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BP in Russia: Analysis of the TNK-BP Failure
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Executive Summary
BP in Russia: Analysis of the TNK BP Failure
British Petroleum has operated in Russia for over 15 years, during which the business
has experienced first hand the difficulties of operating there. A joint venture formed in
2003 was expected to be the answer for BP. However, the partnership was fraught
with difficulties. This paper will look to analyse the causes of strategic failure with the
TNK-BP joint venture. Additionally this paper will contribute to the previous
literature through up-to-date analysis of the latest partnership with Rosneft and
consider if strategic learning has taken place.
This paper will use a combination of audit tools and empirical techniques to
analyse the strategic failure. In depth audit analysis of the internal and external
environment gives this paper a comprehensive overview of the joint venture and
enables it to produce strategic recommendations, which BP should look to implement
if undertaking future business in Russia.
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Table of Contents
Table of Definitions ......................................................................... 4
1. Introduction ................................................................................ 5
1.1 Terms of Reference .......................................................................... 5 1.2 Timeline of Events ........................................................................... 5 1.3 TNK-BP Strategy .............................................................................. 6 1.4 Methodology ................................................................................... 6
2. Strategic Audit ............................................................................. 8
2.1 External Analysis ............................................................................. 8 2.1.1 Political and Legal .................................................................................................... 8 2.1.2 Economics and Environment ................................................................................... 9 2.1.3 Sociological ............................................................................................................. 10 2.1.4 Technological ......................................................................................................... 10 2.1.5 Industry Analysis .................................................................................................... 11 2.1.6 EFE Matrix ............................................................................................................. 12
2.2 Internal Analysis ............................................................................. 13 2.2.1 Human Resources .................................................................................................. 13 2.2.2 Physical Resources .................................................................................................. 13 2.2.3 Technology ............................................................................................................. 14 2.2.4 Intangible Resources and Ethics ............................................................................ 15 2.2.5 Financial Performance and Decision Making ........................................................ 15 2.2.7 IFE Matrix .............................................................................................................. 16
3. Strategy Analysis ....................................................................... 17
3.1 Strategic Fit .................................................................................... 17 3.2 S.W.O.T. Matrix ............................................................................. 18 3.3 Strategic Failure ............................................................................. 19 3.4 Strategic Learning ........................................................................... 19
4. BP in Russia: Post TNK-BP ......................................................... 20
Bibliography ................................................................................. 22
Appendix 1 ................................................................................... 26
Leadership Structure of TNK-BP ............................................................ 26
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Table of Definitions
Term Definition
AAR
BP
Downstream
EBITDA
FDI
IOC
JV
PESTLE
TNK-BP
Upstream
WTO
Alfa Group, Access Industries, and Renova
British Petroleum PLC.
Retail and marketing segment of oil company
Earnings before interest, tax, depreciation, and amortization
Foreign Direct Investment
International Oil Company
Joint Venture
Political, Economic, Sociological, Technological, Legal, and
Environmental
Equal share joint venture of BP and AAR
Production and exploration segment of business
World Trade Organisation
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1. Introduction
1.1 Terms of Reference This strategic analysis will consider the operations of BP within Russia. The
study will consider the failure of the BP-TNK joint venture (JV) and analyse the
factors which caused its failure. This paper will then look at the BP-Rosneft
partnership to determine if previous strategic issues have been corrected in this new
venture.
1.2 Timeline of Events BP has had a long involvement in Russia. The timeline below outlines the key
events between 1997-2012 that affected the strategic direction of the business.
