Joint Ventures: BP and Rosneft - Essay Example

Joint Ventures: BP and Rosneft Introduction A joint venture is a business agreement in which the parties agree to develop, for a specific time, a new business venture and new assets by contributing capital. They exercise control over the initiative and thus share proceeds, losses, expenditures and assets. Joint ventures are limited by guarantee or by shareholding. This analysis specifically covers the joint venture between BP and Rosneft, which are oil and gas industries. Kremlin-backed oil giant Rosneft and BP signed a joint venture contract for purposes of exploring oil in Russia. This led to the renewal of commitments by BP to stand by its investments in Russia in spite of the sanctions enacted on Moscow by the West. The CEO uttered that BP stood by its investments in Russia and that the sanctions on Sechin did not affect its business with Rosneft. BP and Rosneft are among the world’s leading international oil and gas companies. Before May 2014, BP had repeatedly confirmed its promises to tie-up with Rosneft, where it owns shareholding of almost 20 percent. The joint venture underwent signatures by the head of Rosneft, Sechin and the CEO of BP in Russia, David Campbell during an international economic forum at St. Petersburg. The venture will enable the oil giants to explore for underground oil in the Volga-Urals area of central Russia. Andrei Belousov said during the international economic forum that Russia would take legal action if sanctions would go to the extent of restricting the country’s foreign trade (Hunger & Wheelen, 1996). I selected to evaluate and analyse this joint venture due to the sanctions it has been facing since the idea of the joint venture come into existence. Bill Browder said uttered that any decision made by European Union states to enforce sanctions on Russia would force Kremlin to strike back against corporations such as BP, regardless of its 20% shareholding in the energy giant Rosneft. He added that BP was not safe and that they would look for ways to harass it. Browder also criticized the BP head Bob Dudley for striking a deal in Russia, given that he disappeared in 2008 after a disagreement with the company’s oligarch partnership in the previous joint venture TNK-BP (Saloner, Shepard, & Podolny, 2001). Drivers for the Joint Venture The expected regional position from this alliance is another reason I chose to evaluate this joint venture. The alliance will indisputably give way for more doors for BP, mostly within Russia, which is a key region in the oil and gas sector (Dess & Miller, 1993). The expected deal will permit one of the largest firms in the world to the experience it requires to break into the marketplace significantly and ensure its long time exploration of the widespread energy, and untapped hydrocarbon reserves that are therein. The deal strategically appears very positive for BP because it substitutes a private partner for a tactical national company that has bigger access to properties in Russia and has better political backing in this country. The two firms experience a mutual benefit from signing and completing the suggested deal. Rosneft stands to benefit a lot from the international trademark and presence of BP. It will definitely exploit its contributions to implementing more competent and innovative projects and raise its position as an oil and gas specialist (Hunger & Wheelen, 1996). BP has a huge supply of expertise in both engineering and technology that the counterpart Rosneft can use and build on. The oil specialist in Britain too has a reputation for management expertise and transparency. Russians will, of course, seek to benefit from this international position to heighten their reputation, in order to acquire capital from potential international investors. As Rosneft’s standing improves within the business and shares increase, the shareholding of BP in the wider firm will increase in value. As part of the proposed business deal, the British Petroleum Board of Directors acquired two out of the nine slots of the executive board of Rosneft. This will give them a warrant on the rejection. It also proposes a given extent of power needed for planning steps for growth and sharing of projects (Lambertini & Luca, 1998). The ability to seat in the Board of Directors will enable the management of British Petroleum oil and gas to contribute to major financial and operating decisions that affect the way forward for the joint venture. This would ensure fewer conflicts and operational errors and repetitions as the production and funding resolutions result from joint efforts the processes are faster due to common and similar procedures. Benefits of the Joint Venture Even though BP has denied the viewpoint of direct partnership with Rosneft, by warranting a stake in the larger firm, it will now lock itself as the preferred partner for future joint ventures. This will undermine the power and influences of competitors have within the area. Previously, opponents such as Royal Dutch Shell have showed interests to increase their reputation in Russia, but specialists now expect that the BP-Rosneft relationship will put off other potential competitors. This will award BP a very strong standing in the area, something that is important given that Russia is one of the principal oil and gas producers and importers (Lambertini & Luca, 1998). This will help Russians tighten their standing within the broader industry. The proposed joint venture has had immense government support to ensure complete exploitation of oil reserves