Joint Venture of TNK and British Petroleum - Case Study Example

Joint Venture: TNK & British Petroleum Case Study By Introduction There have been a number of changes in the business world since the entry of the concept of globalisation. Companies across the world have grown interestingly pleased to try their fortune at free and feasible locations of their choice. As a result, investors have become empowered to expand their business and find vast scope for smart ventures even outside their home country. With the development of economic propositions prompted by globalisation, several companies started joint operations of their differently managed organisations by way of amalgamation. Expanse of business area, widened fund flow and collaboration of technology and labour etc became easily possible with the international cooperation in business. However, some cases of multinational collaborations like Tyumenskaya Neftyanaya Kompaniya (TNK) and British Petroleum (BP) (TNK-BP) have shown examples of failing to maintain the objectives of their partnership and eventually falling apart. This paper evaluates the complete story from merging to separation of TNK-BP by interpreting the economic and political factors involved in it. Companies at a Glance Both BP and TNK are renowned producers of petrochemicals, dealing particularly in oil and natural gas production. In order to lead the attention to the affairs regarding their merging, a brief reading about the profiles of both companies is essential. TNK TNK or Tyumen Oil Company was one of Russia’s largest petroleum companies founded by the collective privatization of several oil companies. According to some reports, TNK was put to operation from 1995, and later in 1998 AAR took over its ownership after amalgamating the shares in Sidanco, which was created in another privatization process in 1994 (Dixon, 2008, p.86). The gradual course of time witnessed the entry of BP with a ten percent stake which eventually rose to twenty five percent. By the beginning of 2003, Sidanco was completely merged and TNK-BP was formed as a joint venture by Russian and British investments. The partnership aimed at controlling the oil excavation over a large region covering Russia and Ukraine and expanded the investment by developing the structure of TNK International to TNK-BP. The company was founded as a partnership and thus it was named TNK-BP. The owners of the company engaged in frequent disputes and as a result it, BP withdrew its interest in the partnership. After the division in 2013, the company is presently owned by Rosneft and operated from the central office at Moscow, Russia. BP BP is a world famous company among the leading global suppliers of fuel and petrochemicals operated from its headquarters in London, Great Britain. The company operates its business in a range of areas from retail fuel filling stations to large scale delivery of raw materials for heavy industries in various countries (BP at a glance). BP involves the engagement of around eighty countries and as many employees with the objective of rendering quality service to the trusted customers of the BP products. The company is doubtlessly a super power in the petroleum industry and continues to hold a position in the choice list of buyers. Rosneft Group Rosneft Group is a Russian business organisation that took over TNK-BP International Limited in 2013 with the objective of expansion of its activities in petrochemical researches and production. As per the financial statement of ROSNEFT International Holding Limited (2013), the company holds its operation locations in all major oil rich countries like Russian Federation, Brazil, Venezuela, Vietnam and Ukraine. In short, the Rosneft Group has acquired the interests of both AAR and BP in the disputed TNK-BP joint venture and continues to run the organisation from it registered office located at British Virginia Islands. Origin of Togetherness It was in June 2003, that a group of Russian entrepreneurs decided to shake hands with the British business giants BP to enter a partnership that would jointly own and operate a very large network of petroleum industry across the Russian region and Ukraine. As reported in Jones Day (2003), the day, June 26 was remarkable for both President Vladimir Putin and British Prime Minister Tony Blair as they were witnessing the registration proceedings of the largest foreign investment deal in the Russian history. In the mammoth negotiation and mutual contract programme, the TNK-BP was formed with equal share in the ownership and equity by both TNK and BP. For the British Petroleum giants, it was not just a business venture in the economic perspective, but they aimed for a strategic rearrangement in the international petroleum supply chain. While the interest of BP was to expand its global position as a fuel-monarch, Russia focused on the expansion of the home companies business and the prospective chances of foreign direct investment at such a huge margin. The interest of BP in the Russian region started growing in the late 1990s and it gradually covered a quarter of the shares of Sidanco, the fourth largest oil company in Russia. Later it went on to make a joint venture with TNK, which eventually turned out to be the formation of the TNK-BP company. The significance of TNK-BP is it covers the fuel and petrochemical trade over a large region of the world by connecting between West Asia and the Western World. The merging was success oriented and it rewarded the new ownership in making big money. A report says that “TNK-BP went on to become Russia’s third biggest vertically integrated oil and gas company, generating more than $55 billion of net profit in 2003-2012” (BP in Russia ). The growth of TNK-BP was appreciable during the years of its operation as a joint venture under the managerial collaboration. The company achieved its objectives of expansive business across all the proposed regions and improved its productivity at exceptional level. The credit of the economic growth and ever-increasing productivity goes to the excellence of the association of British technology with professional expertise of the Russian technicians employed in the organisation. The combination of BP and TNK changed the picture of the oil industry and continued to stand as the stalwart partnership icon for the rest of the business world. Considering the amount of money and number of people involved in the TNK-BP partnership, it