1997 BP acquire 10pc shareholding in Sidanco (the 5th largest oil company
at the time)
2003 BP form equal share JV with Russian investors AAR
2006 Russian government suspend license on Kovykta gas field on
environmental grounds
2007 TNK-BP attempt to sell Kovykta to Gazprom for $1bn but the deal
collapses
2008 March: Moscow offices of TNK-BP raided and executives accused of
espionage, tax evasion and breach of visas
August: CEO Bob Dudley flees Russia due to harassment by the
Kremlin
December: Bob Dudley resigns his position as CEO
2009 January: BP gives more board positions to AAR in corporate restructure
December: Thirty-five year old Russian Maxim Barksy appointed CEO,
BP shares fall 1.5pc at announcement
2011 BP partners with Rosneft to undertake Arctic exploration, however
UK courts block this partnership
AAR accuse BP of ‘sabotage’ over Rosneft deal
2012 June: BP announced they want to sell 50pc stake in TNK-BP to Rosneft
October: Deal complete with Rosneft including $27bn share-swap deal
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1.3 TNK-BP Strategy
The macro-level strategy of the partnership at its inception in 2003 consisted
of four key areas. In 2011 two further strands of strategic focus to match the business
environment: maximisation of human capital and exploration of gas assets. Figure 1
shows the strategy plan employed by the business.
One of the key facets of their strategy is to exploit competitive advantage that
arises from resources. The JV has access to educated people, world leading technology
and natural resources. Successful integration of these resources they hoped would
yield strong financial performance (Browne, 2003). Their strategy looked to exploit
their core competency of superior technology to be successful in Russia. The strategy
presented in Figure 1 will be used as the basis of analysis in this paper.
1.4 Methodology The strategic analysis will follow a framework as developed by David (2009) in
order to scrutinise the strategy undertaken by TNK-BP. Firstly, an audit of the
external and internal environment will be used to collate the data which can be used
to provide input for analysis tools. Secondly, the factors from the audit will be used in a
SWOT analysis to develop strategic recommendations. Finally, as this analysis is
retrospective, the partnership with Rosneft will be considered to discover if strategic
learning has occurred. Table 1 outlines the tools and techniques of analysis that will
be applied.
Figure 1: TNK-BP Strategy. From TNK-BP Annual Report 2011
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Table 1: Tools of Analysis
Ch. Tool Advantages Disadvantages Reference 2.1 2.1 2.1 2.2 2.2 3.2
PESTLE Five-Forces EFE Matrix RBV IFE Matrix SWOT Matrix
-Highlights opportunities and threats -Simple tool – easy to use -Good foundation for further analysis -Utilises empirical technique -Acts as guide to highlight superior resources and capabilities -Utilises empirical technique -Develop strategies to match internal/ external situation
-Access to quality data is difficult -May suffer from inability to see ‘wood from trees’ -Analysis does not consider effect of business resources on industry -Difficult to define industry -Subjective weightings -RBV doesn’t tell us what are the strategic resources -Critiqued for being self verifying theory -Subjective weightings -No indication on how to achieve competitive adv. -Analysis is based on a snapshot in time
(Morrison, 2013) (Porter, 1979) (David, 2009) (Barney, 1991) (Priem & Butler, 2001) (David, 2009) (Dess et al., 2006)
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2. Strategic Audit
2.1 External Analysis The external environment provides indication of the opportunities and threats
faced by BP in Russia.
2.1.1 Political and Legal
Russia has a complex and difficult political system. The system is characterised
by a political elite and weak institutions (Yenikeyeff, 2011). The level of favour with
the Kremlin can significantly influence the success of business. The use of JV was used
to mitigate this in the case of TNK-BP. However, as the government controls a large
degree of the market acceptance of the JV by the governing party is required.
Russia is ranked 149th globally for preventing corruption with political
pressure significantly influencing the rule of law (Heritage, 2013). Russian parliament
enacted a law limiting FDI to prevent a majority shareholding on certain oil fields
(Papiryan, 2008). TNK-BP experienced a license issue with the Kovykta gas field in
2006. The license was given to the state backed company Gazprom (Fletcher, 2011).
This prompted investors to question the legal framework in Russia and requires a
strategy managing risk from corruption.
Tax policy in the country is economically ineffective with oil producers who
require the most investment in technology perversely paying the highest tax rates.