and gain substantial profits. Input from the government of Russia up to now has been of substantial support as the business deal places the state back on the road as a vital player in the energy industry. The Russian president, Vladimir Putin articulated that the deal was good and large not only necessary to the energy sector in Russia but also the entire economy. He added that it was a very good gesture to the Russian and broader international energy markets (Inkpen, Moffett, & Thunderbird School of Global Management, 2013). This support from the government acts as an encouragement and motivator for the two companies to hasten the joint venture process. The proposed transactions show the firms based in Russia aspires to be one of the most powerful and leading oil and gas companies globally. If the deal succeeds, they will permit ExxonMobil to become the largest publicly traded manufacturer of oil and gas in terms of output in the world. These developments create the chances for growth for both Russian and British counterparts on a number of levels including enhanced profitability and the quantity and quality of output (Inkpen, Moffett, & Thunderbird School of Global Management, 2013). Both companies will expand their operations thus being able to satisfy their consumers in both the retail and wholesale sector, within their countries and without. This would lead to increased loyalty of their existing consumers and attraction of new ones. Russia is a vital part of the business of British Petroleum. It accounts for about a quarter of its oil manufacturing. The chief executive of BP Oil and Gas Company has stated that the country’s vast oil resources as a key element of the company’s recovery from the disastrous oil that spilled in the Gulf of Mexico. This led to huge losses for the company, which it has not recovered since. There was immense pollution of the sea by the sea. The JV will enable the organisation to increase its production capacity and get back to its former production capacity and its revenue and profitability status be restored (Inkpen, Moffett, & Thunderbird School of Global Management, 2013). The British Petroleum oil specialist has a good image for transparency and management proficiency, from which the Russian based oil giant will hugely benefit. They will seek to benefit from this huge reputation in order to enhance their standing in order to source for capital from both current and potential international and local investors. Improvement in Rosneft’s reputation and growth their share, the stake of BP in the broader business is set to escalate in value. The British business conglomerate was alleged to be investing some of the cash from the business deal to escalate its shareholding in Rosneft to around 20 percent (Inkpen, Moffett, & Thunderbird School of Global Management, 2009: 2013). This will too enhance their ability to make decisions and contribute to major decisions affecting the joint venture. Issues Associated With the Joint Venture There have been a number of sanctions from the western against Russia forming a joint venture with the British Petroleum oil and gas company. The sanctions have caused the oil and gas giants to pronounce the adjournment of the proposed joint venture aimed at extracting the hard to cover reserves of hydrocarbon in Russia. The United States and the European Union, together with their supporters, enforced sanctions against Moscow over the crisis in Ukraine and the Crimea’s reunion with Russia (David, 2005). Financial sanctions imposed on Rosneft and Novatek. Rosneft, Lukoil and Gazprom experienced the effect of technological sanctions imposed against them. In that aspect, the imposition of sanctions has changed several things, and, therefore, the establishment of the joint venture underwent postponement. Most of the investors in British Petroleum oil and Gas Company are still not convinced about what may transpire to their investments because of combination with Rosneft. Since TNK-BP has experienced interruptions in growth since its inception, the shares for Rosneft have not increased in value for many years. Reservations concerning their dividends influenced the shares for BP immediately after the announcement of the deal because they declined by 0.3 percent (Johnson, Scholes, & Whittington, 2005: 2006). BP, nevertheless, has vowed to offset any earnings per share dilution likely to result from the deal. This will cost the firm an estimate of £3billion to £6billion. The managers for BP are still trying to assure uncertain stakeholders, stating that the cash and share payment of about 20 percent equity will promise a 25% of earnings. There has been an outright war concerning the joint venture of the two oil and gas giants. The early years of TNK-BP was very promising, with huge amounts of dividends keeping the peace and harmony in the company. Before 2007, Russian partners in BP oil commenced grumbling to the Chief Executive Officer that he was running and treating the joint venture as an office of BP branch. The investors uttered that TNK-BP needed to boost profit through the use of investments outside Russia. Portfolio diversification is of the essence when investments are involved in order to diversify risk and maximize return. The conflict at TNK-BP led to an outright war in 2008, where the police raided the office of TNK-BP. This made more than 100 foreign staff to leave the country, as they were unable to renew their visas. The leadership and management of the joint venture faced many implications and difficulties during and after the joint venture