Holmes Institute: Competitive Strategy Report - BP in Russia Analysis

This report examines the strategic challenges faced by BP in Russia, focusing on its internationalization strategy and the use of strategic partnerships such as mergers, acquisitions, and joint ventures. It highlights the potential of the Russian oil and gas industry and BP's attempts to capitalize on it. The report details the issues BP encountered, including HRM challenges, partnership failures, and the complexities of the Russian oil industry. It analyzes the application of internationalization strategies, including the use of joint ventures and the theoretical concepts behind them. The report also provides a case summary, strategic issues, and a discussion of the theoretical concepts, ultimately concluding with an overview of BP's experiences in the Russian market and recommendations for future strategies. The study also focuses on the institutional instability and government ownership which further complicated the strategic planning of the company in the region.

COMPETITIVE STRATEGY

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Executive Summary
Russia has huge potential of growth in the oil and gas industry. BP made many policies that
can help them in enhancing the resources they have and in the process they extended their
reach in Russian market. This was done by the company with the help of strategic
partnerships such as merger and acquisitions as well as Joint ventures. Joint ventures allowed
the company to have better strategic position in the market and helped them in gaining many
assets. However the company failed in maintaining the partnership. Due to this it was seen
that companies had to face severe loss as there were many strategic loopholes in the
collaboration. The report suggests the application of the internationalisation strategy
especially in terms of use of strategic partnerships like merger and acquisition and Joint
Ventures. It was found that Joint Ventures allows the company to enhance their resources and
allows each other in improving on their weaknesses.
Content

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s
Introduction...........................................................................................................................................2
Case summary.......................................................................................................................................2
Strategic issues faced by BP in Russia..................................................................................................3
Theoretical concept...............................................................................................................................4
Application of the strategy model..........................................................................................................6
Conclusion.............................................................................................................................................7
References.............................................................................................................................................9
Appendix.............................................................................................................................................10

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Introduction
Russia has one of the biggest oil and gas reserve and hence it attracts different companies
from different parts of the world. British Petroleum being one of the biggest companies that
produces oil in the European region. There are various challenges that are faced by the firms
that aim to expand its business in Russia. The partnership model of business within Russia
has been successful but it has also faced many kinds of challenges due to political and
economic situation within Russia. Since oil and gas industry is a capital intensive market
hence companies had to ensure that they have larger numbers of resources that can improve
their financial position within the industry (Fischer, 2016). It also helps companies in
extending into new projects especially the ones that are related to exploration of oil and gas
reserves. It is seen that firms that are not able to manage their relationship with their partners
have often failed. In this report the strategic issues faced by BP in Russia has been
highlighted with the help of appropriate theoretical model. It also explains the application of
the partnership model done by the company.
Case summary
BP entered into the Russia in the year 1997 as the country has large potential to enhance its
oil and gas industry (Ross, 2013). In managing the business partnership, this firm had to face
challenges related to the management of operations and also in managing the control over
their operations. The company faced issues in terms of the fact that government changed their
policies related to the management of human resource management as the government made
the policy to recruit more Russian people within the country. Due to this many of the higher
officials of the BP had to face the issue of Visa renewal. It was seen that companies had to
face challenges in the areas like control over the business due to the partnership model
selected by the company. Case study illustrates the fact that many of the partnerships of the
BP failed due to improper management of long term challenges faced by the company. For
example it failed in its joint ventures with the Uneximbank group. Still its partnership with
Tyumen Oil Company in a Joint venture of 50-50 allowed them to gain control in the Russian
market. However the partnerships faced expansion disputes which were one of the major
reasons why companies separated. The problem also become bigger in terms of the fact that
BP had to do share swap with its partners in Russia. For instance due to BP’s existing
partnership with AAR in TNK-BP at the time of proposed BP-Rosneft alliance, the Russia