Smaller companies who are aligned to the Kremlin are subject to a different more
favourable tax regime (Papiryan, 2008). Thus, TNK-BP will have to consider the
implication of taxation when developing its operational strategy so it is not unfairly
penalised for being a foreign investor. Accessing professional advice and maximising
on the local partnership element should help to mitigate this factor.
The ability to obtain work permits for senior members of staff was also an issue
with TNK-BP. The government restricted the flow of BP executives in an attempt to
stimulate the local labour market (Papiryan, 2008). Such instability that can effect
business operations was experienced with the expulsion of Robert Dudley from Russia
following visa issues. However, the Russian government recognises the problem of
corruption and has created an anti-corruption strategy to help combat issues (Ellyatt,
2013). Since 1995 the country has risen 12.1 points in the Freedom from Corruption
measure (Heritage, 2013). There is still large scope for improvements as lack of
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transparency will reduce the likelihood of investment and increase the levels of due-
diligence required by foreign investors.
2.1.2 Economics and Environment
Russia joined the WTO in 2012 which ensures freedom of international trade
(Papiryan, 2008). The country was described to “provide the right backdrop for
investment” due to the advancements in the economy (Hayward, 2007, p. 2). The
country maintained high levels of growth of around 7% throughout the 2000s until
the financial crisis. However, the strength of economic policy was evident as the
country quickly recovered (KPMG, 2012). The ability of the government to act
quickly to economic shocks is encouraging for a company wishing to invest in Russia.
The price of oil during the JV rose rapidly from around $20/barrel to
$130/barrel by 2008. As the price of oil rose the Russian government wanted control
of its assets and sought to renegotiate with IOCs over deals they had previously made
(Johnson et al., 2011). The risk of future price instability is a significant external risk to
BP in Russia. Figure 2 shows a 10-year price chart for Brent Oil, a negative shock as
experienced in 2008 could affect demand for crude oil substantially. The risk of a
price fall could reduce margins and asset value considerably with this being contrary
to the margin enhancement strategy.
Figure 2: Brent Oil Prices. (Nasdaq, 2014)
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Future opportunity for exploration exists within the Arctic circle where Russia
has a large sovereign claim (Yenikeyeff, 2011). Although this would greatly increase
supply, environmental concerns have been expressed. One expert regards a spill to be
almost certain if drilling continues, yet the government oppressed views of protesters
who tried to prevent drilling (Harvey, 2013). Serious reputational issues exist if a
company utilises these assets and an environmental incident occurs.
2.1.3 Sociological
Oligarchs primarily undertake business in the country with strong personal
connections to the government (Papiryan, 2008). Males control the majority of oil
companies and it is very rare to see female involvement on the boards of companies or
in senior management positions. The country also prevents women from undertaking
a large amount of physically labour intensive jobs (PRI, 2009). Such controls may
seem archaic for Western organisations. Despite increases in equality, foreign
businesses will have to consider appointments to ensure minimal impact on the
strategy of developing people for organisational capability.
2.1.4 Technological
Following reforms to the oil industry Russia made advances in technology
leading to increased levels of recoverable oil. Between 2000 and 2005 proved oil
reserves grew by 18% (BP, 2014). Improved operational efficiency through the use of
better recovery techniques enabled production from wells which were previously
regarded to be depleted (Businessweek, 2004). The use of strategy which leads to
development in technology within Russia will allow BP to maximise its return through
the maximisation of reserves in oil fields.
Nonetheless, the Russian government had previously struggled to raise capital
for development of production technology. In the mid-1990s, the World Bank
provided a loan which aided the problem in the short term (Greenhouse, 1993).
However, as the production rate increases there needs to be significant investment in
onward export solutions such as pipelines and technology for deep-water recovery in
areas such as the Arctic (Deloitte, 2014). This is something a JV with an experienced
IOC such as BP can support, as they can provide both expertise and capital.
