Ireland and Gazprom: study in Economics and Business Risk and Rewards - Term Paper Example

?Ireland and Gazprom An In Depth Study in Economics and Business Risk and Rewards Introduction Gazprom is one of the largest gas-powered energy companies in Europe. The corporation is based in Moscow, Russia, but has expanded throughout Europe and some parts of Asia. The company itself has a high net worth, and must consider all expansions very carefully before making any moves. This paper examines Gazprom’s presence in Ireland, and how it benefits both Gazprom and Ireland, as well as the risks that both undergo concerning Gazprom’s presence. The Irish must study their oil company very carefully, and Gazprom must be ready and able to meet the demands of the Irish economy, despite prior issues with supply, demand, and pricing. This paper demonstrates the compromises and practices that both Ireland and Gazprom must deal with in order to have a successful and fruitful business relationship. Country Analysis Ireland is an ideal candidate for Russia-based Gazprom energy. Ireland, which has been politically divided for a number of years due to religious disagreements, is now in the infant stages of unifying. This opens up opportunities for Gazprom in both Northern and Southern Ireland, as it would be a unified energy company that both sides could rely on. Ireland is a community of both farmers and industry. Ultimately, each sector needing energy for their own purposes. Large industry requires a broad spectrum company to provide energy for factories and mills. Farmers need energy to keep their farms going throughout the year. Ireland also uses natural gas in the metallurgy and cement industries, and Gazprom can readily supply the gas to meet those needs. The Irish economy relies as much on mills and factories as it does on its export and tourism industries. To an effect, these industries must coexist together in order for the Irish economy to maintain the strength and finaicial success that it currently enjoys. Ireland is also a country of highlands and lowlands, which has an economy which is also largely based on fishing and shipping, as well as farming. Some of Ireland’s largest exports are wool, fish, potatoes, racing animals (such as horses and dogs), and alcohol. The country also has massive interests in the golf community, attracting more than two hundred and forty thousand golfers and golf fans a year. Another big business in Ireland is tourism. Ireland needs a dependable energy source for all of its hotels, restaurants, and attractions to run efficiently. Gazprom is an ideal company to fit all of these needs. Retail Analysis From a retail standpoint, forty two percent of all inhabitants of Ireland are under the age of twenty four years. Dublin is the main point of trade, as there is nowhere in Ireland that is more than two hundred miles from Dublin at any given point. The present economic climate in Ireland is at a reasonable high, with some of lowest unemployment rates in Europe, and the disposable income per capita being about fourteen thousand US dollars. Many retail stores in Ireland are independently owned, followed closely by chains. While supermarkets are lowest on the breakdown of retail stores, they also do the majority of food sales in Ireland (Hamby, p. 3). Because of its tourism industry, the sales at retail shops are relatively high. People tend to buy clothes, gifts, postcards, and knickknacks that they would not generally buy if they were in their home country. The mentality becomes “I am an out of towner and I should buy something to remember this trip by”. Ultimately, the tourism industry makes the retail industry as profitable as it is. While much Irish marketing is done within the country, it is easy to see why tourism contributes so much to the overall economic success of Ireland (IGD). Ireland has strong financial footholds in the trade industry, making the banking and financial sector very stable. Ireland has not seen a financial crisis in decades, and its tourism, trade, and export industries all add to its continued wealth as a country. This type of economy is ideal for a company like Gazprom, because Ireland is financially capable of supporting the booming energy company. Gazprom will not expand, only to find that Ireland cannot financially support the expansion. A large company such as Gazprom will fail in an unstable financial economy, and to consider a move to such an economy would be unwise. SWOT Analysis Strengths Gazprom’s size is a definite strength. Because Gazprom is a large and profitable company to begin with, it is able to expand to countries that are more likely to add to its overall financial success. Gazprom can also take short term losses for a long term gain, whereas a smaller company is generally unable to do so. Gazprom can implant an entire infrastructure in a place that may not be immediately profitable, but will pay dividends over time. A smaller gas company may not be able to do this and survive financially. Another major strength for Gazprom is its diversity. Gazprom is able to be involved in several different types of energy markets; such as gas condensate, oil prospecting, natural gas, as well as production