Gazprom and the Its Struggles to Stay Dominant and Sustainable in the Industry - Assignment Example

?Gazprom Topic: 'Gazprom and the Reasons behind Its Struggles to Stay Dominant and Sustainable in the Industry' Table of Contents 0 Introduction 3 1.1Terms of Reference 3 2.0 Procedure 3 3.0 Findings 4 3.1 Socio-Political Issues faced by Gazprom 4 3.2 European Gas Market 4 3.3 Performance of Gazprom 5 3.4 Business Strategic Crisis in Gazprom 7 3.5 Sustainable Strategy Issues 9 3.6 SWOT Analysis of Gazprom 11 3.6.1 Strengths 11 3.6.2 Weaknesses 11 3.6.3 Opportunities 12 3.6.4 Threats 12 4.0 Recommendations 12 5.0 Conclusion 13 6.0 References 14 1.0 Introduction Gazprom is regarded as one of the biggest gas production organisations globally. The core functions of the organisation comprise exploration, production, shipping, processing and marketing of natural gas along with purifying crude oil. Gazprom primarily operates the business in Europe, having headquarters in Moscow in Russia. The organisation was established in the year 1993 as a joint stock business. By 2002, the government held about 38.37% of share of Gazprom. In the global extent, the organisation represents about 20% of international gas production. In Russia, the organisation regulates about 60% of gas services and generates about 50% of power in the nation. Gazprom is liable for a supporting considerable portion of Gross Domestic Product (GDP) in Russia and delivers about 20% of its revenue to the national budget (Thomas, 2006). However, presently the dominance of Gazprom is under stake and the organisation is also facing challenges in order to stay sustainable in business. 1.1 Terms of Reference Focusing on this aspect, the report is based on the analysis of Gazprom. The objective of the report is to discuss the socio-political issue which is faced by Gazprom in the oil and gas industry. In line with the issues faced by Gazprom, the report also undertakes a SWOT analysis of the organisation. 2.0 Procedure In order to analyse the strategies incorporated by Gazprom, information has been collected from several secondary sources such as journals, articles, books and news. The rationale for selecting secondary sources is that they help in gaining information about the subject matter in low cost, time and effort. 3.0 Findings 3.1 Socio-Political Issues faced by Gazprom Gazprom has faced several socio-political issues that have impacted the sustainability of the business. In the year 2006, a disagreement emerged between Russia and Ukraine which resulted in cessation of deliveries of natural gas from Russia to Ukraine. Since most of Russia’s gas for Western Europe transports through Ukraine, the disagreement between these two nations resulted in significant reductions in sales of Gazprom to the Western Europe, particularly during the period of high demand for example during cold weather. During similar period, other socio-political problems resulted in reduction of supply of natural gas to America, Georgia and Moldova, bringing about serious issues to fulfil the demand of customers as well as to enhance the profitability (Perovic & et. al., 2006). Gazprom is a unique organisation, because it was basically a department which has become a corporation. Furthermore, it is also highly contentious to understand the level to which Gazprom represents the government and business interests. Gazprom’s mainstream business is export of natural gas which has reduced due to over pricing activities. The subsidiaries of the organisation are being lopped off and sold at increased prices to more active competitors. The dramatic decline of the organisation’s sales is sparked by rapid improvement of American gas supply companies, failure of Gazprom to invest in research and development activities and ignorance of transformation in oil and gas industry. The problems of Gazprom most probably accelerate the difficulty of long run sustainability, where the government has failed to react to the prevailing market situations (Englund & Lally, 2012). 3.2 European Gas Market The gas market of Europe has stagnated because of high prices. Thus, natural gas provided by Gazprom has lost its appeal and also faced competition from coal. European nations also appear to postpone the plan of replacing coal based power generation with gas based power generation. The following figure demonstrates the changes in demand of gas in different European nations from 2011 to 2012. Source: (Ovchinnikov & Palfi, 2012) From the above figure, it can be observed that in several nations such as Italy, Denmark and France among others, the gas consumption has reduced to a certain extent. Substitute product coal arrives at 50% cheaper as compared to gas. Furthermore, low carbon costs have also worsened the problem of gas consumption in Europe (Ovchinnikov & Palfi, 2012). 3.3 Performance of Gazprom Over the years, the performance of Gazprom has decreased in terms of production, sales and export. The following figure demonstrates the production of Gazprom from 2006 to 2010: Source: (Gazprom, 2010) From the above figure, it can be observed that the gas production of Gazprom was 556 billion cubic meters in the year 2006 which had reduced to about 508.6 billion cubic meters in 2010, signifying degradation of performance (Gazprom, 2010). The export of gas of Gazprom has also reduced considerably in these years. The following figure demonstrates the level of export of Gazprom in Europe: Source: (Ovchinnikov & Palfi, 2012) From the above figure, it can be observed that the level of export of Gazprom had deteriorated from 2004 to 2011 and further deterioration of export is expected by 2018, given the present circumstances and unless any affective steps are undertaken (Ovchinnikov & Palfi, 2012). In the year 2009, the net profit of the organisation had reduced by 11% and the valuation of the organisation had also dipped below US$100 billion. The issue of dependence on Russian gas is also a great political concern for different European nations. Presently, Gazprom is also facing strategic crisis to sustain in the business (Balmforth, 2013). 