National and International Oil Companies - Essay Example

National and International Oil Companies Introduction Energy projects specifically oil and gas projects are always big, expensive, risky, and complicated (KPMG, Sep 2011). For this course, there is a requirement for national and international firms exploring the resource to venture jointly so as to spread expenses and risks (Beamish, & Peter, 2001). Effective management of the interests of the different merging parties should be actually studied to avoid chances of complications and strategy misalignment. Most importantly, the different interests of the partnering parties must be met so as to avoid interferences with the smooth running of the project (Johnson & Whittington, 2012). As several firms from different countries come together, the costs can be equally shared based the agreement. The logistics of managing the oil upstream have increased in the recent past because of increased costs of the equipment. There are high costs incurred during the exploration process thus increasing the business risk (Penttila, 2005). Therefore, the fact that the opportunities and risks involved at this stage are difficult to estimate, it makes sense for the exploring firms to comes together and share the possible risk (Moeller, 2000). Joint ventures also enable the companies to share information about the market because the parties have the common business goal of making profits and reducing costs (Chandler, 2001). Recent reports have indicated that the rare resources, especially the expensive oil reservoirs are expensive thus firms have been increasingly using different strategies that can help them maintain the stiff competition in the lucrative sector. In this regard, the current trend is the increasing joint ventures between National and International Oil Companies so as to explore the oil at the international levels, a classic example being the one between BP and Rosneft (Chzan, 2013). The Joint Venture: British Petroleum and Rosneft The formation of joint ventures to explore oil has always defied all odds because the partnerships are formed across boundaries despite the parties coming from a different geo-political background. For instance, it was quite astonishing that BP formed a joint venture with the Rosneft, a Kremlin based Oil Company (Chzan, 2013). The joint venture was formed to explore the complex oil reserves of Russia thus there was a chance for BP to renew its investments in Russia despite the Sanctions that Moscow had been facing from the West. The joint venture was formed despite the sanctions against the annexation of Crimea but the CEO of BP, Bod Dudley, maintained that the sanctions could not affect investments (BBC NEWS, 2011). Therefore, the two oil giants teamed up to explore resource in central Russia. According to the provisions of the terms of the joint venture, BP was supposed to own 49% of the joint venture while Rosneft was to own 51%. In this case, there was a 4.9 billion share between the two companies (Chzan, 2013). The joint venture is a collaboration between an international private oil company and a national oil company (Brinded, 2010). BP stands in the history as a major oil explorer worldwide whose ownership was privatised or acquired from the government and since then, it has seen tremendous growth in different areas in the world. On the contrary, Rosneft is a Russian National Oil Company and has also been a major player in oil exploration. In this case, the joint venture offers the opportunity to understand some of the benefits that government and private firm joint ventures provide as well as some of the considerations before settling for the investments including potential issues, challenges, and drivers for such particular ventures (Penttila, 2005). The particular joint venture is also important because both the governments and private firms inject different forms of investment into the exploration business (Brinded, 2010). On the other hand, such ventures require high capital investments thus the need for the government-private firm partnership where the government provides the necessary resources while the private company offers the expertise to explore the oil resources (Grant, 2012). In the case of BP- Rosneft joint venture, the Russian government provides the necessary resources for exploring the oil while British Petroleum provides the highly qualified professionals as well as the modest technology of mining oil (Chzan, 2013). There are increasing concerns over the fast depleting oil reserves that have called for attention to come up with ways to strategically manage the resource from a global perspective (Brinded, 2010). The joint ventures between the Governments and private firms are to enlighten the industries and firms operation in the oil industry to come up with ways of managing the resource efficiently (Johnson & Whittington, 2012). The BP-Rosneft joint venture is an important opportunity for managing the scarce oil resources in the Russian territory hence the government does the exploration based on the rules and regulations aimed at protecting the environment and also for efficient or sustainable harvesting of the oil reserves. Analysis of the Joint Venture Drivers There are many factors or drivers behind joint ventures, and market condition is the main reason as to why companies seek to engage in strategic competition (Johnson & Whittington, 2012). The Oil industry is full of many competitors seeking to gain the market share. Therefore, they respond by finding solutions on how to tap the opportunities that would make them more competitive. For instance, the national oil companies consider entering the joint ventures because they want to attract foreign investment and learn the modest