Michael_A._Hitt,_R._Duane_Ireland,_Robert_E._Hosk

C-42 Part 4: Case Studies

CASE 3

BP In Russia: Bad Partners or Bad Partnerships? (A)

This case was prepared by Zuri Linetsky (MA ’07, University of Chicago, and U.Va. political science doctoral candidate) under the supervision of Robert E.

Spekman, Tayloe Murphy Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective

handling of an administrative situation. Copyright © 2011 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved.

To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a

spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden

School Foundation.

Since entering the Russian oil market in 1997, BP plc
(BP) had two main partners. The first was Rosneft,
the  Russian  state-owned oil company. The second was
Alpha  Access Renova (AAR), a consortium of Soviet-
born oligarchs^1 and one of Russia’s largest privately
owned financial-industrial conglomerates, with interests
in oil, gas, and banking.
In January of 2011, BP and Rosneft announced the
formation of a new strategic partnership to develop oil
and gas reserves on the continental shelf in the Russian
Arctic, covering approximately 125,000 square kilo-
meters in the Kara Sea.^2 Yet within five months, AAR,
with whom BP had already formed another partnership,
would obtain a series of court injunctions, effectively
scuttling the deal with Rosneft.
The failure of the BP-Rosneft alliance could be
attributed to a lack of due diligence on BP’s part or,
perhaps more saliently, to poor alliance management.
A key conditional variable of any alliance is the degree
of interpartner conflict: Alliance partners’ interests
can diverge so much that they undermine the initial
common goals of the partnership, and “effective coop-
eration demands a relatively low level of conflict.”^3 In
the wake of the Deepwater Horizon disaster in the Gulf
of Mexico, which cost them tens of billions of U.S. dol-
lars, BP’s interest was in expanding its oil assets and
revenues. AAR’s interest, meanwhile, was in main-
taining TNK-BP’s position in the Russian oil market,
which the BP-Rosneft alliance would have undermined
(Table 1).^4

Russian Oil and BP’s Past

Investments

Russian privatization

Following the collapse of the Soviet Union in 1992, the

Russian government under Premier Boris Yeltsin initi-

ated a series of reforms to end the oil ministry’s monop-

oly over the Russian oil and gas industry. A group of

new distinct oil companies was created, including Yukos,

Onako, Sibneft, Tyumen (TNK), Lukeoil, Sidanko, and

Slavneft, and beginning in 1995, stakes in these com-

panies were sold at auction. In 1999, AAR purchased a

51% interest in TNK, with the state retaining 49%.^5

From 1993 until 1999, Russian oil production was

consistently third largest in the world, behind the United

States and Saudi Arabia, but following the privatization

auctions, Russian production increased steadily, even-

tually by over 50%. By 2004, Russia had overtaken the

United States as the second largest oil producer globally

(Exhibit 1).

BP, TNK, and Sidanko

BP entered the Russian oil market in 1997, when it

purchased a 10% stake in Sidanko, one of the privat-

ized oil companies, from the Russian banking group

UNEXIM-MFK for $571 million USD. Two years later,

Table 1 Ownership of Russian oil firms before and after

TNK-BP alliance

Company

AAR pre-

alliance

share

BP pre-

alliance

share

TNK-

BP

share

Share

owned by

other major

TNK 51% 51% 49% owned by

Russian state

Sidanko 56% 25% 81%

Slavneft 50% 50% 50% owned by

Sibneft

Russia

Petroleum

29% 33% 52%

OAO

Onako

85% 85% 15% various

shareholders

Data sources: Petroleum Economist website, November 30, 1999; Laura Board,

“BP Boosts Stake in Russia’s Sidanko,” Daily Deal (New York), April 17, 2002; Lachlan

Johnston, “BP Adds $1.35bn Slavneft to Russian Joint Venture,” Daily Telegraph

(London), August 20, 2003; “TNK Tosses Slavneft Stake into BP Mix,” Moscow Times,

March 18, 2003; Alla Startseva, “Onako Sale: Better Times Ahead for Investors?,”

St. Petersburg Times, September 22, 2000.