and transmission processing and marketing. Gazprom also has a foothold in the power generation market. This gives them the edge of offering several diversified services to countries and governments that a smaller gas company may not be able to offer. More choices to a country will mean more profit to Gazprom. It also offers more stability for the country dealing with Gazprom. Greater reliability means greater interest in the company. In the case or Ireland, it offers more services to the different industries that need gas powered energy, which is more profitable and much simpler than having to depend on several smaller companies for different types of gas energy resources. Gazprom has some of the world’s richest gas rights. Globally, they control eighteen percent of all oil rights, and seventy percent of all Russian gas reserves. It is state controlled and has been charged by the Russian president to do several things for the Russian community, including provide gas energy to rural areas of the country that may not have had access to it previously. By decree of the Russian president, Gazprom also owns and supervises the UGSS (Unified Gas Supply Systems) of Russia. This is Russia’s universal gas pipeline. This type of appointment means that Gazprom is not going to suddenly close up shop and dissolve. It provides a staying power that can be depended on. The Irish government is not going to suddenly find out that the company has fallen apart and that they can no longer provide Ireland with much-needed gas services. This means that larger countries, such as Ireland are more likely to do a continued steady business with Gazprom. Weaknesses A large company such as Gazprom faces weaknesses as well. Gazprom will not adjust to market changes as quickly or as readily as a smaller company might. Gazprom will spend more time analyzing market changes, whereas a smaller company will simply make the adjustment without too much analysis or debate. They also will not readily appeal to niche markets, while a smaller company might. Because Gazprom is state controlled, there may be market changes, opportunities, and advantages that they may not be able to take advantage of, because Russia’s political climate will not allow for it. This could hurt Gazprom’s profits, and ultimately some interests in countries that Gazprom has holdings in, such as Ireland. Gazprom may also encounter issues with the clean technology revolution. Because so much of Gazprom is dedicated to the use of fossil fuel, and several larger countries are looking for cleaner, more ecologically sound ways to generate power, Gazprom may have issues keeping consistent holdings in some countries. Countries like Ireland are constantly looking for greener ways to produce energy, and while Gazprom does have a stake in power generation, it is unclear what percentage of this holding is dedicated to cleaner technology, and how much of this department is focused on new ways to use gas as a fuel source. As larger countries continue to work towards cleaner technology, Gazprom may be forced to adapt, or may ultimately need to downsize to those countries who must be dependent on fossil fuel. Opportunities Gazprom has several opportunities at its disposal. It delivers gas to almost every country in Europe. The only two countries it does not deliver to are Spain and Portugal. This is especially beneficial to Gazprom as many of these countries have contracts that extend over twenty five years or more with the company. Gazprom’s subsidiary company is also more active in short term sales. This provides more financial and sale options to the countries that Gazprom routinely deals with. As a whole, Europe gets about twenty five percent of its gas from Gazprom. Gazprom is also the sole supplier of gas to ten countries, including the Republic of Macedonia, Moldova and Bosnia. This provides the opportunity to gain continuous profit from these countries who, without Gazprom, would need to find another source of natural gas. For some of these countries, with their economies as they are, this might be impossible. This provides an insurance policy to Gazprom, as these countries are not going to suddenly switch natural gas suppliers. Gazprom also finds advertising opportunities in the sports industry. They have a sponsorship with a German Bundesliga club that carries a net worth of one hundred and fifty million us dollars. They also have sponsorships with three European football clubs, and the Ruussian cycling team. With so many sponsorships, it affords Gazprom the opportunity to advertise and make themselves visible to countries and communities that they may previously not have had access to. It also demonstrates Gazprom’s interest in the communities they serve on more than just a financial level, making them more of a human interest company than they may otherwise be. It demonstrates interest in the customers and not just the numbers. Threats There are also obvious threats to Gazprom as well. Some have been created by Gazprom themselves and some are wholly external. To start with, much of the pipeline of the UGSS is over thirty years old. Gas is corrosive, and over time will eat away a pipeline. This could spell disaster