technology for exploring the oil reserves (Brinded, 2010). On the other hand, the private firms that are better placed in terms of revenue seek for raw materials that can add value to their product lines, and this is easily provided with the national governments. The same is the case with the British Petroleum and Rosneft as BP has expatriates in oil exploration while the Russian government is the provider of the necessary raw material (BBC NEWS, 2011). Cost is another important consideration when entering into joint ventures that was put into consideration in the joint venture between BP and Rosneft (Ledesma, 2009). In this regard, companies choose to align their strategic resources and business competency in reducing operational costs. The implication is that there are high costs associated with the exploration of oil resources. On the other hand, risks are not easy to estimate thus the companies would rather come together to share the business uncertainties (Johnson & Whittington, 2012). Benefits The joint ventures are apparently established to benefit the both the parties where the focus is to ensure that the deal satisfies all the investing firms (Ledesma, 2009). For instance, the Rosneft has the potential to gain a lot from the partnership with BP International. In this case, the presence of BP as an international brand has the potential implement the most efficient as well as advanced projects (Chzan, 2013). In return, the partnership will ensure that Rosneft raises its standards as an important gas and oil expert despite being a national company. Moreover, BP supplies the Russian company with skills especially in the engineering and the technological sector that can be used by the national oil company to build its brand and capability in competing in the oil industry. Nonetheless, the BP oil specialists are known to hold an excellent reputation for management expertise and transparency (BBC NEWS, 2011). Therefore, the Russians have the chance to benefit from the good reputation so as to attract more foreign direct investment and increase the GDP (Moffett, 2011). Furthermore, a growth in Rosneft revenue has a positive implication on BP’s overall stock value since the shares of the national company will grow thus increasing the revenue accrued from the overall business transactions. Reports from the economists confirm that BP as a partner in the deal reinvests some of the dividends from the business deal and this has the potential to increase the overall stock value of the joint venture (Chzan, 2013). On the other hand, BP is also poised to benefit a great deal by investing in Rosneft as a business partner. BP is already investing some of the dividends from the deal and has reassured the stakeholders that such investment is meant to increase value for the shareholders (Chzan, 2013). However, there is uncertainty among the investors on the potential of the business delivering good revenue outcomes. Though other oil companies have been experiencing problems, Rosneft has benefited a lot from the government support thus the Russian government will do all it takes to improve the stock in case of an imminent decline. Despite the challenges of operating in a foreign country, BP's CEO, Bob Dudley promised the investors that for the next few years, the Rosneft investment will change the face of the company by adding some value to the entire stock of the Corporation (BBC NEWS, 2011). Generally, the joint venture by the Government and private firms in the oil exploration has numerous benefits. Firstly, it provides the companies with the opportunity to acquire a new capacity (Ledesma, 2009). In this regard, the joint ventures enable the firms to bring together all the expertise and resources they have to achieve a common business goal. Joint ventures between governments and private firms are best alternatives in the oil exploration because they are very flexible. In most of the times, the joint ventures have a limited life span after which the collaborating firms go back to their usual business (Chaffee, 2000). It limits the market exposure for the parties and commitments. For this reason, the collaborating firms focus on the goals set by the nature and purpose to complete it under the prearranged time frame. By operating within a time frame, the efficiency of the firms increases the business performance (Inkpen, 2010). The benefits of the BP-Rosneft joint venture is much attributed to government support implying that two parties can fully exploit the oil reserves and still return good or healthy profits (Chzan, 2013). The Russian government is injecting a larger amount of inputs thus the deal has already put the government in the picture as being concerned with the full exploration and exploitation of its natural resources. President Vladimir Putin further confirmed that the deal was a larger one that would transform entire economy (BBC NEWS, 2011). Besides, the joint venture was an outstanding move in the international energy markets, and the state had the confident that it would be beneficial. Potential Issues Competition in the international oil market is a potential force that the industry players must address. Though BP was successful in entering the Russian market, other competitors like Royal Dutch Shell also had interests in the Russian oil reserves thus they have been working tirelessly to come up with better strategic partnerships with other Russian oil firms (Chzan, 2013). Other potential issues in oil exploration are politics thus, in the case of BP and Rosneft; the partnerships involve people from different ideological backgrounds coming together for a common business goal. Moreover, given the tension between Russia and the West, investors from BP have on many occasions questioned