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2.1.5 Industry Analysis
Porter (1979) developed a tool to analyse the competition faced within the
industry. The competitiveness is assumed to be a relationship as shown in Figure 3.
Rivalry among firms is assumed to be the strongest force in most industries
(David, 2009). In Russia, following privatisation of a number of state owned
companies created an oligopoly of around twelve vertically integrated oil companies
(Papiryan, 2008). Competition is low within the industry as a few players dominate
namely Roseneft, Gazprom, and Lukoil. This is due to low levels of technological
development and posed little threat to TNK-BP.
Figure 3: Five Forces Analysis. Adapted from Porter (1979, p. 141)
Threat of new entrants was reduced through the first-mover advantage
obtained by the partnership. However, the Lukoil-ConocoPhillips JV offered
internationalisation to the partnership- this differed from TNK-BP. Bargaining power
of buyers is limited naturally by inelastic demand in the oil market. In the short term,
the threat of substitute was low- with TNK-BP controlling a large amount of reserves
and downstream operations. However, this can change in the long run.
Bargaining power of suppliers was a significant risk for the JV. The need to
have a skilled workforce and access to natural resources is paramount to the business.
However this is compromised by the ability of the workforce to walk out as they did in
2008. Additionally, the access to the external pipework network can be easily removed
and these provide a key threat to the business.
Rivalry Among Firms
Threat of Substitutes
Bargaining Power of Buyers
Threat of New
Entrants
Bargaining Power of Suppliers
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2.1.6 EFE Matrix
An External Factor Evaluation (EFE) Matrix provides a summary of the
external factors faced by TNK-BP as established in the previous audit and a weighting
based on its importance (David, 2009). The rating relates to the ability of the current
strategy outlined in Section 1.3 to manage the factor.
Figure 4: EFE Matrix
Key External Factors Weight Rating Weighted
Score
Opportunities
1. Growing economy (7% annually)
2. High price of oil (av. $100/bbl)
3. ~10% of global natural resources in Russia
4. Capital required for infrastructure
5. Companies desire internationalization
0.11
0.08
0.10
0.15
0.07
2
2
3
4
1
0.22
0.18
0.30
0.60
0.07
Threats
6. Corruption (Global Rank 149th)
7. Ineffective tax policy
8. Risk of environmental disaster
9. Insufficient technology development
10. Oil price falls from current level
0.14
0.09
0.08
0.12
0.06
2
1
1
3
2
0.28
0.09
0.08
0.36
0.12
Total 1.00 2.30
The EFE matrix has a weighted score of 2.30. This is below the average of 2.5
indicating that TNK-BP do not have suitable strategy in place to take advantage of
opportunities and mitigate threats. TNK-BP had a considerable strategic advantage in
providing access to capital and improving technology. However, the political
atmosphere and risk of oil price shocks is something which TNK-BP would need to
mitigate in their business strategy.
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2.2 Internal Analysis
Section 2.1 explained how the external environment creates opportunities and
threats which affect the whole market. However, it is the internal resources and
capabilities that differentiate between organisations (Johnson et al., 2011). This section
will apply RBV (Wernerfelt, 1984), although strategic resources are not indicated through
this analysis the audit will seek to identify these capabilities.
2.2.1 Human Resources
Human resources describes the skills and knowledge of employees within the
organisation (Bratton et al., 2010). TNK-BP employed approximately fifty-thousand
people. The BP group stationed around 300 staff in Russia, signalling a clear
distinction between the group and the JV (BP, 2012). TNK-BP invested heavily in
continual professional development with 177,000 days of training undertaken over a
five-year period (Robertson, 2009). The use of training is a strategic tool often
undertaken to maintain competitive advantage of human resources. Nevertheless,
TNK-BP has been accused of bias towards Western staff for leadership positions. As is
evident from the organogram in Appendix 1 the majority of the senior management
were seconded from BP. Russian leaders were limited to positions that specifically
required domestic knowledge, e.g. government relations. However, cultural
polarisation occurred when Russian managers sued for wage discrimination (Belton,
2008). Consequently, the internal conflict will reduce the asset value of human
resources, as the conflict is likely to cause reduced productivity due to lack of incentive
for Russian staff.
