Benefits and Challenges faced by Petronas
The report has been made taking the Joint Venture of Petronas with Kencana, SupreCrest, and Petrofac. The Petroliam Nasional Berhad (Petronas) is a company dealing in energy sector and has entered into a joint venture agreement with Kencana Petroleum, Supracrest Petroleum, and Petrofac Limited to develop an energy service company in Berantai field offshore in Malaysia. In the joint venture, the Petrofac the UK Company holds 50% of shares and the rest is divided between Kencana and Supracrest. The joint venture has been formed with the objective to provide service by Petrofac to enhance the value of the resources holder in the oil and gas sector (Al-Maamar, Kazem and Chaichan 2017). The Malaysian companies have entered into the joint venture with UK Company Petrofac to enhance its value and capture the international market for oil and gas sector. The objectives of the joint ventures companies are to reduce the increasing risk of that the companies face in making the capital-intensive project. Moreover, the companies face challenges to deliver the projects in the international market. Therefore, the companies come into joint ventures so that they can clear all complexities and go beyond their limit of operation which the companies single handedly cannot do. The joint ventures between the companies will help them to hold the global markets by cooperative sharing of risk between the companies (Badiru and Osisanya 2016).
The company Petronas has entered into separate joint venture business, which is backed, by Kencana, SupreCrest and Petrofac. The purpose or objective behind choosing Separate joint venture business is to provide support by each entity through their specialization of work. In the chosen joint venture company Petrofac is the leading producer of oil and gas in UK and other companies Kencana and Suprecrest are oil producing companies in Mayanmar. The companies in companies are lack financial funding for projects, delay in delivery of project, and have no existence in the international market. Through the help of this Joint Venture the UK company Petrofac will enhance more of its productivity by using the available resources of the companies in Mayanmar whereas the Myanmar companies in return of providing assistance to Petrofac in production of oil and gas will be able to enter the international market
The oil and gas industry has innumerable joint ventures in the recent times and one of such joint ventures is the Petronas. The joint venture helps in growing the companies as the companies share the risk cooperatively (Beamish 2013). The participating companies in the joint venture arrangements contribute towards assets and capital for the business. The participants in the joint venture arrangements cooperatively contribute expertise in the field of industry, innovations and innovative ideas, access to wide range of work force, risk sharing, possible market entry, tax benefits, and other contributions (Culp and Forrester 2015). The benefits of entering into a separate joint venture arrangement are many, which include capital contributions, reduction of risk, technology transfer and development, access and proper utilization of resources, utilization of supply chain, market capturing and improving of scale of production, regulatory requirements and politically approved. This will help the Petronas to have a collaborative effort to function The projects the company deals in may be big and expensive for a single company to deal in and financing the projects will be expensive for the single company. Joint venture arrangements can easily handle such big project with well financed (Hamawand, Yusaf and Hamawand 2014). It would be difficult for a single company to make speculative investments in sectors as new entrants but through joint venture arrangements, the participants can easily hold the hand of the existing market holders in the proposed sector, which enables the companies to mitigate the risk involved in it. The companies can easily have access to different technologies and can have a good way of technological transfer and innovation in the sector. In the recent trend, new and innovative technology is required to develop and grab the market opportunities (Hannon and Bolton 2015). The company who has the best technology and has the power to innovate technology has the power to grab hold their position in this competitive market. The Joint venture arrangement also enables participant companies to make technological transfer and develop new technological innovations. In case of joint venture arrangements, the participants can easily access to each other’s resources. Joint venture also helps the participants to have access to supply chain in many geographic locations where the participants of the joint venture arrangement can deliver their project (Harrigan 2015). Moreover, the JV helps to retain, regain, or enhance the market position in the particular sector in which the arrangement has been made. The laws of the country in which Petronas is performing its joint venture arrangements will not have permitted the any company single to enter into the market as new entrants. It is the regulatory requirement of the country to work with the establishment of that country to enter into the market of that particular country. Moreover, joint ventures are politically sensible as compared to other modes like acquisition or takeovers. The political activists and political organizations are against the takeover of foreign entities to capture national or local entities of the country (Heun, Carbajales-Dale, and Haney 2015). However, the disadvantages of Joint Venture arrangements are many. The causes of failing of joint venture arrangements may include failing of high budget and expensive projects, nationalization of the existing business enterprise, disagreement among the partners might be the cause for the breakdown of the joint venture agreements. The other factors may include disappearance of markets, technological imbalance, breach of contract, cultural difference, dispute between the governments of the countries and certain other factors. Governmental interference in the activities of the joint venture companies may be difficult for the participants to continue to run the joint venture business in such country. Many countries do not allow joint ventures on certain type of trade