Joint Ventures – Marriage or Divorce? A Case Study of TNK-BP

Joint Ventures – Marriage or Divorce? A Case Study of TNK-BP
Introduction to the Issue
In 2003, a strategic partnership of joint assets situated in Russia and Ukraine was put into place by BP and the Russian firm Tyumenskaya Neftyanaya Kompaniya (TNK) that also included the Russian concerns Sidanko, and Onako and their subsidiaries (Yenikeyeff, 2011). The joined company quickly became Russia's third-largest oil producer and one of the top ten producers of oil in the world, as illustrated in Table 1, below.
Table 1: TNK-BP Facts and Figures

Source: Yenikeyeff, 2011, p. 4.
Despite all of TNK-BP assets and resources, in the global oil and gas sector, the transforming landscape presents several crucial risks and uncertainties which affected the firm and its development. Among the most important risks and uncertainties are those related with the emergence of substitute for petroleum for industrial, business and household use (Al-Harthy & Khurana, 2007; Mishra & Rahman, 2011; Ornole, Borisade & Muhammad, 2004). For example, due to the emergence of non-conventional oil and gas, the demand for petroleum from industries such energy-efficient vehicles has transformed the demand for oil (Mishra & Rahman, 2011; Deloitte, 2013). Moreover, gas producers now face uncertainty due to government policies promoting towards alternative fuels for fuel. Aside from these, significant portion of oil commerce has shifted to Asian countries thereby generating geopolitical risks and uncertainties (Deloitte, 2013). These are only some of the risks and uncertainties that oil and gas companies as well as related industries have to deal with. For these reasons, the joint venture that produced TNK-BP was thought to be a smart move. Nonetheless, events since the venture took shape have shown that this is not the case.
This essay aims to explore the problems that have beset TNK-BP almost from the initial creation of the joint venture until the present time. To do so, the essay will examine what happened with respect to government intervention and meddling, environmental disasters in Siberia, and an unsuccessful courtship with Rosneft in 2011, the reasons for the disputes and the blame-game surrounding the corporate governance issues and the environmental incidents associated with the merger. The thesis of the essay is that the marriage” between BP and the Russian government was doomed to failure from the start and should never have taken place. The essay will conclude with a commentary about the nature of this joint venture and what its progressive decline means for the oil industry as a whole.
Background to and Rationale for the Joint Venture
Impending changes for the global oil and gas industry have become increasingly forecasted (Mitchell, Marcel & Mitchell, 2012; Deloitte, 2013). For more than a century, production growth in the oil and gas sector had been driven predominantly by the Western market, as well as competition between private companies for access to reserves (Weiyu, Hartley & Sickles, 2009). Since 2005, oil prices “have moved to a permanently high level” (Mitchell, Marcel & Mitchell, 2012, p. xii). An important development is that other industries have been tapping upon some of the demand for transport by designing and creating more fuel-efficient “engines, vehicles, ships and aircraft, and by supplying alternative fuels” (Mitchell, Marcel & Mitchell, 2012, p. xii). Aside from these, new advancements in technologies are delivering diverse yet uncertain opportunities for the production of non-conventional oil and gas in many parts of the world (Zambrano, Sublette, Duncan & Thoma, 2007). In developing nations, car manufacturers are increasingly replacing oil through more efficient vehicles, and bio fuels are supplanting oil products as liquid fuels (Zambrano, Sublette, Duncan & Thoma, 2007). In reality, the trend towards fuel efficiency was propelled by escalating prices back in 2005, combined with government policies aimed at lowering pollution. Consequently, as of 2011 all major importing states had already adopted prominent policies pertaining to CO2 emissions as well as vehicle efficiency (Mitchell, Marcel & Mitchell, 2012).
What this means on a practical level for TNK-BP is that there had been a need for mergers and joint ventures in the oil industry because of these changes to the status quo, which was why this deal was seen as a means to engage in a new way of thinking about oil production in Europe. Among firms that rely on the sourcing of natural resources, consolidation is rampant due to the increasing costs of doing business and related bankruptcies (Das, 2011). As well, "industry-level economic shocks likely lead to inter-industry mergers" (Ahern & Harford, 2010, p. 1) as more organizations build on their shared organizational networks to ensure that they are able to withstand perceived future shocks as well. A common purpose for the formation of an international merger or joint venture is to bring together into one enterprise the distinct but mutually beneficial technological expertise of the participants (Gugler, Mueller, & Yurtoglu, 2010). Similarly, for business ventures that involve new or untried endeavors or other elements of risk, the involvement of multiple participants minimizes the exposure of any one participant to potential loss but can allow for the creation of new kinds of products in the process (Gugler, Mueller, & Yurtoglu, 2010).
All the above requires companies like TNK-BP to undertake systematic due diligence on their prospective partners by making enquiries as broadly as possible in their chosen market to maximize the benefits of a merger or joint venture (Gutterman, 2010). The first benefit is that there needs to be a positive impact on economies of scale, since size does matter in an industry such as this one (Gugler, Mueller, & Yurtoglu, 2010). The larger company can accumulate capital at a lower cost due to the size of its assets base with respect to collateral. Companies who merge can also improve their material costs due to enhanced purchasing power and greater ability to acquire raw materials. When placing larger orders, companies can obtain better prices from suppliers (Jovanovic, 2011). Another advantage for TNK-BP could be the reduced cost through the reduced need for employees in certain areas such as sales and general administration due to redundancy. Since both companies already possess needed employees, they tend to choose those with the required skills who work at lower salary. As a result, a joint venture can save significant amounts of money by reducing employees from accounting, human resources, marketing, and production departments. Another benefit is that the joint venture for TNK-BP might have resulted in greater availability of more advanced technologies (Smythe, 2010). For companies to stay competitive, they must stay on top of their game, particularly in employing advanced manufacturing technologies and enhanced business applications. Also, an improved market reach and industry visibility are key benefits. Through a joint venture, TNK-BP could expand their connections and market visibility as well as revenues and earnings and improve the company’s standing in the investment community (Das, 2011).
In looking at the situation with TNK-BP, therefore, there were a number of reasons that a joint venture made sense from an economic and a risk management perspective. For BP, Russia was an attractive destination not only because of its status as a producer of oil, but also because of its high levels of economic growth, and potential directions of their future economic development. Among the world’s leading emerging economies, linked together through political, social and geographical elements, Russia presented a unique opportunity for business development (Akyüz, 2005). Nonetheless, it pays to note that their economic and trade policies have been of concern and researchers have stated that the country’s economic and business practices should be subject to high scrutiny from trading partners, especially due to the fact that Russia has a growing yet definitive impact on the global economy (Bouët, Bureau, Decreux, & Jean, 2005). This means that Russia’s operations are being increasingly targeted for interest by the WTO and other international bodies, but also that the challenges that the country has faced in the past, such as corruption in the governance structure of the country as a whole, have also come under the microscope.
Issues Associated with the Joint Venture
There are a number of issues that marked the development of the strategic alliance for TNK-BP and which are linked to its downfall over the course of ten years. These included not only growing pains but also environmental disasters, disputes with other firms and with the governments of Russia and the United Kingdom, as well as internal corporate governance issues (Yenikeyeff, 2011). The foundation of many of the challenges that emerged, however, was likely due to the fact that the agreement required that the “joint venture was established on a 50/50 basis, the operation of which required mutual joint decision making” (Yenikeyeff, 2011, p. 1). What this meant on a practical level, however, is that because of the fact that the operations of the firm were located in Russia rather than in the United Kingdom, that Russian political governance factors were a fundamental part of the everyday decision making process.
To this end, government intervention and meddling were a key issue for TNK-BP from the very beginning of the project. As noted in the literature, the foundation for this interference was grounded in the fact that Russia saw their interests in the company as sacrosanct, and because there was a great deal of collusion taking part between the Russian government and the Russian participants in the corporate scheme. Specifically, there was a billionaires’ consortium in charge which “had traditionally enjoyed excellent
communications channels with the Kremlin, while never challenging those in power [and] top corporate executives from AAR (Alfa Bank, in particular) had often moved up to high positions in the Russian government” (Yenikeyeff, 2011, p. 5). What this meant on an operational level is that when decisions were to be made about the company and its assets, there were behind-the-scenes processes that determined next steps and what the company would do with or without the consent of the British.
The addition of BP was seen to give the Russian project the legitimacy and Western influence that the country needed to sell its oil outside of its borders (Yenikeyeff, 2011). In other words, because BP was a Western company, one which based its operations on international legal standards, it was thought that there would be little to no interference in operations from outside of the Russian state. Nonetheless, this approach has backfired. There have been ongoing environmental disasters in Siberia which have been made more apparent by BP’s struggles with its environmental record in the Mexican Gulf. In fact, on a yearly basis, “300,000 metric tons to 500,000 tons of oil and products are leaked into the Ob and Yenisei river basins” (Shiryaevskaya, 2012, p. 1). These incidents are seen to be a result not only of current practices but of a legacy of poorly developed pipelines and infrastructure that goes back to the 1960s (Shiryaevskaya, 2012). What this means is that it is unlikely that BP did its due diligence in a risk assessment prior to the joint venture, or that the Russian government and the forerunners to TNK were not forthcoming as to the nature of this challenge.
Table 2: BP’s and Exxon’s Offers to Rosneft