3.4 Business Strategic Crisis in Gazprom According to different analysts, Gazprom was slow to react to possibly ground-breaking changes in the energy market, for instance, appearance of shale gas in place of natural gas provided by Gazprom. In the United States, there is an abundance of reserve of shale gas and thus US organisations have become much active than the Russian organisation, i.e. Gazprom in the European market. As a result, it minimises the profit of Gazprom to a considerable extent. Irrespective of changing market circumstances, Gazprom has been found to insist on costly long run gas agreements. Gazprom has only concentrated on the prices of its products and ignored the density of demand related to its products. As a result, most of the European consumers have shifted from Gazprom to other suppliers. It has also been observed that in the year 2012, gas sales of Norway to Europe had increased by 16% in spite of European recession, while the sales of Gazprom had decreased by 8% (Adomanis, 2013). Gazprom has also faced problem owing to the utilisation of variable pricing policy. European Commission launched an investigation in order to probe whether Gazprom was stymying the divergence of supply by involving in unfair pricing practices and preventing free flow of gas (Zatzman, 2012). The following figure demonstrates the pricing of gas in different nations of Europe: Source: (Adomanis, 2013) From the above figure, it can be observed that Gazprom treats diverse nations of Europe differently with respect to prices of its products. For instance, nations which are at far distant position from Russia such in the United Kingdom and France, the prices of natural gas were sharply low than other proximate nations such as Bulgaria. On the other hand, nations such as Germany seem to receive pretty discounted price on natural gas where other nations such as Poland do not get any discount (Adomanis, 2013). It signifies that Gazprom has desired to increase the dependence of natural gas by lowering the prices in certain nations so that it can gain monopoly in the industry. The issues faced by Gazprom are rooted in the organisation’s dual role as a business entity and as a blunt tool in foreign policy approach by using energy as a way of satisfying friends and punishing rivals. This political role of Gazprom has resulted in diversifying the energy supplies from it to other organisations. Besides, the business and political strategies of Gazprom have also enforced the organisation to expend funds on expensive pipeline plans with doubtful commercial value (Kanter & Kramer, 2013). 3.5 Sustainable Strategy Issues The foundation of Gazprom is considered as a key problem for endangering its market dominance and industry sustainability. Concerning sustainability, Gazprom had made three key mistakes. First, Asian market represents considerable business growth opportunities for Gazprom. Still, the organisation did not make any important deal to provide liquefied natural gas in the biggest energy markets such as India and China for meeting its aggressive market demand. Gazprom has not taken any aggressive measures for securing best market opportunities in best possible prices for its products which has resulted in the emergence of sustainability crisis for the organisation (Kuprianov, 2012). The second mistake with respect to sustainability was the decision of Gazprom to delay additional development of respective business field. Further development in the business field would have benefitted the organisation to enhance the organisational reach to other segments apart from gas and power (Kuprianov, 2012). The third mistake had been low development of new pipeline. Gazprom was reluctant to establish a new pipeline which can serve as a long-term interest measure for stakeholders. New pipeline can also enhance the reliability of supply of natural gas to the developing market of Europe. Furthermore, the creation of new pipeline would shield Gazprom from unpredictable fluctuations of oil and gas market (Kuprianov, 2012). These three issues are best observed as the key examples of Gazprom for ignoring the trap of short run hindrances in favour of establishing long run value for independent shareholders and the Russian government. 3.6 SWOT Analysis of Gazprom 3.6.1 Strengths Income: The organisation has strong source of income which has helped it in gaining a strong position in the oil and gas industry. Operating Margin: The operating margin of Gazprom is quite large because the organisation has large customer base. This high operating margin assists Gazprom to become a recognised organisation in the entire world. The products of Gazprom are admired by many nations internationally. Internationalisation: The other vital strength of Gazprom is its huge progress of business in the global oil and industry market. The internationalisation of Gazprom has supported development of valuable products for customers (Gazprom, 2010). 3.6.2 Weaknesses Lack of Control: Gazprom has a lack of control on different business activities. The Russian government has put strong control on the assets of Gazprom, leaving the organisation incapable of dealing with any commercial matters on their own (Aslund, 2006). High Debt: Gazprom has also faced increased debt scenario in recent times which has hindered the production of natural gas and crude oil. Low Resources: Gazprom has insufficient resources to meet the production demands. As a result, the organisation faces low level of customer satisfaction. Product Quality: Gazprom is also found to face issues due to low product quality. 