Topics: Investment, Petroleum, Petroleum industry Pages: 7 (2402 words) Published: May 2, 2013
Berge, Andrea
Spring 2013

Case Study: TNK-BP (Russia)

“This case portrays the highly uncertain scenario facing BP in Russia at the end of 2007. In the midst of unraveling relations with its cooperative partner and undesirable host government practices, ideal strategic conditions are implausible. In order to maximize outcomes under such imperfect circumstances, BP's senior management needs to fully assess the situational risks, understand the dynamics and motivations driving stakeholder behavior, and establish a plan which can appeal to all interested parties.” TNK-BP is a joint venture established in February 2003 by BP and Alfa Access/Renova (AAR). The two companies combined their resources in Russia to create the country’s third-largest oil and gas business. Each party holds a 50 percent stake in the joint venture.

Globalization, the flow of goods, capital, and services across international borders, is leading to increased economic interdependence. Globalization increases the available opportunities for firms; it has led to higher performance outcomes, including quality, cost, and productivity. Although globalization offers potential benefits, there are related risks. These risks are collectively known as the “liability of foreignness.” (p.10) Political and Economic Risks

Political risks can be defined as the “probability of disruption of the operations of multinational enterprises by political forces or events.” (p. 246) Examples include uncertainty caused by government regulations, legal issues, corruption, and political instability. Economic risks can be defined as “fundamental weaknesses in [an] … economy with the potential to cause adverse effects on firms’ efforts.” (p. 247) Political risks and economic risks are interdependent. In Russia, BP faced an enormous amount of political and economic risk. Russia’s institutional instability combined with a weak legal system and high levels of government corruption made foreign diversification in Russia a questionable investment.

BP, the world’s third largest gas and oil company, analyzed the level of risk and, beginning in 1997, began investing in the Russian oil and gas industry. Within the oil and gas industry, competitiveness is based on increasing oil and gas production and replacing reserves. Reserve replacement is becoming increasingly difficult as most of the “easy” oil and gas discoveries were already claimed. Russia with its proven reserves and production capabilities was an opportunity for BP to expand. BP was trying to match the financial performance of the top two firms in the global market – ExxonMobil and Shell. The TNK-BP joint venture was an attempt to secure access to the oil and gas resources within Russia. But, despite the size and importance of the raw materials found in Russia, production was declining. In 2008, the Russian oil industry was facing a combination of problems: (1) aging oil fields and poor maintenance policies; (2) a confiscatory tax and regulatory regime; (3) a lack of Russian and foreign investments in exploration and development.

Of specific concern to BP was the confiscatory tax and regulatory regime. Russian leaders had been accused of using oil and gas exports as a means of achieving foreign policy objectives. The majority of the industry in Russia was comprised of six large firms: TNK-BP, Lukoil, Gazprom, Rosneft, Surgutneftegaz, and Tatneft. Four of these firms were government controlled. Only TNK-BP and Lukoil remained independently owned. Of these two, only TNK-BP had major foreign ownership; British-owned BP had a 50 percent stake in the organization. Lukoil’s largest shareholders were two Russian oligarchs with a 25 percent stake and Conoco-Phillips with a 20 percent stake. Regulatory changes made between 2003 and 2008 were also limiting BP’s ability to prosper within Russia. Laws limiting foreign investment in strategic industries made the future of...
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