BP in Russia: Settling the Joint Venture Dispute Harvard Case Solution & Analysis

Background of JV

In 2003 BP merged with Russian oil companies TNK and Sidanko to create a joint venture company TNK-BP. This was a 50/50 international joint venture (IJV) in which British Petroleum Company (BP) had the majority of its assets. Apart from these three major participants, a group of Russian investors, Alfa Group, Access Industries and Renova (AAR) also invested in the Joint venture which helped them to create a huge successful joint venture in Russia. The joint venture employed about 50,000 people and had taken the hold in almost all major hydrocarbon regions in Russia. Since its inception, the company was dealt as the Russia’s third largest vertically integrated oil and gas company (VIOCs). In 2005, TNK-BP became the second largest oil producer in the Russian market with an average of 1.58 million barrels of oil produced per day. The company went through several internal changes included technological changes, policies, structural changes and strategic changes to remain a successful joint venture in the Russian oil and gas industry.

Unfortunately, in May 2008. The RNK-BP joint venture confronted with certain disputes. At the time the CEO of the joint venture was Robert Dudley. The dispute was actually raised between Russian and British shareholders and AAR assumed that BP was treating the TNK-BP as a subsidiary but not as a JV. The situation became worse enough and it got to the point where BP was considering whether they should walk away from the JV by selling their stake or should make it a wholly owned subsidiary by acquiring the stakes of AAR or should continue it as IJV.

Key Issues and Symptoms

As a result of such disputes IJV faced issues in the way of expansion and employment outside Russia because board members did not approve the expansion agreement. This also led to a lack of mutual trust and mutual understanding; as a result some board members quit their jobs and some others were called for explanation. However, all these were just the symptoms of the issues that were present at IJV and were required to resolve immediately.
There were three key issues that are as follows:

  • There were huge differences in the cultural and political environment of the parties because they were conducting business in different regions.
  • There was a lack of control and a lack of an independent body to overlook the performance, participation and decision-making at the joint venture.
  • The third problem which greatly contributed in the dispute was the most unfair and targeted treatment/behavior of Russian government towards TNK-BP joint venture.

Analysis

To better understand and assess the problems that were faced by TNK-BP IJV, it will be better to get an insight of its internal and external environment. Moreover, the assessment of external and internal environment will also help in choosing an appropriate alternative for the JV to fix the issue.
External Analysis

STEEP analysis (Exhibit 1) will help in understanding the effect of different forces on the decision-making process of TNK-BP and BP.

Social Forces: Russia was one of the major countries with proven oil reserves, which increased its demand across the world and at the same time it also increased the interest of Russian people in oil and gas industry. The region had well-educated, hard working and well-trained workforce who could effectively perform in different conditions in order to increase the performance of a company. Due to these qualities, the Russian workforce in the oil and gas industry generated a sustainable source of revenue and had helped BP to enjoy smart benefits from the joint venture.

Technological Forces: In Russia most companies were using traditional technologies that were commonly used in the era of the Soviet Union and now in the 21st century, it needed an extensive upgrade of all such technologies to get more output. For TNK-BP it was not a big deal to make a technological change at its joint venture because they were enjoying good financial conditions. Before entering into a joint venture in Russia, BP should have understood the level of technologies that were required for increased production.

Economic Forces: Oil and gas industry was the corner-stone of the Russian economy and it was contributing about 50% in the national GDP of the country. Due to the presence of proven oil reserves in the country, the current and future economic condition of the Russia seemed to be healthy and secure. Such an economy could offer some potential opportunities for BP and TNK-BP joint venture to get and enjoy certain high-end benefits.

Environmental Forces: Being oil rich country, Russia had a number of natural resources that could benefit different oil and gas companies investing there. However, it could become a threat to the environment of the Russia in case of any kind of oil spills and leaks. Such mistakes could...........................

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In September 2003, British Petroleum (BP), formed by the 50/50 international joint venture (JV) company, TNK-BP, a group of Russian investors: Alfa Group, Access Industries and Renova (AAR). This joint venture was created by the merger of Russian oil company TNK and Sidanco owned by AAR, with the majority of Russian assets of BP. May 26, 2008, the executive director of TNK-BP officer, Robert Dudley, said Vedomosti, Russia's leading business daily, the conflict between the British and Russian shareholders. During this dispute, AAR said BP consider TNK-BP as its subsidiary, not as a joint venture. Moreover, the Russian shareholders criticized management JV expansion strategy and the climate. As escalation, BP management to decide to leave or continue to participate in the joint venture. "Hide
by Kevork Papiryan Source: Richard Ivey School of Business Foundation 22 pages. Publication Date: December 10, 2008. Prod. #: 908M99-PDF-ENG

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