Corporate Strategy:Gazprom - Paradoxes - Essay Example

? Corporate Strategy: Gazprom – Paradoxes In any economy, gas and oil companies are tightly linked to the government especially in petro-states like Russia where companies are closely connected to the government that they at times become indistinguishable. After ensuring that Gazprom was under state control, Vladimir Putin acknowledged amendments on the federal law regarding gas supplies in Russia allowing the government to control interest in the gas monopoly.1 The symbiotic relationship2 has particularly been strong with the expansion of Russian energy corporations like Gazprom and LUKOIL, which are guided by a web of commercial and political motives.3 In 1990s, export of Russian gas to Europe was crucial for Gazprom, since the company experienced low domestic gas prices coupled with rampant non-payment. Delivery to solvent European consumers allowed Gazprom to subsidize it loss for delivering gas within Russia and other former Soviet republics because of political reasons.4 Gazprom attempted to establish itself within Europe especially in Germany through Wingas, a joint undertaking with subsidiary of BASF and Wintershall to transport gas to consumers in Germany.5 By mid-1990s, Gazprom had several other joint ventures in France, Finland and Italy among others and in 1995, the company obtained 10% of interconnector consortium to lay gas pipeline from the Great Britain to continental Europe.6 Gazprom shipped gas to Western Europe in long-term take-or-pay contracts and in 1995, Gazprom gas accounted for 21% of western European market and 55% of the Eastern European market.7 Gazprom offered gas at the lowest price and delivered it to consumers without disruptions therefore it is considered that the company behaved as a responsible member in the European gas market.8 Gazprom’s commercial and political goals dovetailed neatly since gas industries in land locked Kazakhstan and Turkmenistan were Gazprom’s pipeline network thus their economies relied on Russia, which had the potential of barring the nations from the European markets.9 While oil companies are essential players, Gazprom’s role in today’s Russia can be described by an old cliche, which maintains that whatever is good for Gazprom is equally good for Russia. In 1990s, Gazprom and the Kremlin were like business partners, who sometimes differed and in 2000s Gazprom became a loyal servant as well as a dangerous sword with Kremlin being Gazprom’s protector.10 Previous chairperson of the company’s board of managements, the Russian president considered Gazprom a corporate and not an almshouse for sustaining country desires. Nevertheless, Gazprom increasingly acts as a tool for foreign policy and political motives prevailing in many business decisions like the development of Shtokman field.11 Within the domestic context, this may not raise additional strategic issues, however, within the international context; the government action to award Gazprom the tender despite the fact that the company did not enough technology and resources to develop the field, clearly raises strategic issues. Thus, strategists at the company have to grapple with adaptation issues to the diverse international contexts since the company does not have considerable freedom for choosing its strategy process and content regardless of the international context.12 Within the industry context, there seems to be tension regarding the different sides of compliance with choice taking the centre stage of the subject. The opposites create tension since they appear to be inconsistent or incompatible with one another, thus, it seem both the government and the company goals cannot fully be true at the same time. Therefore, if the government and the company goals compete then they are not cooperating; however, if they are to comply with the industry, then they both have no choice but cooperate. Thus, the company strategic management has to wrestle with tricky, strategic tensions and come up with ways to deal with the tensions.13 Russia followed different paths in oil and gas industries after the breakup of the former Soviet Union; for instance, the country largely privatised exploration and production of oil but kept the pipeline infrastructure under the state’s control in exporting oil.14 Privatization of the oil sector brought the much-needed money at the time and favoured individuals as well as enterprises that were politically well connected to the Kremlin. However, with the gas industry, the government of Russia took a different approach that allowed the state retain the largest stake in the country’s gas giant, Gazprom, during Putin’s control, the government of Russia controlled Gazprom like any state-controlled business.15 In the years, which Kremlin was under Putin, Kremlin wanted greater stake in the oil sector by partly building within Gazprom a giant oil company. This resulted in Gazprom becoming the country’s most essential “national energy champion” which has a big political influence both overseas16 and at home.17 Had Gazprom maximised its performance, it would focus at the export markets, which charge high gas prices like Europe. The company seems to have achieved this in countries where it could politically get away with the strategy of charging oil-linked prices on gas, which are at least five times the price paid by consumers in Russia.18 The home market is the key to Gazprom’s political advantage since through tacit agreement with the country; the company offers cheap gas to support the inefficient economy where customers are yet to install meters.19 The company is stuck between Russia its largest market with regard to volume, where it actually loses money and the company’s largest value market, Europe. The company and the Kremlin try to align the cost of supplying gas domestically, which has the potential of realigning Gazprom’s incentives and aid in forestalling gas crisis in the nation through induction of efficient use of gas in Russia, however, this has politically been difficult.20 High gas prices are visible in Russia; however, events in the gas industry can have ripple effects in other sectors like the electricity industry. Thus, Gazprom is synonymous with a soviet ministry since the firm’s political control has its base in Kremlin rather than being in production of gas.21 Hence, the paradox of Gazprom is on one hand the firm manages one of the planet’s largest gas resources while on the other the firm faces looming gas crisis since production in its major fields declined while it fails to invest in new fields sufficiently.22 The paradox is puzzling