Motivation behind formation of TNK-BP
A joint venture is a business agreement where two interested parties each having more or less equal shares joined together to form a new better business entity. In a resulting joint venture both the benefits and associated business risks are share between the two parties. In today’s business world, forming joint ventures has become a way out to overcome major business challenges (Cartwright and Cooper 2014). However, there are different motivations behind the formation of different joint venture. Energy sector is one primary sector having majority of joint venture. The primary forces behind the formation of joint ventures are- the production and exploration of energy is usually costly and involve high risks. To share the cost and mitigate risk major companies are now interested in making joint agreement.
In the energy sector joint ventures are mostly found in oil and gas industries. The participants in the joint venture help each other by contributing assets, their unique expertise skill and capital. The members in the joint ventures enjoy advantages in terms of rise in scale of production, having access to a new market, benefits of sharing risk, benefits in taxes and other respects (Bena and Li 2014). However, to sustain a joint venture for a long time consideration is needed for several aspects. There are also instances where joint ventures break down within five years from its formation.
The paper discusses the joint venture between British Petroleum (BP) and Alfa group, Access Industries and Renova (AAR). The joint venture is named as TNK-BP and considered one of the top ten private oil companies.
TNK-BP is perpendicularly incorporated oil corporation that has expanded itself in the upstream and downstream portfolio in Russia and UK. Its upstream business process is located first in Siberia and Volga-urals region. In the year 2009, the company produced an average of 1.369 million barrels of oil each day (Carlton and Perloff 2015). Commenting on the downward side, TNK-BP controls approximately 675 barrels of oil per day in installed refining capacity, with standard refining the the location of the asset in Ryazan, Saratov and Nizhnevartovsk. The company also performs the functions of retail network of around 1400 filling stations in supplier to the Moscow retail marketplace and it is also the market leader in Ukrain.
Considering the motives behind the TNK-BP formation goals is the strategic goals of increasing the business of natural gas. The organizations large portion of gas asset is located in Rospan International that is completely owned by TNK-BP. Rospan is located in the Yamal-Nenets, which is an sovereign region with notable gas probably of 1.4 million barrels of oil each day, which is identical to the treasury of natural gas with the capacity of producing 15 million cubic meters every day (Schmidt 2015). Another major motive behind the merging of TNK-BP is the long term aims of entering into the international market. During the year 2010 on October 18 TNK-BP and BP reached an agreement for TNK-BP to get hold of the BP’s upstream and canal property in Vietnam and Venezuela for on the whole price of $US 1.8 billion. According to the other side of the contract in Venezuela TNK-BP will be competent get hold of BP a 16.7% equal stake in the Petro Monagas.
Challenges of the joint venture
In Vietnam TNK-BP will acquire from BP a 35% stake in the upstream offshore gas-manufacturing block containing concentrate field (Criscuolo et al. 2014). The production of BP is considered as stagnant and it required deal in spite of hazard of plummeting solid cash in Russia. In spite of the most important fields in Alaska and the North Sea, which is, all have past their prime with extraction cost have all passed their prime. The extraction cost for large part of the BP mature field is reaching the point of diminishing returns (Cooper and Finkelstein 2014). BP’s recent change away from the production targets was the bleated admission that the oil major simply cannot count on the increase in the production levels without the new introduction of assets. The deal has placed the company firmly in the ranks of industry leaders by making the assumptions that BP can make its new decision work significantly. Though there was clash that BP and TNK does not have identical views on several issues, sources have indicated that on a strategic level the company wishes to expand the new company operations in the central Europe where the cost of expansion are low with higher growth and low cumbersome (Khanal et al. 2014).
The TNK partnership with the BP could be viewed as the primary step on becoming the largest producer in Russia. The visibility and opportunity to become the top producer in Russia will help in easing out the concerns of the investors substantially. The new BP-TNK venture will also receive major concession soon (Whitaker 2016). But one of the BP leadings reasons for merging with TNK is increasing the supply with the Russian domestic market with gas. The motive of BP was to expands its operations in China as the new TNK-BP venture holds the license of exploiting the 2 trillion cubic meter of natural gas in the near field. Furthermore, the friendly partnership between TNK-BP will prove to be the critical in the development of Kovytka. The partnership between TNK-BP was particularly aimed at creating cheaper East-West pipeline, which Beijing is currently trying to make (Vasconcellos and Kish 2013). The motivation of merger was to assist the company in gaining the access to the lucrative downstream contract that Beijing has presented its willingness to hand out whoever completes the construction of pipeline first. TNK-BP motivation was to vertically integrate the oil company with the diversify upstream and downstream portfolio in Russia and Ukrain.