2.2.2 Physical Resources
TNK-BP had access to a wide base of natural resources and production
facilities with 9.1bn barrels of oil equivalent in reserves (BP, 2012). Access to these
resources created strong competitive advantage for BP ahead of other IOCs. TNK-BP
has production licenses for three main fields producing 74million tonnes of crude in
2011 and greenfield licences with extensive untapped reserves (Nazarov, 2012).
Additionally, the business started to exploit its gas reserves in 2005, which enabled a
further diversified use of its resource base (Papiryan, 2008). This was recognised as a
key aim in a strategy refresh in 2011 and highlighted that the business was addressing
the changing environment. The TNK-BP assets have enabled BP to grow its global
production (Nazarov, 2012). Production facilities were clustered in two main areas (see
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Figure 5). Clusters often provide gains from economies of scale. However, there are
potential issues with security and business continuity if the region is adversely affected
by an event such as the current Ukraine crisis. Additionally, the business has a
resource deficiency for onward transportation of extracted oil and gas. Pipelines in
Russia are controlled by the state owned company Transneft and therefore TNK-BP
may suffer from the hold-up problem. TNK-BP may have to pay higher costs and suffer
reduced business flexibility (RIA, 2008).
Figure 5: Location of TNK-BP Assets. From TNK-BP Annual Report (2006, p. 5)
2.2.3 Technology
BP often lead the oil and gas industry with vast investment in research and
development (R&D). The use of word leading technology is a core-competency for BP
and is something they exploit in other parts of the world. In Russia, the JV
implemented highly efficient recovery (>100% replacement rate) and production
processes ensuring a long-term competitive advantage (TNK-BP, 2006). Technology
is superior to their competitors which increases their margins and creates competitive
advantage. However, it is BP at group level that undertakes R&D, with the JV
undertaking very little. This is particularly important in the context of breakdown of
the partnership, and gives BP an asymmetry of information control in the JV. As
technology is a core-competency of the business, if a breakdown occurs between AAR
and BP any future R&D may not be disseminated which could further multiply the
strategic failure.
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2.2.4 Intangible Resources and Ethics
In 2003, the value of the goodwill of BP was $9.1billion. The value of the
brand boosts downstream sales for the business as it is recognised as a quality
petroleum offering. TNK-BP aimed to create a socially responsible business investing
$180million in local communities in 2006.Ethical business operations can improve the
efficiency of the business and yield advantage over competitors (David, 2009).
Nonetheless, an oil spill in Siberia causing wide ecological damage in addition to
exploration in the Arctic caused brand damage and loss of reputation as the business
is facing legal action from the Kremlin (Belton, 2012). The Gulf of Mexico spill also
tarnished the BP brand to the tune of around $1bn and also leads to questions over
their technological abilities at the core of its competitive advantage (General
Sentiment, 2010).
2.2.5 Financial Performance and Decision Making
TNK-BP’s financial performance strengthened through the partnership, with
only a minor disturbance caused by the global financial crisis. Table 2 illustrates the
key financial indicators. TNK-BP was described as a ‘cash cow’ by Nazarov (2012)
and produced the highest return on investment of any oil major in Russia.
Additionally it had the ability to generate a free-cash-flow per barrel 38% higher than
the industry average (Nazarov, 2012). Nearly 90% of market participants in the
Russian oil market expected capital requirements to grow (Deloitte, 2014). The JV did
not have such financial constraints enabling it to develop and reinforce competitive
advantage.