Source: Yenikeyeff, 2011, p. 14.
The company also pursued unsuccessful courtship with Rosneft in 2011, which was linked to interests within the Russian government as well, in that in a situation with the potential for “Rosneftegaz's purchase of BP's shares in TNK-BP, the Kremlin could create a state-owned mega oil company along the lines of Gazprom, the state's giant gas monopoly” (Bovt, 2012). Both BP and Exxon were courting this deal, as detailed in Table 2, above. Nonetheless, the pursuit of this opportunity broke down quickly because of the fact that the Russian government was looking to gain ultimate control over the oil industry and push BP out of the picture (Bovt, 2012; Yenikeyeff, 2011).
Commentary
This “marriage” between BP and the Russian government was doomed to failure from the start and should never have taken place. The fundamental issue is that BP rushed into an agreement with Russia as a means to make money quickly, without a great deal of due diligence and an understanding of Russian culture and how business governance is intrinsically tied to political governance. Because corporate culture is rooted in the collective history of an organization, and because of the fact that so much of it is below the surface of awareness, it is important to approach leadership and process management with caution, according to Dessler et al. (2007). As a whole, the overarching challenge within many organizations is that, to increase the level of performance in the firm, the company needs a jump start to its existing norms and standards. This is because of the fact that, in today’s globally competitive environment, most firms’ market shares are being challenged by innovation and worldwide expansion. Human social capital embodied by leadership within the organizational form, and how this relates to company culture, is an area in which more research is required (McCallum & O'Connell, 2009). This is because of the fact that the values associated with building social capital are not usually supported by leadership models in business, which, on an international scale, take a top-down approach to communication and organizational strategy, and yet culture change in global corporate operations requires this approach (Quesada, Gonzalez, & Kent, 2008). If Russian oligarchs believe that only their own culture, as defined by their leaders alone, is the best culture, then they will suffer from a lack of business awareness and a joint venture will fail. Multinationally developed companies like TNK-BP, and companies that sell products on a global basis, in particular need to be aware of this challenge.


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