Business Case Analysis of Tnk-Bp

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  • Topic: Petroleum, Russia, Prime Minister of Russia
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TNK-BP is a joint venture company owned by British Petroleum, more commonly known as BP,

and the Alfa, Access/Renova group, more commonly known as AAR. Both BP and AAR each own 50% of

TNK-BP. TNK-BP was created in 2003 after a merger between BP and TNK that settled the dispute

between the two companies over Sidanco and its subsidiary Chernogorneft’s ownership that had been on-

going for years. The partnership combined BP’s knowledge, equipment, and experience; and Russia’s new

supply of oil fields. The business relationship that seemed to begin as a win-win for both parties has seen

its share of issues over the years.

Being a profitable business has not seemed to be a problem that TNK-BP has faced. From 2002-

2011 they have shown revenue growth year after year. In 2002 they showed sales revenues of $9.2 billion,

and have grown this number every year to $54.9 billion in 2011. They have also shown a positive net

income every year ranging from $1.5 billion in 2002 to $9.2 billion in 2011 (Annual Report, 2011).

Symptoms

The first issue arose in the very beginning of the merger in June 2003, Robert Dudley, TNK-BP

CEO said, “With all due respect for BP, it had a fairly vague idea about what was going on in Russia”

(Moffett, 2011). BP as a company was very interested in the huge amounts of oil that were in Russia, but

they did not do a very good job of understanding the political or economic climate of Russia at the time.

The long line of disagreements in the joint venture began in June 2003 as well when AAR

informed BP that they had issues with the bonuses and entitlement for expatriates. In 2004, AAR wanted

payments for their fraction of the company to be made sooner. In May 2008 the three oligarchs of AAR

met with Tony Hayward, then CEO of BP, and insisted that Robert Dudley be removed as CEO of TNK-

BP because he was showing favor to the BP side of the joint venture over the Russians, and the disputes

would continue to this day. BP and AAR would also have disagreements about expanding TNK-BP

operations outside of Russia and Siberia because of the direct competition it would place against BP.

During all of these disputes between AAR and BP, TNK-BP was also running into governmental

issues in Russia. In April of 2005, TNK-BP was hit with a $1 billion tax bill from the Russian government

that related to earnings from 2001. Later that year, the Russian government not only canceled auctions on

three major oil fields, but also declared that companies that were more than 50% owned by non-Russians

would not be allowed to participate in the upcoming auctions the following year for new fields. In 2006, a

licensing dispute began over the Kovykta gas field in Siberia that forced TNK-BP to keep the oil

development there strictly for Russia in fear of the license being revoked. After angering Vladimir Putin,

who was serving as the Russian President at the time, TNK-BP eventually sold its stake in the Kovykta gas

field to Gazprom. In 2008, TNK-BP offices were raided by Russian officials and an employee was

detained on charges of espionage. That same year BP faced issues when trying to renew visas for

expatriate employees getting only about half of the needed visas approved by the Russian government.

Problems Statements and Analysis

All of these issues lead to three main problems that TNK-BP faced. The first problem is that BP

was not prepared to deal with the cultural and political differences that come with conducting business in

Russia. The second problem is that there is no controlling party in the joint venture. The third problem is

that TNK-BP is constantly the recipient of seemingly targeted, unfair treatment by the Russian government.

As previously stated, BP was not prepared to deal with the cultural and political differences of

conducting business in Russia. They had previously purchased an oil company in Russia...
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