since the oil industry produces large amounts of gas; however, little of it actually is delivered to the market since Gazprom refused to accept delivery of such gas. By western standards, the firm has very weak corporate governance, which explains its accountability to political masters instead of shareholders.23 The weakness is tolerated by shareholders partly because of the company’s partial privatization and because of the rising gas prices, which in return increases the value of the company. However, the main reason behind shareholder tolerance is that political connections are considered essential to the viability of the enterprise.24 Gazprom system of governance is never a case of weak control by shareholders but rather what is known as “false governance” because the company shares are listed in New York, London and Frankfurt; thus, the company engages in a collection of normal-looking reporting.25 A disclosure, which is a move toward being a dominant energy champion,26 in which the company managers reckon the need conversant with western accounting practices. The style of governance in the firm indicate the fact that Gazprom’s operation rely on its political connections in Russia, which details among other things the reason behind the firm’s role in Russia’s media industry.27 In the west, such investment makes little sense to the western gas companies since in Russia media control is crucial in electoral control. Compared to other state-controlled enterprises, Gazprom’s economic performance seems to be among the worst; though, it is unclear how the company would perform without the low internal gas prices set by the government and the requirement to dedicate scarce resources to various investments far removed from functions of finding, producing and delivering the natural gas. In fact, the company is unable to sustain current production level without the help of the delicate political agreement for importing and transhipping gas from independent producers as well as from Turkmenistan. Therefore, the company would be unable to satisfy the prevailing contractual commitments; thus, Gazprom performance is sensitive to unique economics and politics of gas. Compared to western gas companies like Shell or BP, Gazprom prefers to maintain extensive control of marketing and production enterprises. Indeed, compared to those firms Gazprom drastically makes little use of contracted field services; moreover, the partnerships with Gazprom are picked and often financed by the company besides being disproportionately outside of Russia, notably key marketers of gas in Europe.28 The company’s investment approach is rational from the standpoint of its enterprise managers, who keep the company horizons short especially the presidential election and its supply lines lean.29 The company managers seem to be convinced that shortfalls in gas supply do not necessarily mean a disadvantage since they keep the markets tight; thus, managers coordinate supplies from independent gas as well as associated gas companies in order to prevent oversupply in the market. Hence, the company managers are attentive to risks of any decline in gas prices that accompany oversupply. These risks make the Gazprom management wary of devoting a lot of capital in large projects like Yamal Peninsula, which can cost at least twice its historical production costs in fresh fields in Russia.30 Gazprom to boost its international presence acquired assets in various gas distribution companies in Europe; as well, the company’s international activities extend to exploration, production and marketing of oil and gas.31 Gazprom seems to have been triumphant in dividing the EU from forming strong and common policy for energy through persuading Germany, France and Italy with good bilateral deals.32 Gazprom’s strategy for undermining the common European energy policy is captured by appointment of two executives of Italian ENI to the organization’s board of directors.33 At the same time, the European Commission launched a new approach for avoiding Gazprom’s dominant position gas industry in Europe.34 For Europe to maintain Gazprom as short-term strategy for gas supply could be a cost-effective way as opposed to a long-term strategy. Various reasons sustain the move among them being Russia in future may become unpredictable supplier, since a strong capability in Europe to establish an independent policy, exists. The fact Russian advantage over Europe is strong and can undermine Europe’s efforts of securing a common policy, does not augur well with Europe’s need35 for long-term energy security.36 In Russia, it is difficult to predict long-term trends of consumption especially with the uncertainty of the way domestic gas pricing evolves and how consumption responds to increased prices. The reason behind Russia’s high consumption levels of gas and a major concern for Gazprom is the inefficiency in gas usage since most of the households and industrial gas consumers lack meters. As a result consumers never obtain information on the amount of gas they use thus unable to control their consumption. Moreover, there is lack of consistent information about payments for consumed gas; indeed, payment by consumers in Russia is loosely defined in Russia compared to other economies. In Russia, gas is cheaper than coal making the only country in the world with this unique pricing; besides, the future of gas demand in the country relies on the much needed efficiency improvements.37 Moscow strategy of investing in other gas fields away from home is evident in Algeria where a country’s gas company signed memorandum with Gazprom for gas exploration in the country. In that occasion, Putin the Russian president negated about $5 billion of debt demonstrating “trade with Algeria is beneficial than debt repayment”.38 Gazprom entry into Algerian gas market seems to be against the interests of Europe since Algerian gas supplies constitute almost all of Europe’s imports; therefore, Gazprom-controlled Algerian market forms an element of Gazprom’s strategy for encircling and controlling gas imports into Europe.39 Apart from controlling supplies, Gazprom then would influence suppliers thus constituting Europe’s “diversification”.40 In conclusion, relationship between Russia and Gazprom is complex and seems to change with time, since the company’s management goals are short time from one election to the other. The Russian government is never interested in restructuring Gazprom because if the industry opened itself to competition, the country’s income would drop significantly. 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