practices and put restrictions on such. The countries that have such policies are at state of disadvantage to enter into joint ventures with organizations in those fields or trade. Lack of cooperation among the participants of the joint venture concerns are the reasons for the failure of joint venture agreements. In certain cases the decision making process of the companies may differ from that of the other which may raise dispute between the two and may break the joint venture arrangement (Kimiagari et al. 2015). The oil and gas is facing serious challenges in the global market and so the cost of the goods and services increases with the increase in the price of the oil and gas. Therefore, we should think how to regulate the price of oil and gas so that the price of other commodities can be reduced. The modernization of the society has the most necessary requirement of oil and gas. The supply of oil and gas does not meet the quantity of demand and this give rise to the increase of the price of oil and gas in the market. Moreover, the countries which has a large amount of deposit of oil and natural gas is the richest country in the world but such countries either do not have proper technological know-how or cannot use the resource efficiently and sustainably. Oil and gas is the major source of power and fuel for the running of the large production units (Li, Cui and Lu 2014). The oil and gas sector faces serious challenges in the upstream as well as in the downstream. The companies who formed the joint venture and formed a new company known as Petronas faces the following challenges which are as follows:
- Management: The companies forming the joint venture of Petronas are facing challenges due to the geopolitical pressure. The companies that formed the joint venture are Part of European nation and South Asian Nations. Both the management deals with separate political scenario. To reduce the pressure or handle it efficiently we need to have proper knowledge, contacts, and skills in the industry and should take appropriate efforts to the dynamic needs of the society. The challenges faced by the company can only be effectively handled if the coordination and cooperativeness in the managerial level of all the companies involved in handling he challenges and settle the dispute arising within itself.
- Increasing of oil production: The joint venture company is facing real challenges in the global market due to low quantity of production. The rising demand for the oil in the global market can only be met by increase in the production and supply of oil and gas in the market by Petronas. The increase in production will help them to get hold of the international market by increase in supply of oil and gas in the market. Increasing supply of oil will have effect on the reduction in the price of oil and gas in the market and will reduce the cost of other goods and services in the market.
- Non-renewable in nature: The oil and gas as a resource is not a renewable resource and so Petronas is facing challenges due to low capacity of crude oil in the oil reserves. The companies as well as the government of Mayanmar has made intensive use of oil and gas from the mines which has decreases the capacity of oil and gas in the oil reserve units. The challenge that the joint venture of Petronas is facing regards to oil and gas cannot be resolved as the resource is non-renewable and people cannot be prevented from using oil and gas. The only thing that can be done is finding an alternative method for sustainable use of oil and gas by the company. The company should use other scientific methods to find out new undiscovered oil reserves (Lilian 2014).
- Operational challenges: The Joint Venture Company is facing challenges in the operational stream. The companies or entities that have entered into the joint venture does not have proper integration and cooperation within themselves which results in delay in delivery of the projects which in turn make losses for the joint venture entities. The problem can be solved through integration and cooperation between the managerial personnel and operational stream. The integration between the upstream and downstream within the Petronas can only be solved if all the entities think and act to achieve the goals of the joint venture arrangements instead of their personal interest.
- Energy demand and supply: Due to the reduction in the production of oil and gas by the company, the demand and supply of oil and gas is not meeting its equilibrium. The increasing population and economic growth has increased the demand of oil and gas in the market whereas the supply has been reduced due to lower number of producing units of the company.
- Environmental Pollution: The joint venture company Petronas in the oil and gas sector is facing regulatory issues due to increase in pollution level for the production in the producing units. The pollution released in the environment during the production of oil and gas. The company is facing regulatory issues due to non-compliance of latest technologies in the reduction of air pollution and oil spills in the water affecting the inhabitants of water.
- Political instability: The political instability in the country or states of Myanmar where the oil production units have set up for the production of oil and gas has led to the fluctuation of prices of oil. Due to political instability the tax structure changes, thus increases the prices of oil and natural gas, and in turns increases the prices of other goods and services in the market. Moreover, due to political instability the company Petrofac is facing problems with regard to the structure and shareholding percentage in the said joint venture of Petronas.
- Economic uncertainty: The risk of slow movement of the units and financial incapacity to deliver projects within deadline also hampers the growth of joint venture arrangements and increases the risk of economic uncertainty. The slow movement of the market and the producing units creates economic uncertainty and possibility of firms making financial loss. Another reason for the economic uncertainty is the non-availability of skilled work force has led to low production and thus creates economic uncertainty. Petronas does not have technological innovations and advancement has not been made which has a considerable effect on the business and economic activities (Lowendahl 2014).