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partners made a legal claim to have a share in the Artic shelf development. AAR claimed that
BP’s new partnership with Rosneft undermined the relationship between these two nations.
This case study also illustrated a very different kind of partnership where alliance with
specialists is done. Apart from this alliance type also includes suppliers and contractors
alliance. In the last section of the case study there is illustration about the future trends in the
industry.
Strategic issues faced by BP in Russia
There are several types of challenges faced by the company while it entered into Russia with
the partnership with other global brands. Due to the orientation of the Russian market, this
company faced challenges related to the management of operations. Some of the strategic
issues faced by BP are:
 HRM related challenges: This company had to face challenges related the
management of talent within Russia. This can be understood by the fact that Russian
government refused to renew the Visa of the officials in the country. Russian
government had more control over the legal affairs of the companies (Klimovets,
2015). Companies were forced to hire more employees from Russia which created
talent management related challenges in front of the firm. HRM challenges are also
becoming bigger because of the fact that in Russian is already facing the issue related
to the skill development.
 Wrong partnerships: It is seen that Russia is facing challenges related to the wrong
partnership. Their partnerships with TNK and AAR faced legal challenges. This is
because there was share swapping between the companies. This complicated the issue
in terms of the fact that when new partnerships was done by the company then there
were certain legal claims from the previous partners regarding their share in the new
partnership (Kapustin and Chernysheva, 2010). This can also be seen in the case of
TNK-BP exchange program where minority stakeholders were given shares but they
faced range of legal disputes. AAR shareholders in TNK-BP threatened BP with legal
action to strip BP nominated directors of their power in the TNK-BP. Due to this
threat company has to remove the TNK-BP CEO Bob Dudley.
 Structure of the Russian oil industry: It is seen that in the Russian oil industry is
differently oriented when compared with other oil markets. It is seen that most of the
oil reserves in Russia was under the control of the public sector firms. It makes it

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essential for the companies to get into the partnerships with the public sector firms.
Due to this private sector firms had to ensure that they are dealing with the
partnerships in a better manner. There are five types of alliances in the oil industry.
This includes consolidated joint ventures, alliance with specialists, suppliers and
contractor alliance, company indulge in series of alliances with suppliers, service
providers and other companies in the industry as well as operated by others (Bahgat,
2010). The deterioration in the AAR and BP relationship was from the beginning
where the relationship had to gone to the level of mistrust and this has also increased
the issue related to the management of operations.
 Institutional instability: In Russia companies also faced challenges related to the
management of institutional instability. It is seen that after the disintegration of
USSR, governments become weak and this gave birth to the social evils like
corruption. In Russia it was difficult to defend the property rights which created
challenges related to maintaining competitive advantage over the rivals. It was the
weakness of the institutions that brought weakness in the judicial systems, regulatory
and licensing uncertainty (Logan and McNeish, 2012).
 Government ownership: Government companies have greater control over the oil and
gas reserves within Russia. Companies like Gazprom are trying to gain control of the
oil projects all over Russia. This has increased the insecurities in the management of
BP oil and gas firm within the Russian market. Even the judicial system in Russia
gave lesser powers to legally fight against the state-sanctioned corporate raiding
practices which have increased the threats related to managing operations and
safeguarding their investments (Luong and Weinthal, 2010).
Theoretical concept
BP selected its internationalisation strategy for its growth in the new industry. Following their
international strategy this company made many types of strategic partnerships with different
companies in Russia.
They had to face issues related to expatriation. In following expatriation, this company hired
managers from different parts of the world in Russia. This has helped the company in
managing the talent within Russia but it was seen that company had to face challenges related
to government policies regarding recruiting more people from the Russia only. In order to
continue with the strategy of internationalisation, BP in Russia followed the strategy of

