Choose a joint venture
Choose a joint venture�
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As the search for rare resources becomes increasingly risky and expensive oil and gas firms have to use different strategies to maintain their place in a competitive sector. �2013 saw a continuation of the growing joint venture trend between NOCs and IOCs for international exploration� (Global Oil and Gas Transactions Review 2013, EY Review, 2013)�
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You have been tasked with evaluating a joint venture in the energy sector. In this concisely written report you are required to provide specific information and analysis about the chosen joint venture.
Introduction
As the global market in the oil and gas sector continue to be highly dynamic and competitive, most of the companies operating in the sector have been engaged in plans to devise appropriate measures or interventions to make sure that they cushion themselves from the threats posed by the unpredictable conditions in which they operate (Forsyth, 2011). According to Louis (2007), it has become greatly essential for most of the companies operating with the gas and oil sector in order to make sure that they strategically position themselves in the international markets, and one of the main strategy that many oil and gas companies have been adopted include entering into joint ventures or through mergers and acquisitions. However, this research report will only focus on a particular joint venture in the oil and gas sector, in particular between British Petroleum (BP) from United Kingdom and Reliance Industries from India, and specifically belonging to India Gas Solutions.
Therefore, in the case study joint venture betweenBritish Petroleum (BP) from United Kingdom and Reliance Industries from India, and specifically belonging to India Gas Solutions was aimed at exploiting or leveraging on the strengths of each other in order to make sure that they both continued to expand their market share across the global market. This decision was mainly informed by the fact that both companies were in possession of different strengths, which if effectively exploited could have result to enormous market competitiveness and advantage. For instance, the joint venture between Reliance Industries (a subgroup of India Gas Solutions) to continue sourcing for natural gas across the globe and eventually market it in India, it definitely required to make sure that it developed a significant infrastructure, which would have enable the company to make sure that it effectively source for natural gas across the globe prior to transporting and marketing it in India (Business Line, 2011). However, due to financial constraints the company had no other option rather than seeking for another company which had the capability to allow it achieve its intended goals and objectives, in particular those concerned with the level of transportation and marketing of natural gas sourced globally utilising the infrastructure of the company it would enter into a joint venture with (Business Line, 2011).
Reasons for choosing the joint venture between BP and Reliance Industries Ltd.
There were various reasons why the joint venture between BP and Reliance Industries Limited was chosen for analysis:
- The joint venture was a unique one from the fact that, the considered BP is a giant company with enormous infrastructure; whereas the considered Reliance Industries Limited is a small company with interest in natural gas sourcing and marketing but unable to establish its own infrastructure due to financial constraints.
- The joint venture involved two companies which are from two markets that are very different socially, economically and culturally. BP is from UK (Europe) while Reliance Industries Limited is from India (Asia).
- Each of the considered companies managed to leverage on the strengths and opportunities of the other company to improve its performance. For example, BP managed to acquire significant gas and oil reserves from Reliance; whereas Reliance managed to utilise BP’s infrastructure to improve it natural gas sourcing, transportation and marketing.
Background of the joint venture between BP and Reliance Industries
BP Plc (IW1000/4) and Reliance Industry Ltd (IW1000/83)
In 2011, BP company which sough to gain from increased access to new resources and market of hydrocarbons, entered into an agreement of purchasing 30 per cent stake of Reliance company’s stake in its existing 23 gas and oil blocks, for $7.2 billion including its most crucial block i.e. KG-D6 (Business Line, 2011). This resulted to a merger between BP and Reliance whereby BP had high hopes of embarking on utilising its expertise in drilling within deep waters aimed at raising its output especially from KG-D6 that had significantly slumped as a result of geological complexities leaving Indian dependent on importation of LPG. Business Line (2014) states that implementation of this merger plan entailed a total investment of $5 billion for a duration of three to five years which would currently be valued at slightly above $50 billion importation of natural gas to India meaning that the natural gas resulting from this joint would definitely make India independent of natural gas importation according to the concerned minister Moily. Since the signing of the agreement, BP and Reliance have formed a 50:50 joint venture aimed at sourcing and marketing natural gas in India referred to as the India Gas Solution Ltd. which intends to fully utilise BP’s deep water drilling expertise in India (British Petroleum, 2015). However, the challenge of slow process of approval by the government is aimed to be fast-tracked in order to ensure that Reliance and BP begin to step up the development so that more natural gas is found and geology complexities along the Indian coast are addressed for the purpose of fulfilling the natural gas deficit in India (Business Line, 2014).
