Internationalization in Oil&Gas Industry

Improvements in international communications and transportation and increased homogeneity of international markets are stimulating increasing number of firm to go global (Keogh et al, 1998). Such a process of internationalization has touched not only every segment of world economy but even has stopped being a prerogative of developed countries attracting more and more emerging ones. A historical view on the market-entry literature implies that in the 1960’s, the main focus was on a comparison between two internationalization modes–exporting and FDI.

In the 1970’s internationalization literature identified licensing, franchising and subcontracting as other strategic options. In the 1980’s the resurgence of mergers and acquisitions highlighted the choice between greenfield ventures and acquisitions (Buckley & Casson, 1998). Reasons for going abroad vary according to the industry sector as well as to the country of origin. Taking all the motives for internationalization together, they can be represented by the following list. According to Bartlett et al.

, the earliest motivation to invest abroad was the need to secure key supplies, that’s why the first MNCs were Standard Oil, International Nickel and others. The second reason was market-seeking behavior which drives companies with volume-intensive manufacturing processes (food, tobacco, chemicals, automobiles) to move beyond their home markets. Traditional trigger is access to low-cost factors – exactly low-cost labor stimulated companies in clothing, electronics, household appliances etc. to establish offshore productions. Moreover, some

more modern motivations can be pointed out: scale economies, ballooning R&D, shortening product life cycles, scanning and learning capability and competitive positioning (Bartlett et al, 2004). Regarding to country of origin it can be revealed that the decision of firms from developed countries to internationalize is explained by the willingness to exploit their existing competitive advantages, while those from emerging countries may invest abroad to explore critical assets available in global markets (Tsai & Eisingerich, 2010). Despite the reason of internationalization, its process is usually described by the well-known Uppsala model.

According to this model, foreign-country entry is a learning process which starts from exporting products through first independent and then own channels of distribution and finishes with own production establishment. However, nowadays this model is not a universal one and different cases can be observed when firms jump over some stages and start joint ventures or acquisitions. Particularly, it is typical for emerging countries and firms with huge start investments. Hence, a reader can notice that reasons and ways of internationalization can extremely vary what gives huge area for investigations.

However, in this paper the author is going to analyze internationalization processes in oil and gas industry. Internationalization processes The selection between the different modes is influenced by many issues, such as the control requirement, commitment, costs, the value creative potential and the complexity involved, experience, capabilities and resources possessed, partner-related risks and national/cultural preferences, the knowledge sharing policy, and most of all, the firm’s overall strategy (Liuhto, 2001).

Buckley and Casson (1998) name various operation modes based on the operation type and the ownership of production and distribution which can be seen in the table below. Source: Buckley and Casson (1998) Let’s discuss the major types. 1. Exporting Despite the increasing number of firms leapfrogging the internationalization stages exporting is still the major step in exploration of a new market. Usually firms start this process from dealing with independent local distributers and later establish their own distribution facilities.

Advantages of this strategy are pretty obvious. Firstly, there are costs associated with establishing manufacturing operations in the host country. Secondly, it may help to achieve experience curve and location economies (Hill, 2007). So, this step enables to learn more about the market, new customers, their needs, to evaluate the volume of demand and, hence, to assess the profitability of intensifying the entrance. Additionally, expanded size of the market can ensure economy on scale, thereby lowering its unit costs.

However, tariff barriers and transport costs can increase unit costs what can make exporting uneconomical. 2. Licensing Charles W. L. Hill defines licensing as an arrangement whereby a licensor grants the rights to intangible property (patents, formulas, processes, copyright etc. ) to the licensee for a specified period, and in return, the licensor receives a royalty fee from the licensee. This strategy is very convenient for companies which are not able or do not want to bear the development costs and risks associated with opening the foreign market.

Additionally, it takes place in conditions of volatile foreign economy or barriers to investments. But looking at the situation from the other side, licensing limits control over marketing, manufacturing and other business aspects, and, what is very important, over technological know-how which is usually a competitive advantage of many multinational firms. 3. Franchising Franchising entails longer-term commitments and stricter rules of way of doing business in comparison with licensing. 4. Joint ventures This entry mode implies establishing a firm owned by two or more independent firms.

By using this strategy company benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political and business systems. Secondly, it gives an opportunity to share costs and risks associated with opening a foreign market. Finally, such a kind of cooperation with locals decreases risk of government interference. When it comes to drawbacks, establishing joint ventures entails sharing is about giving control of firm’s technology to its partner. 5. Wholly owned subsidiaries

It is type of ownership when 100 percent of the stock belong to the firm. Establishing wholly owned subsidiaries can be done in two ways: by acquisition of an existing company or by building own facilities from the scratch. On the one hand, wholly owned subsidiaries ensure opportunity to keep control over technological competencies and all operations in different countries and are required if a firm is trying to realize location and experience economies. On the other hand, this entry mode is the most expensive and risky method of new market exploration.