Several studies have highlighted that there also prevailed a challenge between the two companies. Studies has suggested that there was the problems of cultural integration as the Russian executive needs to listen to the western colleagues. Russian and western executives not only speak different languages and they also make the use of different standards but also have entirely different mental approach (Alimov and Officer 2017). The company of late has been trying to overcome the grave problems of cultural differences by instituting numerous measures to bring two sides together. Every Western executives overshadowing the Russian executives as this will help in informally discussing the issues that creates an impact on the company. There is a challenge of disagreements between Russian and British specialist at work. Another priority for TNK-BP joint venture is to incorporate world standards in environmental protection and working conditions (Francis, Huang and Khurana 2016). It is evident that Russians did not had an easy time in adapting to the standards with the top management has to force them on the company.
A large number of joint venture are not distributed proportionately in Russia. This results in difficulty in obtaining the system of pipeline, which in turn results in complicated procedures. Accessing the pipeline is necessary for the success of any oil extracting company as it is only way through which the company has to gain access to the market (Deng and Yang 2015). Because of the prevailing issues relating to gaining the access of the pipeline system, a company can turn out to be constrained in the amount of oil and gas it can export from the point of production plants.
Export pipeline system in Russia is administered by the state owned Transneft that has control over the system. The international joint venture is given the priority by making the use of pipeline system while in reality they are charged with superior than the local firms in the form of export taxes and duty tariffs. This also helps in increasing the cost of allocation for the international joint venture, which makes them less lucrative and leading to competitive disadvantage.
There is a large a number quota that is set for exporting the oil and requirements to export with the help of official license holders. This results in less accessible foreign markets for international joint ventures. This again creates the barriers in the process of system. Companies are unable to select the marketplace according to the availability of best price. International joint venture has also been suffering losses because the Russian government has made it mandatory to ship the part of the production to former soviet countries. This nation never pays in time and runs a high risk of defaulting (Francis, Huang and Khurana 2016). This ultimately increases the risk of default along with the capital requirements and this has direct consequence on the profitability and loss sheet of the company due to the interest paid by the companies on debt.
The success of the TNK-BP is characterized by the internality and the partner related attributes which can be described as human factor forming as the fundamental key to success. The external and venture task related success factors may be categorized initially as the functional contract terms and it is fuelled by the capital resources (Dixon, Meyer and Day 2014). The latter observation is assisted by the motive of entering in the joint venture by Russian oil and gas companies. The commission had in the earlier stages recognized separate product markets for the production and supply of heavy fuel oil and light fuel oil. Concerning the geographic scope of these markets, the commission has already found the market for the production and supply of heavy fuel oil to be refined by the company and to operate as the largest national. In regard to the production and supply of refined fuel products, the commission has previously taken into the considerations regarding the distinction between the different levels of distribution chain (Morresi and Pezzi 2014). Accordingly, sales made by the company concerning the ex refinery levels the wholesale market level and the retail level could constitute distinct relevant product market that has been confirmed in relation to the fuel market.
The benefit from the collaboration between the companies is the TNK-BP has resulted in active sale of heavy fuel oil. According to the study, it is found that the cargo sales of heavy fuel oil represents a distinct relevant product market from other sales of heavy fuel oil. There is a geographical scope of such market for the cargo sales of heavy fuel oils possibly worldwide (Holburn, G.L. and Vanden 2014). The commission of in the earlier stages has considered that the market for ex refinery sales of refined fuel products is either likely to be expansion in the Eastern Europe and Western Europe ranging across 25 to 26 region.
Based on the assumptions that the purpose of the competitive assessment the TNK-BP partnership enabled active oil and gas sector exploration and the collaboration is deemed to constitute one solitary economic unit and their respective market positions is combined since the proposed transaction would give rise to numerous vertical relationships. The collaboration between TNK-BP has successfully established an upstream activities in the development, production and sale of crude oil and has also resulted in downstream activities in the production and supply of the refined products (Lebedev et al. 2015).
At the initial stages of the joint venture things did not resulted in smooth sailing of the business operations for the involved participants. Several different strategies and discontent on the other issues made things very difficult to arrive at solutions at the initial stages of the joint venture. Even though the joint venture was proved to be the successful the investors were not satisfied with the rate of turnover generated by the company (Hosseini and Paul 2017). One of the prime reason behind dissatisfaction of the investors was the low rate of profit and functioning of the BP. According to the investors BP was not executing the assigned responsibilities up to the required extent. Other major sectors like business, finance and marketing must have a small piece of reflection of Russian executives. Their increased involvement in the joint venture top sectors and management team proved to be the beneficial in the long run and it would also reflect their contribution of the domestic investors.
