PROS AND CONS OF ESTABLISHING A RUSSIAN BRITISH PETROLEUM (BP) OFFICE
EXECUTIVE SUMMARY
This manuscript aims to identify the advantages and disadvantages of setting up a British Petroleum (BP) bureau in the country of Russia. Primarily, it discusses the impact of the European Union (EU), the state of the Russian economy and environmental issues that affects the organisation of a BP office in Russia. These factors, among others were taken into consideration in the evaluation of whether it is wise to set up a BP headquarters in Russia.
An introduction containing brief background information on the BP provides sufficient data to enlighten the readers of the background of the organisation under discussion. The discussion regarding the leadership capabilities of their CEO, Lord is also presented. Following this discussion is the EU section, with a one-point comparison of EU and Russian legislations when it comes to business activities to illustrate that there exist differences and even contradictions in the two legislations and a discussion of the advantages and disadvantages of BP being under the governance of both. The section on the state of the Russian economy examines how the present economic conditions in the local scene directly affect the BP in doing business within the country, either positively or in an adverse manner. The part on environmental issues mainly tackles Russian environmental regulations, how the strict or lax implementation of such laws significantly influences the establishment of a BP office in the country. Other concerns, such as the leadership capabilities of Lord , BP CEO in accordance to his environment and social concerns will be discussed in this manuscript.
A BRIEF INTRODUCTION[1]
BP is one of Britain’s biggest companies and one of the world’s largest oil and petrochemicals groups. William Knox D’Arcy, the company’s founder, believed that oil deposits were to found in Iran so in the company’s first six decades, its prime focus lay in the Middle East. But from the late 1960s the center of gravity shifted westwards, towards the USA and Britain itself. Oil exploration and production account for 20 percent of BP’s revenues. In 2005, the firm reported a turnover of 2 billion and by December of the same year, they have 96,200 employees working for the organisation. Lord is the Chief Executive Officer of BP as of the moment. The recent 2003 merger with the Alfa Access Renova group creating the TNK-BP tie-up and the not-so-recent 1998 acquisition of the Amoco Corporation oil company has provided the groundwork for BP’s strategy in the Russian territory. As with any business deal, there have been debates on the economic rationale of the TNK-BP and Amoco deal, and Browne has been quick in justifying them. The following sections are discussions of the pros and cons of establishing a Russian BP office, sides which the group hopes to bring about a fair account of the pros and cons of setting up office in the said country.
LORD JOHN BROWNE LEADERSHIP CAPABILITIES
Conceptually, in order to perform, and grow in either a national or a global business environment, a business needs to possess some form of ‘competitive advantage’ and apply a unique ‘business strategy’. Competitive advantage is about how a firm actually puts the generic strategies (i.e. cost leadership, differentiation, and focus) into practice (1980). It is concerned with developing a value-creating strategy by uniquely combining of valuable firm resources and skills ( 2002). Likewise, (2002) refer to ‘competitive advantage’ as an offer made by a firm’s that is most attractive to customers. In accordance to this advantage, the leadership capabilities of Lord, the CEO of BP plays significant role to the development and advantage of the company in terms of their global shift.
It cannot be denied that the only constant in this world is change, many people especially those in the business arena find themselves normally adapting. In this manner, the British Petroleum is never an exception. This is because change can bring about so much improvement in certain aspects. In many ways, change can make work easier, pave the way for future innovations or generally improve people’s lives. Similarly, change has been adopted by various work organisations for varied reasons. Known as change management, companies and businesses are integrating change into their work strategies so as to be competitive and more efficient.
Due to the environment and social concerns and the target growth that have been distinguished by this company, the CEO, Lord John Browne has decided to create a plan in relation to company advancement. As part of these advancements, Lord wanted to employ switching of company logo, manufacturing process and human resource management. Primarily, her major objective is to utilise change management process in order to enhance their target market by venturing to global shift and to satisfy their clients with respect to the environment and social concerns. Basically, Lord John Browne wanted to remove the old mindset in regards to ‘petroleum’ that is the idea in which oil companies are treated as dirty, secretive and supercilious.
Although this concern is in favour to the overall public and environment, Lord should still need to be aware of the culture of the company. He should have respect to the BP history. Actually, Lord John Browne certainly needs to get the cooperation of the people involved in order to have successful changes in management.
With regards to ethical issues, Lord John Browne should be able to take considerations of what would be the reaction of their employees to the changes that would be imposed. Furthermore, he should have seen to it that her employees have undergone critical explanations about the reasons why the change of management system and strategy is needed for a certain aspects within the company. He should also give the employees enough time to master the skills and proficiency of their employees from maintenance, communication services and human resource management in utilising the changes made by the organisation. This is done by providing them enough trainings and orientation to explain the changes made.