for the company’s stocks if the pipeline was to break open and spill into the Russian soil. This threat is even greater as Gazprom would ultimately be responsible for an economic downturn to the very country that they are providing a majority of the gas resources to. Because this pipeline is also a major asset to the Russian economy, it is a prime target for terrorist attacks. Since Gazprom provides so much gas to Russia, if the pipeline were to be disabled or destroyed, much of Russia would be crippled in regards to energy resources, not to mention the aftermath of such a large and catastrophic oil spill. This type of event would spell disaster for Russia and Gazprom. Pricing disputes, tax evasion, and asset stripping have also hurt Gazprom. In the mid nineteen nineties, Gazprom was caught in a tax evasion scandal and it was revealed that their board members were profit-skimming into personal accounts. The Prime Minister of Russia was ultimately fired, though his termination was unrelated to Gazprom. He later became head of the Gazprom board of directors. Today, according to a Swedish analyst, over fifty percent of Gazprom’s profits are still lost to corrupt practices (Page, p. 4). During the Russia-Ukraine gas dispute, Gazprom ceased all gas supply to the Ukraine. The corporation also tripled the price of gas sold to Belarus during the 2006 Russia-Belarus gas dispute. Belarus refused, and threatened to deny Gazprom access to its gas pipelines. Gazprom was never able to fully settle the disputes with either of these countries. Repeatedly, this has resulted in Gazprom cutting off gas supplies. Gazprom has also raised its fuel prices a staggering ninety percent between 2009 and the present (Gazprom Figures). What this means for larger countries like Ireland is that Gazprom may not be the most cost effective solution. Because of this, countries that have other choices in fossil fuel supply may be more apt to go with a company who has less shady business practices and is less likely to drastically raise the price of gas. This would mean an even larger profit loss to Gazprom. While Ireland can benefit from many of the services Gazprom has to offer, Gazprom is not the only option available to that country when it comes to natural gas. If Ireland feels that Gazprom is a less cost effective and ultimately less profitable choice, it is not bound to Gazprom like a country such as Bosnia (Goldmann, p. 212). Another huge issue that Gazprom faces is the development of their fields. Some of their fields remain under developed, or completely undeveloped at all. Often this is due to the expense that such development would cost Gazprom as well as the Russian government. The downside is that it lessens Gazprom’s oil reserve and, to an extent, their profit. It also lessens how much money the Russian government can add to its own pool, considering that Gazprom is half state owned and entirely state controlled. The development of oil fields comes down to the numbers game, and it is one that the Russian government is currently unwilling to play. What kind of overall effect that this has on Gazprom and its profits remains to be seen. However, with all of the countries that Gazprom provides oil to, it seems that the logical benefit to them would be to develop any oil fields and oil reserves that they are able to. Proposal Ultimately, Ireland will need to set some strict guidelines if they are to work successfully with Russian based Gazprom. If they are to take a contract with the company, then it would be fruitful and almost necessary for them to pay close attention to the rights and responsibilities that Gazprom awards to themselves as well as to the Irish public and government. Ireland should clearly state what prices they are willing to pay and what prices are unacceptable, as to avoid an issue such as the issues that both the Ukraine and Belarus. A situation of this magnitutd could seriously damage Irish industry and economy. It may be more beneficial for Ireland to work with Gazprom’s short term sales, as opposed to being locked into a contract where there is very little room for interperetation or change once the document is signed. While Gazprom may be one of the best providers for Ireland and the industries it would serve, it may also not be the best. Therefore, it is advised that the Irish government take a long hard look at Gazprom’s business practices before it makes any hard and fast decisions on how beneficial Gazprom is to the Irish economy at large and how long Ireland really wants to be locked into doing business with the company. Gazprom has less decision making to do on its part. It gains increased profit by working with the Irish, however, it also would not be a crippling loss if Gazprom did not work with Ireland. Gazprom best benefits from the deal by looking into Irish culture and determining what services it can offer the Irish that would be very useful to them and what services that the Irish may not require.. It is best that Ireland and Gazprom have a meeting of the minds and come to a compromise that ultimately benefits them both. Each can benefit by working with the other, but only if the collaboration between the two is really useful. If