Table 2: TNK-BP Financial Performance
Measure 2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue
EBITDA
Income
10.4
4.0
2.8
14.2
6.4
4.0
22.2
9.1
4.7
24.7
11.2
6.6
35.0
9.4
5.7
45.1
9.9
6.3
31.4
8.3
5.4
41.1
10.2
6.8
54.8
13.7
9.7
Notes: Data from TNK-BP annual reports. Revenue and Income are net value. All values in $bn.
The financial leverage from the BP group additionally provides a strong base
for investment. Annually capital expenditure for the group was on average $25.9bn
between 2008-12 (BP, 2012). Finlay (2000) regards firms with high levels of sunk costs
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to be on average more successful. Increased investment may not always increase
returns as the escalation of commitment theory notes that increased expenditure may
occur because of an unwillingness to quit (Brockner, 1992). Previously BP has been
accused of reluctance to exit investments in the case of Macondo (Shefrin &
Cervellati, 2011). BP has suffered many issues in Russia yet continued to invest and
this could indicate poor financial decision-making.
2.2.7 IFE Matrix
Much like the matrix used to establish strategic fit with external factors the IFE
matrix assesses the internal strengths and weaknesses of the JV (David, 2009). Figure 6: IFE Matrix
Key Internal Factors Weight Rating Weighted
Score
Strengths
1. Heavy investment in staff training
2. 9.1bn barrels of oil reserves
3. Greenfield licenses for further 6bn barrels
4. World leading replacement tech >100%
5. Strong focus on ethical business practices
6. Financial (8yr av. 30% income growth)
0.08
0.09
0.10
0.14
0.05
0.10
3
3
4
4
3
3
0.24
0.27
0.40
0.56
0.15
0.30
Weaknesses
7. Cultural clash between Russian & BP staff
8. Reliance on Transneft pipeline system
9. R&D at BP group level not by TNK-BP
10. Brand damage from Siberia oil spill
11. Poor financial decision making
0.15
0.06
0.06
0.09
0.10
1
2
2
1
2
0.12
0.12
0.12
0.09
0.20
Total 1.00 2.57
The IFE matrix weighted score of 2.57 indicates slight internal business
strength above the average of 2.5. However, by no means did TNK-BP have a strong
internal position. It does however highlight the strength of technology and reserves
within the business and conversely shows the weakness that arises as a result of
cultural clashes in the business. The weaknesses all have very low weighted scores
which indicate that TNK-BP was not fully combatting internal weaknesses through
effective strategic management.
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3. Strategy Analysis This chapter will consider the strategy of TNK-BP (Section 1.3) and the
discoveries made within the audit undertaken in Chapter 2.
3.1 Strategic Fit
A number of strategic incompatibilities with the assessment of the business are
evident. TNK-BP sought to promote high standards of corporate governance. This
involved the development of an operational structure and procedures that make the
management accountable as well as appreciating their wider social responsibility
(Johnson et al., 2011). The external environment in Russia is rife with corruption and
is an oligarch-dominated market. TNK-BP recognised in their strategy the need for
high levels of governance. However, BP used a large number of Western BP-
sponsored directors for the majority of board positions in an attempt to have external
bodies who would not be tied to Russian corruption. This caused an internal division
and cultural clash in the organisation. The failure to actively manage the situation and
a natural distrust of the Russian partners created division and did not promote
strategic fit.
Conversely in some elements of the partnership strategic fit creating
competitive advantage was established. The JV wanted to employ advanced
technologies. This strategic fit matched with the external need for capital investment
in technology in Russia. Expertise from BP led the business to have industry leading
extraction rates. However, there was an issue with the R&D coming primarily from
the BP group. This meant the group had an upper hand with technology and may
have contributed to cultural division in the business. Nonetheless, the use of world
leading technology complimented other strategies within the business: people and
organisational capability; resources; and margin enhancement. The fit between assets
held by the JV and the ability to maximise extraction in a growing economy during a
period of high oil prices produced a cash cow. This kept both investors happy as it
enabled an excellent return on investment.
