Question

Strategic Management

Review the terms, nature, and timing of BP’s strategic alliances in Russia. What are the benefits and costs of the arrangement for each party?

Answer 1

In 1997 BP entered Russia. It got into partnership with two companies in coming years (one was private and other state owned). After 2005, disputes started among them. The alliances of BP are summed below.

1^st alliance with Roseneft , 75% Russian state owned company.

Terms:

• In 1998, it was to explore and mine licensed areas of Sakhalin islands that had oil and gas reserves.
• In 2002, it started a joint project for the same. Roseneft had 51% ownership in project with BP 49%. It was a carry agreement that is financing by BP and if it turned successful cost will be borne by Roseneft. Not much success achieved in it.
• In 2011 BP entered into a alliance with Roseneft for exploring oil in arctic area of Russia

Nature: It is alliances with specialists. It involved a share swap in 2011 of 16.5 billion USD. Roseneft would take 5% stake in BP. BP would get 9.5% in Roseneft. They wanted to collaborate on oil reserves at Kara Sea in Arctic area.

Timing: alliances in 1998, 2002, 2011

Benefits and cost to parties: got access to oil fields, license and technology of Roseneft. BP contributed funds and knowledge of business.

TNK-BP partnership came as a hurdle to the proposed share swap. Because of it, the Russian consortium demanded share in Arctic shelf development. AAR legally claimed that the Roseneft-BP alliance undermined interests of inter-partner AAR and their 2009 share agreement that mandated all projects by AAR or BP should be through TNK-BP. If shareholders agree then they can work independently. Thus AAR got injunction order against BP alliance with Roseneft. Tribunal also upheld it.

2^nd Alpha Access Renova, (AAR) private Soviet born finance conglomerate interested in oil sector:

Their alliance was named as TNK-BP alliance in 2003

Terms: TNK-BP: 50:50 joint venture. The companies had holding in Sidanko that later turned into its accession in 2005, AAR had controlling interest in TNK and 50% share of Slavneft.

Nature: Consolidated joint venture. BP aimed at expansion in oil assets and revenues. AAR aimed at maintaining TNK-BP position in oil market. Both were interested in Russian petroleum (Kovyotka gas field license) offshore oil exploration opportunities and downstream integration in refineries and retail business.

Timing: in 2003

Benefits and cost to parties: It was not much of a beneficial alliance.

• In 2007, State had put allegations on TNK-BP for violation of licensing that led to selling its Kovyotka gas field to state controlled company Gazprom.
• In 2008, Moscow offices of TNK-BP raided by state police on plea of criminal investigation.
• In 2008, conflicts started between BP and AAR. Board of directors was set up for their equal representation.
• In 2009 with appointment of AAR CEO, the power of BP on alliance started to wane. Finally after Gulf of Mexico oil spill BP relations with AAR became bitter.
• In 2011, AAR brought injunction order to strategic alliance of BP with Roseneft. AAR had 51% interest in TNK Oil Company. Strategic alliance of BP with Roseneft would have undermined its interest.