formation accomplishment. After the police had attacked the TNK-BP offices in Russia, Dudley was unable to renew his visa and thus left town in July 2008. He ran TNK-BP from an unrevealed location for many months, a report from the United States diplomatic cables. British Petroleum failed to give a comment on the cables that released this information (Grant, 1995; Neupert, Grant, & Grant, 2000). The company and Dudley faced unexpected investigations and enquiries in which the TNK-BP partners in Russia refused to be involved in the mischief. This forced Dudley to resign from TNK-BP at the end of 2008, vowing privately never to return to Russia. His work was to oversee operations of BP in Asia and America. In addition to the threat of imposing sanctions, a most senior court in Europe ruled that a substantial amount of the assets owned by Rosneft had fallen into it hands due to an illegal expropriation of holdings that belonged to Yukos, another privately operated oil group of companies located in Russia. A group of financiers, awarded $50 billion worth of damages by the court in Hague had warned that it would come looking for BP to secure the payment of the awarded damages that were not paid yet (Johnson, Scholes, & Whittington, 2006). Later, the court of human rights in Europe ordered that a further 1.5 billion UK pounds to be paid to former shareholders of Yukos in compensation for the loss of shareholding. Recommendations to the Joint Venture First I would recommend for the two joint ventures to ignore and pay less attention to the U.S. imposed sanctions on Russia. So far, the sanctions were too specific individual officials in the firms rather than against the firms themselves. They thus do not stop the two companies from conducting business with Russia. The Russia’s large business is oil, and they have not demonstrated shyness regarding the global power of their energy marketplace. The oil and industry are undertaking very stern business as a normal approach. This is regardless of whether Europe and United States decide or fail to impose further sanctions on the economic empire (Lambertini & Luca, 1998). Secondly, the joint venture ought to continue the establishment of the Arctic technology centre in Russia. The technology will work with prominent Russian and international exploration institutes and universities to advance technologies and engineering activities that will ensure safety in the exploration of hydrocarbon resources underneath the Arctic shelf. This will ensure reduced accidents and oil spillages and outbursts that cause deaths and huge losses. The centre of technology will build on British Petroleum’s deep offshore expertise and knowledge. The combination of this will lead to the complete importance of safety, environmental veracity and response capability to emergency spills (Inkpen, Moffett, & Thunderbird School of Global Management, 2013). This will ensure timely responses to the issues affecting the venture therefore ensuring its effectiveness in operations. Conclusion An analysis of the joint venture between BP Rosneft oil and gas companies is extensively covered. The reasons for forming the joint venture include the expected regional position from this alliance is another, the two firms experience a mutual benefit from signing and completing the suggested deal and the British Petroleum Board of Directors were awarded two out of the nine places on the Rosneft executive board. The benefits accruing from the joint venture are Rosneft will now lock itself as the preferred partner for future joint ventures, The British Petroleum oil specialist has a good image for transparency and management proficiency, from which the Russian based oil giant will hugely benefit. Some of the issues are of sanctions from the western against Russia forming a joint venture with the British Petroleum. The recommendations are for the joint venture to continue the establishment of the Arctic technology centre in Russia and joint ventures to ignore and pay less attention to the United States imposed sanctions against Russia. Bibliography David, F. R., 2005. Strategic management: Concepts and cases. Upper Saddle River, NJ: Pearson Prentice Hall. Dess, G. G., & Miller, A., 1993. Strategic management. New York: McGraw-Hill. Grant, R. M., 1995. Contemporary strategy analysis: Concepts, techniques, applications. Cambridge, MA: Blackwell. Hunger, J. D., & Wheelen, T. L., 1996. Strategic management. Reading, MA: Addison-Wesley Pub. Co. Inkpen, A. C., Moffett, M. H., & Thunderbird School of Global Management., 2013. The global oil and gas industry. Glendale, AZ: Thunderbird School of Global Management. Inkpen, A. C., Moffett, M. H., & Thunderbird School of Global Management, 2009. TNK-BP (Russia). Glendale, AZ: Thunderbird School of Global Management. Institute for the Oil and Gas industry Management on Public Relations-Public Affairs, 1962. Institute for the Oil and Gas Industry Management on Public Relations Public Affairs [papers]. Prentice-Hall. Johnson, G., Scholes, K., & Whittington, R. (2005). Exploring corporate strategy: Text & cases. Prentice Hall. Johnson, G., Scholes, K., & Whittington, R., 2006. Produktionssamling: Exploring corporate strategy. London: McGraw-Hill. Lambertini, & Luca, P., 1998. RJVs in Product Innovation and Cartel Stability. Neupert, K. E., Grant, R. M., & Grant, R. M., 2000. Instructor's manual to accompany Cases in Contemporary strategy analysis. 2nd ed. Oxford: Blackwell Business. Saloner, G., Shepard, A., & Podolny, J. M., 2001. Strategic management. New York: John Wiley. Read More