However, the failure came from the incompatibility of the investor’s desires.
BP saw the JV as just their Russian business, whereas AAR wanted to expand
internationally. The strategic fit was strong for financial performance, but it was the
cultural clash and incompatibility of aims between the investors that appears to have
led to the demise of TNK-BP.
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3.2 S.W.O.T. Matrix
A S.W.O.T. Matrix considers the strength, weaknesses, opportunities and
threats faced by a business (David, 2009). The external analysis established the
opportunities and threats, whereas the internal analysis looked at the strengths and
weaknesses. The combination of the IFE and EFE matrices in this tool will enable the
development of strategic recommendations which would promote strategic fit in the
business.
Figure 7: S.W.O.T. Matrix
Strengths Weaknesses 1. Staff training
2. 9.1bn bbl oil reserves
3. Greenfield licenses
4. Technology
5. Ethical business practice
6. Financial strength
1. Cultural clash
2. Reliance on Transneft
3. Little TNK-BP specific R&D
4. Brand damage- oil spill
5. Poor decision making
Opportunities SO-Strategies WO-Strategies 1. Growing economy
2. High price of oil
3. Russian natural resources
4. Capital required
5. Internationalization
1. Increase output to meet growing economy (S2, O1) 2. More exploration (S3, S4, S6, O3, O4)
1. Offer international projects to TNK-BP (W1, O5) 2. Development of pipeline infrastructure (W2, O1)
Threats ST-Strategies WT-Strategies 1. Corruption
2. Ineffective tax policy
3. Ecological disaster
4. Insufficient technology
5. Oil price falls
1. Ethics training (S1, T1) 2. Sell expertise to other companies (S4, T4)
1. Oil spill safety programme/ CSR (W4, T3) 2. Start Russia specific research for oil (W3, T4) 3. Use local partnership knowledge, management restructure (W1, T2)
The analysis has highlighted a number of key recommendations arising from
TNK-BP. The operation in Russia clearly had the ability to generate excess financial
returns. Exploiting SO-Strategies by increasing output matching the growing
economy would only further enhance the strategic objective of margin enhancement.
WO-Strategies focus on overcoming the internal issues and devising projects to tackle
19
opportunities. The JV failed to have coherence of objectives between the investors and
this is something recognised as a common issue with joint ventures (Daniels &
Radebaugh, 1995). By providing the partners in Russia with further opportunities
such as internationalisation as undertaken by Lukoil-ConocoPhillips could reduce
cultural clashes. ST-Strategies again can be used to reinforce a distinct business
identity rather than two separate ventures and enables the business to tackle problems
such as corruption through the use of training programmes. WT-Strategies are for
fire-fighting and look to overhaul part of the business. In this instance this is achieved
through the maximisation of Russian specific knowledge which had been previously
undermined in the JV.
3.3 Strategic Failure A strategic failure is not an organisational failure, but multiple strategic failures
can lead to the failure of the organisation (Hughes et al., 2010). An unhealthy
organisational culture within TNK-BP with a bias of operation towards BP led to
fragmentation of the management. Strategic fit was not established in the
organisational structure and this negated the financial performance achieved. There
was little attempt after the loss of a BP CEO to turnaround the partnership and this
was evident by the attempt to form partnerships with Roseneft. The JV did not
implement a turn-around strategy. Again an asymmetry existed with BP appearing to
have different objectives and a lower desire to recover compared to AAR.
3.4 Strategic Learning
Failing to learn from strategic failure could cause issues in future with any
partnership (Cannon & Edmondson, 2005). Browne (2003) noted BP had learnt from
the Sidanco partnership. This is something they need to do from the TNK-BP JV.
Organisational learning would strengthen any future position the business undertakes
in Russia. Robert Dudley said BP now recognises the true asset value held in the
group instead of emotional connections (Economist, 2014). BP need to ensure that
they implement a sufficient corporate structure and clearly outline the objectives of
the JV in the future so investors understand the scope of the business.