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partnerships such as Joint Ventures and Merger and Acquisition. Merger and acquisition
allowed the company to gain control of the market. The smaller firms and subsidiaries were
acquired by BP from the public entities. This also had impact on the organisation’s strategy.
However the greater impact on the company’s strategy is from the Joint Ventures that BP has
made with different companies like AAR, TNK and Rosneft. In these Joint ventures what this
company has done is that it has shared the voting rights into each other’s company. Every
new strategic alliance gave the companies in partnership to be more into each other as it gave
the companies special rights to change each other’s decision. In each of the strategic alliances
this company had to maintain a strong legal position in case any new acquisitions or business
decisions made by the company (Claes, 2013). They have also gone into different kinds of
partnerships when it came to going into Joint ventures. This included consolidated joint
venture in which both the firms merged each other’s operational assets and oil reserves. This
type of merger enhanced the value of the company and has also ensured that they have larger
numbers of resources to deal with. But there are also the hurdles in such type of partnerships
such as valuing reserves, meeting regulatory necessities and persuading minority stakeholders
to accept the consolidation that might cause difficulties. BP did this kind of alliance with
TNK.
It was seen that alliance partners was not ready to combine their assets then second type of
alliance was used by BP i.e. alliances with specialists. In this type of alliance both the
companies’ share each other’s capabilities and competencies with others so as to ensure that
they achieve success in their business model. Here one company shares its competencies like
technology and oil reserve while other shared its competencies like business mode and
knowledge. For instance due to the projects of Sakhalin-4 and Sakhalin-5, BP deliberately
had gone into alliance with Rosneft which helped them in exploring Kara Sea.
Apart from this they also made partnerships with the help of third type of alliance i.e.
suppliers and contractors alliance in which one firm provides money to another in return of
the percentage of production. This type of alliance is generally done by the companies for
digging wells or any kinds of additional services. Firms also goes into set of alliances where
they are into contractual agreements with different suppliers, service providers and even
operating firms (Kapustin and Chernysheva, 2010). This is also an alliance that is used by
many companies to improve the overall operational function. This helps them to improve the
overall functionality within the firm and also helps the firm in reducing the overall system
costs and cycle times.

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Apart from this, another strategic alliance that can be used by the companies as a part of the
international strategy was operated by others relationship. In this type of partnership one
partner deals with the responsibility of the operating oil exploration while the other one solely
invests the capital. This type of alliance works where any company dot have specific type of
skills or knowledge hence they make it done with the help of another firm.
Application of the strategy model
Internationalisation is used as a strategy by any company so as to make sure that they have
new revenue sources and also helps the company to face the challenges which again they
could not have been able to deal with. All these strategic alliances allow the company to deal
with some or the other strategic issues faced by the company (Locatelli, 2014). It is seen that
there are many competitors in the oil and gas industry. In order to deal with this competition,
it was critical that firms have their own set of internal competencies which they gain from the
type of alliances they make with each other.
This internationalisation strategy is also used by the companies like BP to make sure that they
have a better understanding of the market. This can also be understood in terms of the fact
that Joint Ventures allowed firms to know about the challenges that the company might face
to due to change in culture and also due to the market dynamics. This is because the better
understanding of the market dynamics allows a company to make better policies that enables
a firm to deal with the government policies and regulations in the market (Mitchell, Marcel
and Mitchell, 2012). Since the government companies have larger powers to change the
policies of the government in their favour hence making such strategic alliances with
companies has benefitted the firm in dealing with the political and economic challenges
within the firm.
Strategic partnerships in the process of internationalisation has been used by the firm to
increase the resources ad knowledge they have on the basis of which they can enhance their
overall competitiveness in the market. In this case also there were many things that were not
present with one company but after going into the strategic alliance they learnt things. This
helped the firms to manage the overall operations within the firm in which they themselves
do not have strategic abilities to perform (Bhar and Nikolova, 2010).
Share swapping is used by the companies so as to make sure that companies are able to have
their say in each other’s decision making process. Since the companies are in strategic