IMPACT OF THE EUROPEAN UNION
Corporate governance practices in the EU and in Russia differ considerably. A comparison of the Russian and the EU legislations regulating certain aspects in corporate activities and the way the existing laws are coped with by Russian businessmen would show, among other major dissimilarities, one distinct difference in that whereas the non-compliance of EU members of the First Directive on Disclosure of Information (which is required to ensure adequate administrative, judicial or preventive control of documents submitted to the registration authorities of a EU member state) would mean that the documents are not accepted or the company may be recognised invalid, even if the breach is established after the company is registered, the Russian tax registration authorities accepting the documents are not obliged to verify the documents as to whether they comply with the Russian law and the documents are not subject to any other control procedures under the Russian law (2005).
These discrepancies in the EU and Russian legislation could provide difficulties in the setting up of a BP office in Russia. The United Kingdom being the hub of the entire BP business and a member state of the European Union, its corporate laws are subject to the directives of the economic organisation. The Russian government has yet to apply for a Union membership, and for the meantime, observes their own national legislation, which are sometimes, in an illustration above, different or contradicting to EU legislations. In another view, the TNK-BP and Air BP (both BP-held companies) offices being in Russia, it has to abide by the domestic rules and regulations that the country sets for foreign businesses. In this aspect lies one major disadvantage of establishing a BP office in Russia, because future disagreements between the two operating countries may arise with respect to the office set-up in Russia. Another factor to be taken into consideration is foreignness liability. This concept, introduced by states that internationalised firms are at a disadvantage in comparison with local companies due to foreign exchange risks and unfamiliarity with the business conditions of the foreign market (1960). Although this should not be wholly viewed as a disadvantage, more like a challenge for the BP, foreignness liability is one doubtless pitfall in setting up an office in Russia, or any other foreign country, for that matter.
On a positive note, a major impact of the European Union to the BP is that with ongoing attempts to establish closer relations with Russia, the EU has compromised to work with the former in facilitating the movement of people and goods, common challenges (tackling crime, health, environment), and contributing to the economic development (2002). The BP could benefit in this in that being based in Russia, the firm is naturally a subject of common interest for both countries, thus giving impetus to the support that the organisation may acquire from both nations. Also, the European Union, because of want to establish closer economic ties with Russia, will push for the establishment of an oil and gas company partially owned by one of their member states. This will be good for the EU in that it can help them gather knowledge and forge relationships in the Russian territory that could turn out to be critical in securing an EU-Russian economic partnership. Another major impact of EU to the establishment of a BP office in Russia was their agreement to Russia’s admission in the World Trade Organisation (WTO). Russia’s attempts to join the WTO were prevented by refusal on the EU’s part to let Russia become a member state. When Russia conceded to gradually increase the tariffs that Russian oil corporations charge Russian companies for natural gas, the EU finally let the applicant country forge on with their WTO accession. The BP’s part in this is that when the Russian oil companies begin charging higher prices for natural gas, logically, the company — and their shareholders — stand to benefit from the higher margins of profit resulting from such charges.
THE STATE OF THE RUSSIAN ECONOMY
A peruse of the Russian economy for the past decades would reveal that it has its share of highs and lows. What is important, however, is that the country ended 2005 with its seventh straight year of growth, averaging 6.4% annually since the financial crisis of 1998 (2006). Russia is now the fourth richest country in the world in terms of hard currency reserves and oil export earnings over the period since took office in 2000 rose from billion to 0billion (2006). Economic experts have been noted to say that high oil prices, relatively cheap rubble, investment and consumer-driven demand and the Russian government’s renewed efforts to advance structural reforms have been important drivers to this economic rebound (2001; 2005). Given the set of current circumstances, the BP may deem it wise to set up in Russia as the economic growth of the country could give impetus to the firm’s own economic performance. Another major advantage is that being a country rich in oil and gas reserves, the BP could easily source their products from within the country, decreasing the costs incurred for transportation of such and the taxes that they need to pay in order to import them. The demands of the local market could then be easily met, provided that they establish an oil plant in Russia, and of course operating under the environmental regulations of the country.
ENVIRONMENTAL ISSUES
A facet of corporate social responsibility is the company’s responsibility in the preservation and care of the environment. Oil companies, particularly the British Petroleum have battled issues coming out against them in relation to environmental issues. In fact, some environmental organisations have expressed dismay over the indiscriminate company performance of BP that resulted to harm in the environment. ‘In August 1991, based on its analysis of Environmental Protection Agency (EPA) toxic release inventory data for 1990 (the most recent available), the Washington, D.C.- based public interest group Citizen Action named BP among the top 10 polluters in the United States’ ( 2006). The findings brought out by environmental agencies and concerned environmentalist groups have caused the firm to take measures regarding the issue. Two years after Lord John Browne took over the BP administration, the firm rolled out a new marketing strategy that involved emphasis on environmental responsibility. In 1997, the British Petroleum supported the Kyoto Protocol, a worldwide agreement that seeks to prevent global warming by reducing greenhouse emissions. Subsequent efforts to minimise their business’ impact to the natural environment (providing cleaner burning fuels, reducing emissions, ending all facilitation payments (bribes) and political contributions) were also much publicised by the company, not only in observance of their corporate social responsibility, but also as a way of maintaining their stakeholders’ trust. These attempts on the part of the firm were questioned for their real intention, particularly the question ‘will it lead the world in a sustainable energy revolution, truly moving beyond petroleum, or will it be content to profit from the exploitation of an increasingly taxed planet while draping itself in green?’ (2004).