20
4. BP in Russia: Post TNK-BP Since 2011 BP has pursued a partnership with state-owned oil company
Roseneft. One must consider if they have learnt from the TNK-BP JV, if not then it is
likely the partnership could also fail. Political risk and internal cultural divisions were
the primary issues faced by BP. Insufficient management of this issue could lead to
difficulties in operating. Therefore, the decision to utilise a local partner again is a
good strategic decision. However, BP must ensure cultural clashes do not occur
between the two companies.
The latest partnership could be defined as a strategic alliance. This form of
collaborative strategy did not create a separate entity JV. Rather it is an agreement
between the two companies that involved a degree of equity swap (Daniels &
Radebaugh, 1995). The tie-up will enable BP to access resources in Russia whilst
Rosneft will benefit from the BP core-competency of advanced technology. The
partnership included the appointment of a BP director to the Rosneft board that
allowed expertise to be transmitted. However, this arrangement is not reciprocated on
the BP board and may cause the same level of cultural polarisation as previous
experienced. The use of a share-swap may nonetheless help to bind the strategic
directions of the business together.
The Rosneft partnership has addressed clearly the strategic direction and
boundaries of the business. BP is willing to explore international opportunities with
Rosneft (BP, 2013). However, these are likely to be restricted to Arctic Circle
operations. The companies have recognised their synergy and accept that BP will be
providing technological expertise. The matter of corruption and unethical business
practice has not been addressed. This may seem implicit by entering a partnership
with a state-owned business but as BP has previously experienced the government can
be unpredictable. BP and Rosneft have formed an ‘integration committee’ which may
reduce cultural conflict (BP, 2013). As there is no direct JV subsidiary and rather
more project based approach issues with remuneration should be reduced.
Nevertheless, during the writing of this report important developments have
occurred in Russia with political tension heightened over the crisis in Ukraine. Some
analysts have warned that the tension between Russia and Europe may see BP caught
up in the middle (Davies, 2014). In a recent speech, Bob Dudley regarded BP to play
“an important role and a bridge” over the conflict (Dudley, 2014, p. 4). The business
must not lose sight of business aspect and get caught up in international politics.
21
Again, they must recognise and maintain an exit strategy that may involve the
sourcing of other global reserves to ensure they do not experience an emotional tie
with Russia.
BP if it continues to operate in Russia should consider implementing the
following strategies based on previous learning:
1. Maximise the use of BP technical expertise in deepwater operations to recover
reserves in the Arctic circle.
2. Manage political risk in Russia through involvement in the board of the state-
owned business Rosneft
3. Ensure projects have sufficient due-diligence to prevent issues with corruption
interfering with business activities.
4. Use Rosneft projects as a supply source to Asia to provide energy to the
emerging markets.
The use of these strategic aims should help to mitigate some of the risk in
operating in Russia. The market is volatile. BP should work more with Rosneft rather
than taking a controlling position in the alliance. Through the latest structure of the
strategic alliance the equity based risk for both partners may help to control internal
divisions. However, as a state owned company Rosneft may be less driven to
maximise shareholder value.
Despite all the previous issues faced by BP the financial return on TNK-BP
was 8-10 times their initial investment. Risk and return is a key principle of business.
BP’s experience has highlighted the volatility of Russia for other investors. BP has
been in Russia over 15 years and this experience should help in future operations.
The recent volatility with Ukraine reminds investors of the unstable external factors.
Ensuring internally the business has superior operations will enable it to mitigate some
of the risk. Uncertainty over the latest venture still exists and the relationship could
easily meet the same fate as TNK-BP. Yet, the use of the strategic alliance may help to
provide tighter control. If BP-Rosneft will arise From Russia With Love will depend
greatly on the political risk and the ability of BP to suitably mitigate it.
22
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Appendix 1
Leadership Structure of TNK-BP