can be compared to a celebrity marriage function. Relationship Issues The operations of TNK-BP under the joint management venture continued to show a progressive trend nearly a decade until the firms split apart. The regional advantages of the Russian oligarch partners in policy formations and business forecast always brought benefit to the business; however, the involvement of AAR in the day-to-day management developed confusions among the British partners. Even though AAR was the major party among the Russian group, BP had major share in the purchase of interest in Slavneft by TNK-BP. Two years after the partnership, TNK-BP shut down Sidanko. The struggles started the following year as the company entered the focus of the criticism for its alleged participation in activities challenging the environmental sustainability. The subsequent year also added confusions in the management over the sales proposal of Kovykta to Gazprom. According to a Telegraph report TNK-BP: a troubled history (June, 1, 2012), in 2008, TNK-BP was taken for legal scrutiny on the basis of the complaints of Kremlin, which wanted to buy out the Russian shares to hold a partnership with BP. The complications started from then as the activities of the office came under the judicial observations as per the Russian law. This move eventually prohibited the foreign officers from holding key positions in the company. The conflict escalated to new heights and the Russian stakeholders responded with legal action which turned out to be a blow to the Chief Executive of TNK-BP Robert Dudley by locking him in a visa crisis. From the end of 2008 with the return of the long serving CEO Dudley, the company continued to face conflicts within the organisation and the things went on to a position where it became an open fight between the Russian interest and the BP. From the year 2010, the company was moving through a real tough series of legal battles over the sales of partnership. The intensity of the problem reached its pinnacle when BP and Rosneft entered a stake-swapping deal, which was disapproved by the Russian partners of BP. The continuous process of insider trade initiated by the BP partners for the sake of defense in the Russian regional business settlement was the real reason that made all the problems. Finally, AAR partner Fridman resigned as the CEO and the split come to the real zone with BP heading to sell its fifty percent shares in the partnership with the objective of buying out Rosneft. The crisis of began with the indecisiveness surrounding the ownership of the company as both parties – BP and AAR had their claim on the upper end. While the company wanted nearly one hundred and fifty visas for the English employees, the TNK allowed sanction for only half of them. Several arguments of critical nature went on between BP and TNK over the years of its partnership, only to make a concern that it was an unlikely partnership right from the formation. According to the reports (TNK-BP: At war with itself, The Economist, July 3, 2008), the basic reason behind the unsettled dishevel at the management level of TNK-BP was constituted by the misunderstanding between BP and AAR about each other’s objectives and the suspicions developed around the managerial function of both parties. The conflicts mounted when the stakeholders focused on a bifurcated strategic management, and the result was overall collapse of the company as a dependable business icon in the eyes of the shareholders. From every point of view, the fights within the firm benefited the Russian political majors who could easy disrupt the company and enter a deal with BP. Faces of the Fight TNK-BP is one of the best remembered names in the corporate world for its outstanding commencement and shameful collapse. Even though the parting of the companies stirred disturbances in the world of business, particularly in fuel and petrochemical industries, there are several advantages of the conflict for certain individuals and groups. The expansion of BP to Siberian region was a great thought but the owners truly lacked vision – that is what the eventual history of the TNK-BP partnership suggests. However, as White (2011) points out, some individual stakeholders like German Khan, an AAR principal argue that conflicts between the shareholders benefit the business as the situations they bring encourage the managers to perform well for overcoming the challenges. It is remarkable when an insider goes with a comment that supports the fight. However, Khan was a leader capable of handling the pressures with his own strategies, sometimes contrary to the traditional Russian aggressive business leadership styles. The joint venture under the multinational partnership also looked great according to the predictions of Khan. Internal conflicts were encouraging, as the management continued to settle issues and perform better at the close of each session of government interventions. There were also signs that the Russian authorities extended their support to the operations of TNK-BP as it was one of the biggest tax payers to the government. The political drive in Russia with regards to the oil and petrochemicals business gained a strategic harvest from the split. While organizing the TNK-BP partnership, a number of independent and private groups had amalgamated into one group and the government would observe it as an easy door to access them all at once after they actually came under the AAR banner. The resolution by the Russian government to take over Kovykta Gas Company from BP was a political motive of Moscow to interrupt the growth of BP in Russia. The internal conflicts of TNK-BP made huge impact on the business interest of BP as the Russian government continued to haunt the outsider shareholders in the group. Another important fact about the conflict is it helped the Russian authorities to easily locate highly rewarding oil fields and set up companies under the state laws. Blank (2011) points out that Russia focused on the Caspian energy projects for the political and economic benefits that it could achieve by building a monopoly of pipelined gas supply from Siberia through the eventual elimination of foreign investors like BP and China. The process of centralization of power and creation of monopoly involved tough practices of the Russian laws which frequently troubled the foreign officers of the TNK-BP organisation. The overall picture of the conflicts involving BP