the long-term existence given the uncertainty of the political situation. Another potential issue is the extent of environmental pollution that oil mining leaves on the environment). In this case, the two partners must enter into an agreement to ensure their activities do not pollute the environment. The joint venture is between a national oil company and private multinational company, but it is the government has the responsibility of establishing regulations that aim at protecting and conserving the environment. Nonetheless, the oil price is a major issue affecting the exploration of the resource, and this depends on the regulatory framework set aside by the particular country to regulate the energy prices. In this case, the private partner may be disadvantaged as the prices sometimes favour the national company. The potential issues affecting the Joint ventures can also be viewed from a general perspective. Firstly, there are always decision-making issues and in the case of BP and Rosneft, there can be conflicts of interests due to the difference in authority. In this case, the complexity of the stakeholders becomes a major hindrance to the decision-making processes of the joint ventures (Choi & Paul, 2004). The implication is that the partnership between the government and the private firms lead to the integration of multiple structures thus influence the ability to tolerate risks, governance, and control and also has a direct impact on the strategic decisions and setting up of the objectives. Another general potential issue is the complexity of information. Investments in the oil industry are always made under conditions of uncertainty (Johnson & Whittington, 2012). The commodity prices, regulatory and policy requirements, capital costs, and many other factors can quickly change affecting the outcomes (Yergin, 2008). Also, the information that relates to understanding and anticipating these shifts and the implications they have for the investments is continuously involving. The multiple owners, government, and private firms in this case, always do not have equal access to information and also face the challenge in the way they interpret the available information (Johnson & Whittington, 2012). Recommendations 1. Most important It is highly recommendable for both the parties to come up with a comprehensive decision making process and a model so as to avoid the potential issues that comes a as a result of the miscommunication of the strategic goals and objectives (Child & David, 2000). On the other, the Russian Government as the main partner that makes the important decision concerning oil exploration should at least consult with BP oil specialists on serious issues. Some of the issues that require collective decision-making include oil prices to charge, the expertise required for the entire process and also planning for the processes, from extraction to the refinery (Tesler, 2000). Therefore, it is imperative for all the companies to leverage their capabilities so as to fulfil the business strategy and also maximise the efficiency in the exploration of the oil reserves. Nonetheless, both BP and Rosneft should make sure that they have proper communication models that can enable them to share information, review performance, and monitor the allocation of the resources. All of the above measures are meant to address the issues that come as a result of the dissatisfaction of the investors who may question the profitability of the entire investment (Hill & Gareth, 2012). The underlying assumption is that effective models of communication, monitoring and decision making brings the teams together thus avoiding the problems of misalignment with both the company objectives and those of the joint venture (Inkpen, 2010). 2. Second important For the oil exploring companies to be successful, the community they are operating around should also be satisfied with their operations and promise that the activities have least harm on the general environment. Therefore, the best strategy for both BP and Rosneft is to adopt the social responsibility initiatives. For instance, BP already has put in place some corporate social responsibility initiatives where it engages in community services and also does everything to protect and conserve the environment. However, while operating in Russia, both the companies can join hands in fulfilling their responsibility to the surrounding community because such initiative will improve the brand reputation and drive up the revenue accrued from the oil exploration. Conclusion In summary, the complexity of exploring oil reserves has forced the major players to consider partnering with organisations with the same strategic business objectives to achieve competitive advantage. In this regard, it is now common to witness joint ventures between national oil companies and international oil companies to achieve the common goal of reducing costs and increasing benefits or revenues. Therefore, the essay has focused on the joint venture between British Petroleum, a private multi-national company, and Rosneft, a Russian company owned by the government. Throughout the discussion, it is evident that market demand and cost factors are some of the drivers are some of the reasons behind government-private fir joint venture in the oil industry. Besides, both parties benefit a great deal where the private firm provides the necessary expertise while the government owned firmed provides the necessary resources. However, the complexity of such partnerships brings about constraints on decision-making, and these issues call for appropriate models for monitoring, planning, and communicating the joint objectives to the parties (Lynch, 2012). 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