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alliances with each other hence everyone’s growth will be impacted by the decisions made by
the company. It is seen that with the help of share swapping a company is able to manage the
decisions in such a manner that all the stakeholders gets benefitted from the decisions
(Hawdon, 2017).
Strategic partnership is also used as a strategy to make sure that company has long term
sustainability. This can be ensured by the company in terms of the fact that it allows the
company to invest in new projects and at the same time it also helps the company to complete
all the projects on time. This also allows firms to gain new competencies and on the basis of
it they can improve the way in which they are dealing with opportunities in the international
markets (Tarr, 2010). However it is also critical that each firm saves their own intellectual
property. This was necessary for bringing standardisation in the work of that particular
company. Research and development activities also get boosted due to such strategic
partnerships and it allows development of new products or services which again plays a
significant role in giving competitive advantage to other firms.
This strategic partnership also allows companies to control the challenges that they are facing
in managing the expatriate employees (Howard, 2010). This can be understood by the fact
that expatriate employees face many kinds of challenges when they go in some other cultural
environment. In such an environment, it is necessary that companies reduce the expatriate
employees and hire more local employees. In this situation also strategic partnership helps as
the local company’s employees can be given major positions.
Conclusion
In conclusion it can be said that BP in Russia went into the strategic partnerships with many
firms. They have to face large numbers of challenges in the Russian market. Some of the
major issues that are faced by the BP in Russia are HRM related challenges, wrong
partnerships, structure of the Russian oil industry, institutional instability and government
ownership. It was seen that international strategy was used by BP in the form of strategic
partnership where they have used merger and acquisition as well as Joint ventures as a
strategy to enhance the growth within the industry in Russia. It was seen that BP was not able
to maintain the partnership in an appropriate manner due to their lack of proper understanding
with each other.

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References
Bahgat, G., 2010. Russia's oil and gas policy. OPEC Energy Review, 34(3‐4), pp.162-183.
Bhar, R. and Nikolova, B., 2010. Global oil prices, oil industry and equity returns: Russian
experience. Scottish Journal of Political Economy, 57(2), pp.169-186.
Claes, D.H., 2013. Cooperation and conflict in oil and gas markets. Andreas Goldthau: The
Handbook of Global Energy Policy, Wiley-Blackwell, UK, pp.176-189.
Fischer, L., 2016. Oil imperialism: The international struggle for petroleum. Routledge.
Hawdon, D., 2017. The changing structure of the world oil industry. Routledge.
Howard, R., 2010. Russia's new front line. Survival, 52(2), pp.141-156.
Kapustin, V.M. and Chernysheva, E.A., 2010. The development of petroleum refining and
petroleum chemistry in Russia. Petroleum Chemistry, 50(4), pp.247-254.
Kapustin, V.M. and Chernysheva, E.A., 2010. The development of petroleum refining and
petroleum chemistry in Russia. Petroleum Chemistry, 50(4), pp.247-254.
Klimovets, M.V., 2015. Practice of outsourcing for strategic purposes by Russian and foreign
companies. Mediterranean Journal of Social Sciences, 6(3 S6), p.193.
Locatelli, C., 2014. The Russian gas industry: challenges to the ‘Gazprom model’?. Post-
Communist Economies, 26(1), pp.53-66.
Logan, O. and McNeish, J.A., 2012. Flammable societies: Studies on the socio-economics of
oil and gas. Pluto Press.
Luong, P.J. and Weinthal, E., 2010. Oil is not a curse: Ownership structure and institutions
in Soviet successor states. Cambridge University Press.
Mitchell, J., Marcel, V. and Mitchell, B., 2012. What next for the oil and gas industry?.
London: Chatham House.
Ross, M.L., 2013. The oil curse: How petroleum wealth shapes the development of nations.
Princeton University Press.
Tarr, D.G., 2010. The crucial role for competition in the Russian gas market: implications for
Russia and Europe. In IAEE Energy Forum, Fourth Quarter (Vol. 2010, pp. 31-35).

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Appendix
Who did which part?
Name Student ID Section
Mujtaba MMSS3028 Executive Summary,
Introduction and Case
Summary
Izaz ES3027 Strategic issues faced by BP
in Russia
Jasbir EGP3136 Theoretical concept
Sohail EAB3083 Application of strategic
model and Conclusion