and their eventual end indicates that the riches of Central Asian and the Caribbean regions in oil and natural gas is capable enough to attract many more foreign companies that would enter the land, try their luck and cede to the Russian government at last. The Russian approach to see the outsiders as mere foreigners irrespective of their capacity and investment share in the domestic market is a long lasting political condition in the country. The issues related to the expansion of BP partners in the TNK-BP share that prevailed in after 2007 is an example of the logical connections the country’s politics predicted between the partnership and national security concerns. There are reasons for any government fear the national security issues that may derive from the disputes between the state and the company ownership if the production and distribution of essential commodities like fuel. In such a move to protect the national security, TNK-BP was excluded from the list of companies that were given sanction for expansion by the Russian government. However, the stories of the strategic changes of TNK-BP operations in 2008 were reflective of the overtaking motives of the AAR group. As a result, the BP nominee CEO was denied visa and was forced out of Russia. Thus, by seeing the political pressure exercised on BP partners in the TNK-PB venture, it is easily understood that the fights always benefited the Russian partners as they had large deposit of oil in their homeland. An Overview of the Separation The joint operation of TNK-BP by the togetherness of both BP and TNK majors AAR was economically stable and the business was going great despite the internal disputes and changing leaderships. From the trader’s angle, the venture developed the AAR into a powerful consortium from the diversely interested and distantly located business giants. However, the question that the disputes brought out, as to who was the head of the affairs, posed the real confusion for the stakeholders. In a partnership that meant equal share of both parties, parity of rights must stand as the fundamental provision for the partners. In TNK-BP, the conflicts began over the selection of the rightful leader of the business from the very beginning of its origin. BP’s approach to look down upon the Russian business tycoons in the strategic management ignited the first spark of tension into a big flame over the years till the company was brought to a separation stand. It was from the beginning of the togetherness did the partners start fighting for their prospective leadership position. This created a strategic mess inside TNK-BP and went on the affect the BP partners badly as the political interventions proved favourable for the local partners under the Russian laws. As in any marriage, when togetherness goes beyond the proportion of understanding and cooperation, separation is the best option. Bovt (2012) suggests that the BP initiative to sell out its shares in TNK-BP would be for its own benefit as the nearly eight billion dollar investment had rewarded it a nineteen billion dollar dividends with the values of its investment leaping to four times in the course of its partnership with AAR. From the separation, BP gets freedom and money, whereas AAR’s objectives of expansive oil monopoly is challenged by the state-owned togetherness of Gazprom and Kremlin in both oil and gas monopoly. With the Russian partners stand being united and strong against the managerial roles and key personnel of BP in TNK-BP, any chances of prolonged unity was far from imaginations. The strategic approach of the Russian government to invite foreign direct investment for the sudden economic growth was successful because the company returned a great amount of revenue to the government in taxes. If any rethinking about the separation was possible, it should take place before AAR instilled the visa crisis to prevent the entry of BP employees. From the overall evaluation, the separation seems better for BP than holding an office where under continuous legal issues and frequent in-house conflicts. Conclusion The entry of BP in the Russian oil corporate and the eventual partnership with AAR to form TNK-BP attained the focus of the entire business world. The company continued to gain the global focus for making news of conflicts between the Russian and British interests among the shareholders. During the life of TNK-BP, several strategic changes took place and the government policies were also modified in the company’s favour. Problems escalated when the common objectives were personalized by either partner with a biased approach to the role of each other. At end, a struggled BP announced its willingness to sell out its share in TNK-BP and decided to continue its independent stand in the region. References Blank S (2011) From Russia With Greed: British Petroleum’s Other Crisis. World Affairs. Available at: http://www.worldaffairsjournal.org/article/russia-greed-british-petroleum%E2%80%99s-other-crisis Bovt G (2012) BPs Good Divorce Better Than a Bad Marriage. The Moscow Times. Available at: http://www.themoscowtimes.com/opinion/article/bps-good-divorce-better-than-a-bad-marriage/459951.html BP at a glance. British Petroleum. Available at: http://www.bp.com/en/global/corporate/about-bp/bp-at-a-glance.html BP in Russia. BP operates in Russia in collaboration with leading Russian oil and gas companies. Available at: http://www.bp.com/en/global/corporate/about-bp/bp-worldwide/bp-in-russia.html Dixon S (2008) Organisational Transformation in the Russian Oil Industry. US: Edward Elgar Publishing. Jones Day (2003) Jones Day counsels on a historic oil and gas joint venture in Russia. Available at: http://www.jonesday.com/jones-day-counsels-on-a-historic-oil-and-gas-joint-venture-in-russia-06-30-2003/ ROSNEFT International Holding Limited (2013) Financial Statement. Available at: http://www.rosneft.ru/attach/0/02/89/6M2013.pdf TNK-BP: a troubled history (June, 1, 2012) The Telegraph. Available at: http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/9305157/TNK-BP-a-troubled-history.html (July 3, 2008) TNK-BP: At war with itself. The row over the future of BP’s Russian joint venture deepens. The Economist. Available at: http://www.economist.com/node/11670616 White GL (Nov 14, 2011) TNK-BP Russian Partner Relishes Conflict. The Wall street Journal. Available at: http://online.wsj.com/articles/SB10001424052970203503204577036000854767804 Read More