For example, across the world when companies such as BP/Reliance, Exxon/Mobil, BP/Amoco/Arco, and Chevron/Texaco enter into joint ventures, the key factor that was driving the decision was their interest in making sure that they gained scale in order to make sure that they achieved significant reductions in operational costs while at the same time remaining highly or considerable profitable. Therefore, since scale as well as cost efficiencies remain highly relevant in the international markets which are highly dynamic where most oil and gas companies operate, many focuses on accessing as well as the management of fiscal take by the national governments from the nations where those countries originate (Meyer & Brysac, 2008; Safina, 2011; Kirkland, 2014). However, considering that governments are involved, the issues involving these joint ventures have continued to become increasingly complex, and necessitate the adoption of models that are highly sustainable and which are in the interest of the manages of both the new forms of partnership (that is, joint ventures).
Mergers and partnerships may seek on linking with either one or possibly more than one through provision of necessary expertise and funding in their attempts towards expanding their operations, subsequently leading to gaining access to reserves of substantial amounts (Meyer &Brysac, 2008; Kirkland, 2014). This implies for most entering into joint ventures ought to devise appropriate models as well as high caliber people, in a group that would make sure that international expansion is exponential continued (Louis, 2007; Meyer &Brysac, 2008; Safina, 2011; Kirkland, 2014).
For either to be successful or a failure prior to entering into the joint venture, something which would be of significant essence in order to make that these joint ventures are undoubtedly successful. Thus, potential merger matrix which could be adopted in order to ensure that the joint ventures entered achieves their anticipated goals and objectives, in terms of profitability, cost reduction as well as improved effectiveness (Meyer &Brysac, 2008; Vassiliou, 2009; Kirkland, 2014). Hence, the merger matrix shown in the figure below clearly illustrates how these partnerships can be done even though it slightly involves others other than the joint ventures while evaluating the viability of each of the possible partnership.
Source: Boscheck (2008)
BP and Reliance Organisation Structure
The board for this joint venture comprises of six members drawn from both companies i.e. BP and Reliance. For example, they are: Kris Sliger (Chairman) from BP and Bibhas Ganguly (vice chairman) from Reliance. The executive team of the board comprises of Hiten Mehta (chief executive officer), from BP; Suresh Manglani (chief financial officer) from Reliance; Amit Mehta (chief operations officer) from Reliance; as well as Brian Dodson (chief commercial officer), from BP. According to British Petroleum (2015), the regional president stated that the vision for the joint venture between BP and Reliance is to ensure that the growing demand for natural gas in India is met by making sure that there are assured natural gas supplies from the BP-Reliance partnership. As a result, the joint venture began its operations with only 30 employees in addition to the utilisation of the expertise of BP and RIL in deep water natural gas drilling both in India and internationally. Therefore, the joint venture will result to an assumption of the administration of the prevailing natural gas contracts to customers of KGD6, LNG import included (Business Line, 2014, British Petroleum, 2015).
The challenges of the merger between BP and Reliance
Despite the fact that operational joint ventures in the oil and gas sector are quite common, the merger between BP and Reliance in the recent years can be sited to be one of the highly effective in joint collaborations. However, there are various challenges that faced the operations of the joint venture between BP and Reliance including cultural and political differences between the two countries (Louis, 2007; Meyer &Brysac, 2008; Safina, 2011; Kirkland, 2014). For example, there might be very significant differences between how joint venture are run. For example, India’s bureaucracy is undoubtedly exquisitely sluggish and slow-moving, as anti-corruption and weak political leadership drives snarl up in the process of making decisions in New Delhi leasing to declination in the production. According to Kirkland (2014) BP insists that its envisaged rate of declination to be currently 31 down from slightly above 60 in the year 2010. The main challenges are discussed below in no particular order:
- National breadwinner. In most countries national governments are highly dependent their source of revenue in terms of taxes, royalties, as well as profit sharing. However, in some countries where personal and corporate taxes range from low to minimal, the potential of providing approximately 90% of total revenues of the state. Therefore, the significance of these revenues may result to a conflict between the national governments and the anticipated joint venture (Meyer &Brysac, 2008; Safina, 2011; Kirkland, 2014).
- Benevolent employer. In a considerable number of partnership, companies may decide to maintain lean operations in order to ensure that the processes are streamlined and headcount is reduced, both of which are not priorities which would definitely result to a conflict between the interests the two (Louis, 2007; Meyer &Brysac, 2008; Safina, 2011; Kirkland, 2014).
- Trustee for future generations. BP and RIL partnership are not just business, but they are also held responsible to oversee what may be considered as the only viable natural resource for the nation as well as a source of national pride. This means that at all time there must be constant weighing the development of these national resources against the custodians’ need (Meyer &Brysac, 2008; Kirkland, 2014).