3.6.3 Opportunities Establishment of Pipeline: Establishment of pipeline can assist Gazprom to secure new resources for the organisation. As a result, it can enhance the production and accordingly the business (Cornell & Nilsson, 2008). Growth in Europe: There is a rapid growth opportunity for Gazprom in European region as there is a high demand of natural gas. Gazprom can exploit this opportunity and increase its business in industrial segment (Cornell & Nilsson, 2008). International Expansion: Gazprom can grow the business internationally and spread the pipeline system in other nations where it has no business presence (Cornell & Nilsson, 2008). 3.6.4 Threats Brand Image: Gazprom has faced negative brand image due to its lack of responsible market practices. It can have an impact on the sustainability of the organisation (Gazprom, 2013). Competition: Gazprom has shown less effectiveness to compete against other oil and gas organisations which can hinder the development of the business and to deal with the competition. 4.0 Recommendations There are several recommendations which would be helpful for Gazprom to stay dominant and sustainable in the oil and gas industry. Development of New Market: Gazprom is required to develop new markets specifically in Asian region. There is a considerable demand of oil and gas products in Asia which can help Gazprom to enhance the customer base. Diversification of Business: It is essential for Gazprom to diversify the business, for example, it can invest in research and development and exploit it to amplify energy generation not only in the home country, but also in other countries. Besides, Gazprom can also involve in hydrocarbon exploration, production and transmission. It would help to satisfy the increasing demand of power in different nations and bring great possibility of market dominance (Stern, 2005). Development of Reserves: In order to stay sustainable in the oil and gas industry, Gazprom must secure reliable supplies as well as develop new reserves. Furthermore, it is also advisable that the organisation must develop business relationships with European nations by eliminating unfair trade practices. It will help to enhance the level of export of natural gas. 5.0 Conclusion Russian multinational giant Gazprom has faced several issues in the international market due to ineffective business practices and for attempting to exploit a monopoly position in the gas industry. As a result, it has faced a reduction in sales in its most important market i.e. Europe. Presently, the organisation is striving hard to stay dominant and sustainable in the oil and gas industry with increased competition from other multinationals. Sustainable development of Gazprom in gas industry necessitates harmonised interests of organisation and customers. Thus, Gazprom must pursue harmonisation with its key customers in different European nations by supporting global joint projects, creating multinational production chain and involving in appropriate business operations. Gazprom must make the supplies of natural gas more secure and fill the gap of demand of supply so that customers can share their good experiences related to the organisation in the gas industry, resulting in increased brand reputation. 6.0 References Aslund, A., 2006. Gazprom’s Strategy. Peterson Institute for International Economics. [Online] Available at: http://www.piie.com/publications/papers/print.cfm?ResearchId=690&doc=pub [Accessed November 15, 2013]. Adomanis, M., 2013. Why Gazprom in in Trouble in One Chart. Forbes. [Online] Available at: http://www.forbes.com/sites/markadomanis/2013/02/19/why-gazprom-is-in-trouble-in-one-chart/ [Accessed November 15, 2013]. Balmforth, T., 2013. At 20, Russia's Gazprom Struggles To Stay Dominant. Radio Free Europe/Radio Liberty. [Online] Available at: http://www.rferl.org/content/gazprom-gas-industry-russia/24986891.html [Accessed November 15, 2013]. Cornell, S. E. & Nilsson, N. N., 2008. Europe’s Energy Security: Gazprom’s Dominance and Caspian Supply Alternatives Supply Alternatives. Central Asia-Caucasus Institute & Silk Road Studies Program, pp. 5-155. Englund, W. & Lally, K., 2012. Cumbersome Gazprom Losing its Clout. The Washington Post. [Online] Available at: http://articles.washingtonpost.com/2012-09-23/world/35496193_1_natural-gas-decline-in-gas-prices-kremlin [Accessed November 15, 2013]. Gazprom, 2010. Gazprom in Figures 2006–2010. OAO Gazprom. [Online] Available at: http://www.gazprom.com/f/posts/57/370859/gazprom-reference-figures-2006-2010-en.pdf [Accessed November 15, 2013]. Gazprom, 2013. Gazprom is Russia’s Most Expensive Brand. Gazprom News. [Online] Available at: http://www.gazprom.com/press/news/2013/october/article176181/ [Accessed November 15, 2013]. Kanter, J. & Kramer, A. E., 2013. Europe Threatens Gazprom With Antitrust Action. The New York Times Company. [Online] Available at: http://www.nytimes.com/2013/10/04/business/international/europe-threatens-gazprom-with-antitrust-action.html?_r=1& [Accessed November 15, 2013]. Kuprianov, S., 2012. Gazprom’s Long-term Strategy. The Washington Post. [Online] Available at: http://articles.washingtonpost.com/2012-09-30/opinions/35497099_1_nord-stream-shareholders-asian-market [Accessed November 15, 2013]. Ovchinnikov, A. & Palfi, Z., 2012. Gazprom. Equity Research, pp. 1-16. Perovic, J. & et. al., 2006. Russian Energy Power and Foreign Relations: Implications for Conflict and Cooperation. Routledge. Stern, J. P., 2005. The Future of Russian Gas and Gazprom. Oxford University Press. Thomas, S., 2006. Gazprom: Profile Gazprom: Profile. University of Greenwich, pp. 3-15. Zatzman, G. M., 2012. Sustainable Energy Pricing: Nature, Sustainable Engineering, and the Science of Energy Pricing. John Wiley & Sons. Read More