Gazprom is not providing worthwhile service to Ireland, then Ireland will find someone who better suits their needs. If Ireland is not willing to compromise at least a small amount on what they are willing to pay in terms of price inflation, then Gazprom will ultimately find a country that will be happy to pay whatever Gazprom wants, and ultimately have no other choice. Bosnia is a perfect example of such a country. Ultimately, both parties have to be satisfied with their stake in the deal and neither party should feel strong armed in the contract. Gazprom should keep in mind when serving Ireland that the Irish government is very interested in cleaner ways to fuel their daily lives. For this reason, it would greatly benefit Gazprom to provide Ireland with cleaner energy solutions that do not largely involve natural gas. The inability or unwillingness to do so could cause Ireland to terminate any existing contracts or to refuse to sign any new contracts with Gazprom. The benefit to Gazprom to offer and explore green energy solutions is becoming more apparent as time and economies progress. To remain afloat, Gazprom will need to diversify. They will have to work with countries who depend on oil and gas for sole fueling needs, but they will also need to find ways to work with governments and countries who can and will find more energy efficient ways of creating and using fuel. Eventually, there will come a day where Gazprom will be forced to focus on something other than gas and fossil fuel (Hoffman, p. 12). Also, Gazprom will need to repair their pipelines. While this may not effect Ireland directly, an incident with the pipeline could effect Gazprom’s ability to deal with Ireland and other large scale governments. The main reason is that governments are not going to want to deal with a company who does not repair or update their pipelines and equipment for whatever reason. Also, if Gazprom is stuck cleaning up a public relations mess because of an oil spill into the ground of their home country, they may not be able to afford to work with bigger countries, and their credibility could easily sour. This type of damage might lose contracts in several European and Asian countries; including Japan, who is still recovering from their own natural disaster and the aftermaths that come therewith. Credibility is a major issue and a major asset when it comes to working with large scale countries and government contracts. It is easy for larger and more profitable countries to find more appropriate alternatives when the company they have worked with no longer has the same standard of credibility that they once had. Gazprom also needs to increase its oil reserves. It will be more profitable for the company, and they will have less difficulty in meeting the increasing oil demands that Ireland might have. It would not benefit the company or the country if Ireland needed a certain amount of oil and their biggest natural gas supplier was unable to meet the demand. This would also effect the credibility of Gazprom, and could cause serious issues for them from a profit standpoint. If Gazprom cannot supply oil and gas to Ireland, other countries may become concerned that their own needs cannot be met. This could, in theory, cause countries to terminate their contracts with Gazprom. Ultimately, this is a situation that would end badly for Gazprom. It is, therefore, in the best interests of the company to have as many available oil reserves as possible to meet the ever growing needs and demands of their clients. Conclusion There are several benefits and disadvantages to Gazprom and Ireland alike regarding Gazprom’s presence in Ireland. Many of the Irish industries depend on gas as a primary source of fuel. There are gas stoves in restaurants, and gas heaters in hotels. Some hotels and residences even run completely on gas. Many of the trade industries in Ireland are also gas based. Not just the metal industry but also the cement and farming industries. There is a lot of opportunity for Gazprom to flourish in Ireland and just as much opportunity for the Irish to continue to flourish with Gazprom’s assistance. Gazprom must pay attention to the needs of the Irish economy and provide them with the oil and the ability to meet those needs. The cost to the Irish should remain fair, and the response time to any concerns the Irish have should be timely. A contract with Gazprom should be welcoming and not wearying to the Irish government. This having been said, the Irish need to completely understand any contract they sign. They must make room for some cost increase, yet must also have the time to prepare for it. They should not deal with consistent and sudden price hikes in their oil prices. The lines in the contracts must not be blurred and everything should be clear and concise to both parties. Gazprom and Ireland can easily make very compatible business partners and enjoy a very fruitful relationship together. Irish industry can continue to flourish, increasing the wealth that Ireland already has as a country and Gazprom can confidently provide more services to their clients. Ideally, this is how business should be done. 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