- Cultural difference: Based on Hofstede’s cultural dimensions, the employees of both companies especially those who were repatriated to work in other countries involved in the joint since UK and India are significantly different culturally (Louis, 2007). Thus, any UK employees repatriated to India or any Indian employees repatriated to UK will definitely need adjust to the culturally changes in order to work better and co-exist well with their colleagues and neighbors. Therefore, both companies will be required to adopt Hofstede’s cultural model in order to make sure that any differences in culture are amicably addressed which involve slight restructuring of the organizational structure (Louis, 2007).
Key market
As highlighted earlier, the joint venture between BP and Reliance Industries Limited was solely driven by the benefits each would acquire upon completion of the joint venture. For instance, BP considered, India a very highly attractive market from natural gas. In particular, BP company has outlined in its Energy Outlook 2030 that, Indian energy consumption has experience an exponential growth particularly by 190 per cent over the last two and a half decades and this growth is envisaged to continue by 115 per cent within the next twenty years (which means that the growth will be occurring at an annual rate of over four per cent). Furthermore, the other reason why BP was also highly interested in the joint venture is attributable to the fact that from now and onwards up to 2030, natural will definitely be the fastest growing source of energy due to it exponentially increasing demand. On the other hand, Reliance Industries Limited saw this as an opportunity to utilise BP’s transportation infrastructure in order to source for natural gas across the globe as well as transport and market it back in India, particularly getting the highest amounts of natural gas from BP (Business Line, 2011). In this kind of a situation each of the two companies are expected to benefit.
Key aspects and significant statistics of the joint venture between BP and Reliance Industries Limited (a Subgroup of Indian Gas Solutions)
The joint venture between British Petroleum (BP) and Reliance Industries Ltd (RIL) was significantly informed or motivated by the increasing global demand for liquefied natural gas (LPG) across the world. In the joint venture signing and statement, BP was to get 30 per cent stake in the twenty three blocks of oil and gas of Reliance Industries Limited including the KG-D6 oil fields (British Petroleum, 2015). The value of the total deal was approximated to be about 9 billion dollars, and the entire 23 oil and gas fields were expected to cover about 270,000 square kilometres. Hence the deal was envisaged to be highly significant since it is expected to have positive to both companies that entered into the joint such as the BP and Reliance Industries Limited (Business Line, 2011). As a result of this joint venture both companies experienced significant growth in revenues, profitability and market share subsequently resulting to improvements in effectiveness and market competitiveness (British Petroleum, 2015).
Recommendations
The recommendations for the firms involved in this joint venture in a descending order are as follows:
- The two firms should ensure that an upper limit of the joint venture agreement is set to avoid discomfort from either side. This is because Reliance is exchanging its gas and oil blocks in India which may be considered a strategic natural resource with BP’s infrastructure which is constructed through public funding. This may cause dissenting voices from either side if one side feel that the other side is benefiting more.
- The two firms should avoid merging any of their operational activities to avoid conflict of interest. This is because BP is a public firm and may prioritise the interest of UK’s citizens at the expense of profits, while Reliance Industries Limited is a private company which may prioritise profits at the expense of citizens.
The reason for this ranking is that, natural resources as well as publicly funded infrastructures are considered highly significant because they are often sabotage targets by enemies. This made the first recommendation rank number 1 compared to the interests of citizens and profits which are of less national importance compared to natural resources and publicly funded infrastructures.
Conclusion
In conclusion, it is undoubtedly evident that through joint ventures companies operating in oil and gas sector can achieve significant benefits in terms of operational cost reduction, market expansion, as well as increased profitability and improved effectiveness. This is attributable to the fact that, each of the companies entering into a joint venture utilises all possible avenues to leverage on the strengths as well as opportunities inherent in each of these strengths and opportunities with an objective of making sure significant benefits accrue from such engagements. For instance, it has been observed that through this report the case study joint venture discussed between BP and Reliance Industries Limited has shown that, each of the two companies leveraged on what it was lacking, but present in the other company in order to make sure that each of the two companies eventually achieves the anticipated results. In particular, BP leveraged on the ability to expand its market share by making sure it sell more natural gas; whereas Reliance Industries Limited leveraged on the transportation infrastructure of BP in order to source for natural gas across the globe and transport and market it in India. This means that a joint venture between the two companies resulted to a win-win situation whereby both benefits from the strengths and opportunities inherent in the other partners within a joint venture by leveraging on the positive aspects integral in each of the company.
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