Some of Russia’s most important environmental problems include air and water pollution (over 200 cities often exceed Russian air pollution limits and less than half of Russia’s population has been found to have means in acquiring safe drinking water), solid and hazardous waste management (generation of solid wastes has increased in the country due to adoption of Western-style consumption and Russian officials estimate that about 200 metric tons of the most highly toxic and hazardous wastes are dumped illegally) and nuclear waste and chemical munitions contamination (1999). Russian president Vladimir Putin in 2000 dissolved the only government body responsible for environmental regulation and protection in Russia. It was a move that provoked outrage from environmentalists around the world, and even some Even some members of the Russian business community have objected to Putin’s decision, fearing the potential for arbitrary enforcement of environmental regulations and the mounting international perception of corruption (2000). Deutsche Presse-Agenrur reported on June 13th that Russian oil giants had a role in pressuring Putin into eliminating the committee. The oil companies claimed that certain ecological hindrances” would diminish their ability to invest in oil and gas exploration over the next five years, whereas they promised to invest 7 billion dollars if those “hindrances” were eliminated ( 2000). However, a subsequent action in 2004 that approved the Kyoto Protocol (a worldwide agreement that seeks to prevent global warming by reducing greenhouse emissions) by Putin gained favourable responses from economic authorities and the general public. This move from the Kremlin has aroused dozen debates of whether such decision would hinder the continued economic growth of the country in that the development of Russia’s critical oil and gas resources – the nation’s biggest source of wealth, but also its biggest source of carbon dioxide emissions – in particular would be jeopardised by any strict application of Kyoto regulations ( 2004).
As a general rule, environmental laws in a country where an oil firm is planning to put up business could prove an entry barrier to the company. However, the relatively lax environmental regulations for companies conducting business in Russia could prove an advantage for BP, as they need not go through the hassles of strict environmental protection procedures to set up in the country. In contrast, the disadvantage lies in the stakeholders’ perception of businesses in Russia. If other international firms who are known for their rampant violation of environmental laws can operate in Russia, then the image of BP could be stereotyped with those companies who are not observing such rules.
TWO OTHER CONCERNS
The following concerns, miscellaneous in nature but nonetheless vital considerations, would add to the pros and cons of establishing a British Petroleum office in the Russian territory already mentioned in the previous sections. The BP could set up office in Russia without fear of oil and natural gas resources diminishing along with relative political stability and production reliability, without fears of attacks or civil war unlike in other oil and gas reserve countries like Iraq, according to of the Washington, D.C.-based Brookings Institution (2004). However, according to Tim Lambert, director of energy consulting at Wood Mackenzie in Edinburgh, ‘taxes have cut into the new entity’s [BP’s] earnings, making it less profitable than it might have been. And last June, President Vladimir Putin’s administration questioned whether TNK-BP had broken laws regarding sharing reserves information with foreigners, according to a report in the ( 2004).
CONCLUSIONS AND RECOMMENDATIONS
These diverse arguments on the pros and cons of establishing a headquarters in Russia have brought the group face-to-face with an undeniable reality, that for every advantage, there is an equally considerable disadvantage that arises. The good may not be taken without the bad, and as such, setting up office in the Russian territory is an attractive prospect but not devoid of difficulties and stumbling blocks. But if a conglomerate such as the British Petroleum was to widen their business horizon, risks need to be taken for it to be possible. Alternative avenues for growth are always in existence. It is in the discretion of the firm itself what path it chooses to take; the path that BP believes would provide a stable business future.
On the other hand, change management is a process wherein all sectors in the society undergo. It is a significant process because it allows the organisation to create decisions that will be beneficial to the employees and the company. Moreover, organisations that are accept changes like the British Petroleum are usually more successful compare to companies that resist it. In a globalise market, new technologies and procedure are emerging rapidly, in order to keep up with this progress a company must be willing to adapt to management changes. The British Petroleum also needs change management particularly with its marketing, inventory, and performance of the employees in order to keep up with the competition that rapidly becomes a huge threat in the organisation. Addressing changes particularly in environment, social and human resource concerns will directly benefit the company because the development in these sections will either aid in the improvement or failure on the performance of the company.
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