production and oil refining technological capabilities Continuous increase in its reserves enables TNK-BP to have a stable production growth Opportunities Investment to catalyze TNK-BPs global energy market growth Expansion of retail presence into new regions Construction of a combined cycle gas turbine plant Weaknesses Resource concentration Heavy dependence upon Transnefts pipeline system

Threat Fluctuations in crude oil and natural gas prices Increasing importance of renewable energy

Stake Holders
Stakeholders are a person, group or organization that has interest or concern in an organization (Freeman). Most of these are shown on the right, however the following are some important stakeholders of BP-TNK, their current and historic behavior and some reasons for that behavior.

hareholders

As TNK-BP share 50-50 joint ownership of the company with no defined management hierarchy or goals, there has been as uncertainty created between both BP shareholders and Russian partners on the issue of management control. June 2003 saw this conflict come in the media when Russian partners accused BP of employing oversees expatriates in management positions at high costs rather than locals, therefore not sharing profits with the Russian population. This problem was again in media hype when in May 2004 Russian Oligarchs wanted to change their deal to early payments and was rejected by the BP. 4|Page

This uncertainty has created a large backlash in the Russian media, a significant lack of trust between employees and the BP shareholders and the demotion of Robert Dudley from the position of CEO.

mployees Added to the dispute of increased pay to upper level expatriates the local employees also took issue with the lack of equal job opportunities, contending that only the foreigners workers were promoted and given higher salary schemes in comparison with local employees.

This resulted in the already mentioned backlash in confidence and a further partial embargo placed by the Russian government to restrict the number of working visas issued. Moreover, the companys CEO Robert Dudley visa was not renewed.

overnment

Due to a $28 billion tax bail-out of the Yukos firm in 2004, the Russian government was forced to payout $1 billion in a tax back claim. However this prompted a greater inquest into the finances of TNK-BP and allegations of corruption and tax avoidance being leveled from the current employees (6). The other major reason behind this reassessment of tax was governments high focus on defense strategy. This also resulted in two police raids in the same month of March 2008 on the headquarters of BP-TNK, located in Moscow (7). Moreover, because of the general public point of view that foreign companies are exploiting their natural resources which pushed government to change the rules for the control structures of the companies incorporated in Russia that more than 50% control should be inside the country. As a result BP-TNK in April 2005 was not allowed to bid for any new oil fields.

M E

edia TNK-BP, was always in the for-front of media scrutiny, but recent situations has heightened the issue. The reason behind was again the high influence of the Oligarchs (Russian partners) on the media, and greater attention from the public.

nvironmental Groups The recent involvement of environmental groups is due to the oil spills issues BP was involved with and the Serbian oil spill which had a lot of cost on BP and unfair practices (equal job opportunities) was the other reason behind the attention. This situation will require greater attention to reduce future spills and retain public confidence.

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Potential Risks
Risk in the business world is the chance of losing property and capital within an organisation due to its operational activities. An action such as Foreign Direct Investment is considered high risk as a large amount of resources are utilised to execute the operation (Reuvid,J). The case of BPs expansion into Russia is no different, a highly risky operation due to the large amount of financial and nonfinancial resources deployed.

There are three main risks a company faces when conducting FDI like BP. They are Currency risk, Dissemination risk and Political risk. In the case of BP Political risk is the main concern as the rules of the game in Russia are not set and constantly changing.

C D

urrency Risk

Currency risk is the risk associated with loss due to fluctuations in the exchange rate. This type of risk is critical to BP because it would have required a lot of money to commit to 50% ownership in the joint venture(Peng). Currency Risk Strategies In order to counteract this risk BP can use the method of Price hedging, a strategy which involves doing a forward payment locking in the current exchange rate at the time for later payments (Peng). issemination Risk

The risk associated to the leaking of information and operational practices to unauthorised personnel is known as dissemination risk (peng). BPs operations in Russia as previously mentioned will be under the joint venture of TNK-BP. Under these circumstances the loss of Intellectual Property is an issue and definitely something the management staff would need to consider. Dissemination Risk Strategies Tight control measures are a strategy which is employed by BP in the joint organisation. The involvement of western European expatriates in Russian operations is an outcome of this strategy (more on this bellow)

olitical Risk

Political risk is the risk associated with political changes in the country which may affect the business operations and activities of the company (Peng). With respect to BP and its joint venture political risk would be its major concern as the rules of the game in Russia are constantly changing(B). In order for companies like BP to plan around such occurrences this type of risk has been categorised into five areas, they are as follows (Wild,Wild): Conflict and Violence Terrorism and kidnaping Property seizure Policy Change Local Content requirements

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Out of the 5 categories BP is affected primarily by the bottom two factors, policy change and local content requirements. In the beginning of the venture Russian law had stated that a 50-50 ownership deal was necessary in the field of oil exploration and extraction, however as experienced there has been a change to this tipping the balance in the Russian favor. Furthermore changes to the recruitment laws have forced BP to take on more local workers across all management levels exposing it to acts of disseminations. This constant change of legal issues have coursed the management staff of BP to take drastic actions in order to defend against all of the above risks, with the most recent proposal being a complete withdrawal from the joint venture (more on this below). STRATERGIES TO COMBAT POLITICAL RISK The following list is a composition of strategies which can be used to manage political risk (wild, wild): Adaptation Information gathering Political influence Avoidance

In BPS case Adaptation, Information gathering and Avoidance are applicable. Adaptation is the strategy of changing a product or method of operation to suit a local need or want (Wild,Wild). BPs decision to undertake FDI in Russia employed the adaptation strategy as it changed its method of operation from sole owner to joint venture operations, an unavoidable change due to local laws. Furthermore the strategy of information Gathering should be in use as it is always good to stay a step ahead. By employing the services of an Investment Promotion Agency (IPA), the company can constantly be informed of potential political change and plan appropriately. Finally the strategy of avoidance, the act of leaving the area of operations can be utilized in extreme cases (wild, wild).

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Strategy
There are currently two main strategies that may be employed to mitigate the risks for BP in its operation in Russia. The first is continuing ongoing operations in Russia and accepting the losses as they stand. As a long term proposal this strategy is unsustainable, however a partial withdrawal from the country while keeping a 10% controlling share is far more preferable. This will allow for two main advantages, the first being access to the government and oil production networks should the process of a greater Russian role in global politics be successful or devastating, thus allowing for a favorable future negotiation or buy-out position in either case. The second advantage is the access to trained employees who may have certain expertise that would be of more benefit at other BP locations The second strategy is a complete withdrawal from the Russian economy and the reinvestment of finances from the nation of Russia into projects renewable energies and alternative oil reserve locations such as Brazil and Argentina. The main advantage to this stratagem is that of renewed public confidence or at least favor through investment in renewable energy. However this also constitutes a defeat in the eyes of the government and places BP in a much weaker negotiating position with future endeavors.

Recommendation
Through much consideration the stratagem of partial withdrawal is most favorable to the ongoing profitability of BP. However as mitigation for media scrutiny it is also recommended that a foray into renewable energy by BP be indicated and advertised to create a greener image of the company.\

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References Wild,J Wild,K (2012). international buisness The challanges of globalization. 6th ed. England: Pearson Eduction Limited. p106-112.
Peng,M (2008). Global Business. 2nd ed. United States of America: south-western,cengage learning. p226,p187,p40. Reuvid,J (2012). ManagingBusiness Risk. United Kingdom: Kogan Page limited. Nee,P (1999). Making Money in Russia. Boston: The Internationalst Publishing Company.

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