- Shortage of human resource: There is a relative shortage of skilled labor in the country working in the oil and gas sector. Moreover, the young employees are relatively not attracted towards the oil and gas industry due to considerable loss and winding of many oil and gas units in Mayanmar. The problem can only be solved through encouragement and attracting new and experiences labor force. Regular training of the existing workers and rewards for better performing can lead to solve the problem within the company (Merchant 2014).
- Marketing: The firms involved in forming the joint venture of Petronas do not use new and innovative marketing tools to enhance the growth of the production units in sector. The firms have low knowledge towards using the available resources to the best possible manner and using better investment techniques to improve the market and pricing structure in the operation of the oil and gas sector (Maine and Seegopaul 2016).
Motivations behind Petronas’ Joint Venture
Petronas in the oil and gas sector are using the traditional methods and techniques for accumulation of capital. The entity should use innovative techniques and better source of finance for growth and achieve its target (Merchant 2014). The firm should try to use the funding from the non-banking sectors and capital markets instead of banks as the only financial assistance.
There are firms in this energy sector who have entered into joint venture for the production and marketing of oil and gas in the market. For instance, Reliance India Ltd has entered into joint venture agreement with the Britain Petroleum for exploring and production of oil and gas sector. The RIL has entered into joint venture agreement with British Petroleum and ONGC investing on 30% shareholding units of the joint venture arrangement. The purpose of this joint venture is to explore the British Petroleum’s deepwater and development expertise whereas the RIL will provide and look after the project management skills. The RIL and BP wants to become a major player across the South Asian region and get the greatest hold of the market.
From the statistical data sources, it is found that more than 205 projects in the global market are handled by the joint venture. The increasing pressure on the oil and gas sector is due to the environmental incidents, decreasing in the performance standard, increase in the cost of production and the drop in the prices of the oil and gas (Mouraviev 2016). The Petronas should not only resolve the problems but should also take swift and appropriate measures to enhance the standard of performance. After evaluating the performance of the Joint venture enterprise i.e. Petronas in the market it has been found that the entities are facing problems as to the cost of the product and the delays in delivery of the projects. The Joint Venture arrangement between firms and units are facing problems due to inappropriate Joint venture structure that they have actually chosen. The joint venture firms entered into an agreement in Petronas lack knowledge to select and use appropriate structure of the particular joint venture (Reuer 2014). They should select suitable partners to handle the growing challenge. They do not think to achieve the goals jointly. The planning of strategies of the joint venture firms are made separately and so they cannot achieve the possible performance standard (Skovhus, Eckertn and Rodrigues 2017). The JV’s should adapt each planning and strategical decisions jointly to enhance the growth of the firm and achieve the goals jointly. The joint venture firms should build a relationship with trust to develop and maintain shared investment and benefit. Trust is a very important aspect in the growth of joint venture arrangements. The integration, cooperation and coordination among the firms in the joint venture projects are required in successful completion of the project and achieve the goals jointly (Tavakoli, Shirouyehzad and Dabestani 2016). Integration and cooperation between the firms build the confidence of trust, which enhance the standard of performance and achievement of goals. The firms should look into the using of latest technology to ensure effectiveness in the gas and oil industry. The technologies should be used to record the data, analyze in such a manner, as it would enhance for efficient work force in achieving the goals. The industry should use the information technology as the backbone to enhance knowledge, skill and innovate new technologies. However looking into all the segments of the industry it is found that the firms involved in a joint venture arrangements should look into their financial positions so that the firms can increase its availability and lowers the cost of production. The availability of finance is the very important in the smooth running of the joint venture. The firms should look for new sources of financing instead of banks and existing financial institutions (Verbik 2015). The joint venture firms should take services of the risk management firms to enhance the growth of oil and gas sector. The governments and other authorities and statutory bodies should make such rules, which will attract the firms to enter into joint venture practices and enhance the growth of the oil and gas sector (Yan and Luo 2016).
Internal and External Influences on Corporate Objectives and Strategy
Conclusion:
Therefore, the “PETRONAS” should follow the recommendations and ensure to achieve its interpersonal goals of the companies involved in such joint venture arrangements. The Joint Venture Company should use new and innovative methods to finance its projects appropriately, innovate new technologies and sustainable use of resources, enhancement of skilled workforce by attracting new, young and skilled workforce with the help of making attracting policies.
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