Undoubtedly, TNK-BP is regarded as one of the most flourishing business that BP has run in financial terms. The stake of company is worth $8 billion supporting the investment in 2003, which is now worth around $20 billion as per the Russian stock markets, and some of the market analyst has also stated the number even higher. BP has also yeilded a sum of $19 billion dollars from the commencement of TNK-BP and the international joint venture provided 29% of the total production of BP. However, it is noted that BP association with its partner AAR has been discolored by the clash of interest, selling the stake in the joint venture appears to be the correct thing to do. Numerous market analysts have also started stating the same recommendations, reflecting the cash inflow from the selling of stake would wipe out the debt on the BP books and would open the land of other opportunity in diverse parts of the world. Once BP gets off AAR, it will be able to concentrate on the opportunities that are obtainable in other parts of the world. With an increase in the liquidity from the selling of stake in TNK-BP is certainly going to aid in this. United States is regarded as one of the areas of focus for BP as the company plans to expand the number of deep-water rigs in Gulf of Mexico.
Conclusion
The company must move ahead only when the probable returns in other projects are anticipated to be higher than the one they would make by remaining invested in Russia. The report also highlighted that the relations between TNK-BP improved further in the year 2010 when TNK-BP acquired the pipeline and upstream assets in Venezuela and Vietnam for a total sum of $1.8 billion. The report further highlights the challenges that were faced by the company from the acquisition of the TNK-BP however; it also stated the success from the acquisition by the company. As evident TNK-BP has successfully established upstream activities in the development, production and sale of crude oil and has resulted in downstream activities in the production and supply of the refined products.
References
Alimov, A. and Officer, M.S., 2017. Intellectual property rights and cross-border mergers and acquisitions. Journal of Corporate Finance.
Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), pp.1923-1960.
Carlton, D.W. and Perloff, J.M., 2015. Modern industrial organization. Pearson Higher Ed.
Cartwright, S. and Cooper, C.L., 2014. Mergers and acquisitions: The human factor. Butterworth-Heinemann.
Cooper, C.L. and Finkelstein, S. eds., 2014. Advances in mergers and acquisitions. Emerald Group Publishing.
Criscuolo, C., Johnstone, N., Menon, C. and Shestalova, V., 2014. Renewable energy policies and cross-border investment: evidence from mergers and acquisitions in solar and wind energy. OECD Science, Technology and Industry Working Papers, 2014(3), p.1.
Deng, P. and Yang, M., 2015. Cross-border mergers and acquisitions by emerging market firms: A comparative investigation. International Business Review, 24(1), pp.157-172.
Dixon, S., Meyer, K. and Day, M., 2014. Building dynamic capabilities of adaptation and innovation: A study of micro-foundations in a transition economy. Long Range Planning, 47(4), pp.186-205.
Francis, J.R., Huang, S.X. and Khurana, I.K., 2016. The Role of Similar Accounting Standards in Cross?Border Mergers and Acquisitions. Contemporary Accounting Research, 33(3), pp.1298-1330.
Francis, J.R., Huang, S.X. and Khurana, I.K., 2016. The Role of Similar Accounting Standards in Cross?Border Mergers and Acquisitions. Contemporary Accounting Research, 33(3), pp.1298-1330.
Holburn, G.L. and Vanden Bergh, R.G., 2014. Integrated market and nonmarket strategies: Political campaign contributions around merger and acquisition events in the energy sector. Strategic Management Journal, 35(3), pp.450-460.
Hosseini, K. and Paul, D.L., 2017, April. Assessing Cybersecurity Risk for Oil & Gas Mergers and Acquisitions. In SPE Western Regional Meeting. Society of Petroleum Engineers.
How, H.R., 2015. Mergers and acquisitions.
Khanal, A.R., Mishra, A.K. and Mottaleb, K.A., 2014. Impact of mergers and acquisitions on stock prices: The US ethanol-based biofuel industry. biomass and bioenergy, 61, pp.138-145.
Lebedev, S., Peng, M.W., Xie, E. and Stevens, C.E., 2015. Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), pp.651-662.
Morresi, O. and Pezzi, A., 2014. Cross-border mergers and acquisitions: Theory and empirical evidence. Springer.
Palmquist, S. and Bask, M., 2016. Market dynamics of buyout acquisitions in the renewable energy and cleantech sectors: An event study approach. Renewable and Sustainable Energy Reviews, 64, pp.271-278.
Schmidt, B., 2015. Costs and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, 117(2), pp.424-447.
Vasconcellos, G.M. and Kish, R.J., 2013. Cross-border mergers and acquisitions. In Encyclopedia of Finance (pp. 515-523). Springer US.
Whitaker, S.C., 2016. Cross-border Mergers and Acquisitions. John Wiley & Sons.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