Although acquisition of established firm decreases risks, but it creates new ones associated with trying to marry divergent corporate culture (Hill, 2007). Internationalization in oil and gas industry First of all, it is necessary to define several characteristics of the industry which have an impact on the internationalization processes in this economic sector. The companies operating in oil and gas industry deal with natural resources which are under governmental control – so, in this sector high power of government can be observed.

Since natural resources tend to run out, governments introduce constraints on starting up such a business and quotas and tariffs on exporting its products to secure domestic supply. Western companies have experienced outright nationalizations, such as what occurred with Exxon Mobil and ConocoPhillips in Venezuela. Or Western companies have been shown the door through intimidation and bullying legal tactics under the guise of “tax laws” or “environmental enforcement,” such as what happened with Shell Oil Co. at its Sakhalin project in Russia.

Even Brazil has shown its nationalistic teeth. Moreover, most oil and gas reserves has been nationalized, therefore the top ten of oil companies regarding their reserves consists almost only of National Oil Companies which are obviously dominating the market. As recently as the late 1970s, Western oil companies controlled well over half of the world’s oil production. But now the NOCs — such as Saudi Aramco, National Iranian Oil Co. , Kuwait Oil Co. , Petroleos de Venezuela, Petroleos Mexicanos (Pemex), etc. — control over 85% of the world’s oil resources.

Western majors control about 7% of the world’s oil resource base. Furthermore, the biggest market players are vertically integrated from oil and gas extraction to even petrochemical production. Besides, oil and gas production is not a flexible process which can be stopped at any stage. However, what drives oil companies to go abroad? Reasons can be divided into three groups: advantages of the company, advantages of the new market and disadvantages of the domestic market. The first group: competitive product, economy on scales etc.

The second one refers to what the market can offer – growing demand, skilled and cheap labor force, difference in price, climate conditions facilitate exploration and extraction, oil deposits are not far from the surface – cheaper oil extraction costs, good suppliers, support from government etc. And the last group is usually mainly about drawbacks in legislative system: heavy taxation, bureaucracy, corruption. The history of Multinational Oil Companies reflects the typical internationalization 4-stage model. Hence, they all started with exporting.

As it was mentioned above, oil and gas export is under governmental control which implies necessity of getting permission on doing such an operation. Moreover, there are obstacles for import – trying to protect National Oil Companies, which have state importance as providers of work places, suppliers for national industries. However, despite the problems it is even not profitable for oil and gas companies to stay within one country at least due to economy on scales opportunities. While exporting, distribution of oil and gas can be realized through the own distribution channels as well as through franchisee.

For example, world-wide known BP has its own gasoline stations and franchise contracts with Arco and Trifty Oil Co. (Rigic, 2012). Moreover, franchise acquisition is wide spread among just-born oil services & supplies companies. One of the most widely used forms of contract in international oil and gas ventures is Production Sharing Contracts. The host country grants to the foreign oil company a contractual right to explore in a specified area in exchange for the company’s opportunity to recover its costs and a specified profit.

In return, the country contributes the acreage and receives a share of production. The management clause of the agreement may give the state oil company significant involvement in the operation of the enterprise since the ultimate goal of the host country is to assume operatorship of developed, producing fields. Joint ventures have a great popularity among international oil companies. Its establishment takes place in every stage of operation processes: in drilling, refinery, equipment production, distribution, alternative fuels projects etc.

Moreover, this entry mode is typical as for SMEs as for large multinational companies. Joint ventures enable its partners not only to share costs in such a capital industry but also to gain unique knowledge from each other. As an example, in the industry where size and experience matter, Sasol Chevron Holding is a joint venture between Sasol of South Africa and the California-based Chevron Corporation and combines the skills and excellence of the world’s largest synthetic fuel producer with the global reach of an international energy plant. The last entry mode is the establishment of wholly owned subsidiary.

Both approaches to establishment are widely used by representatives of the industry. As they are both extremely costly, the main argument for acquisition lies in time. For instance, in less than a decade, GE has extended beyond its Nuovo Pignone turbomachinery heritage, building an integrated drilling, surface, and subsea systems franchise that includes VetcoGray, Hydril Pressure Control, Wellstream Holdings plc and the Well Support Division of John Wood Group plc. Today, GE Oil & Gas operates in over 100 countries, has over 16,000 employees, and generates sales of approximately $9 billion.

Acquiring facilities the company has been acquiring market shares, suppliers, customers and exactly this approach enabled the company to become a noticeable player on extremely new market (Ball, 2011). http://www. hollerafrica. com/showArticle. php? artId=85&catId=2&page=2 http://www. dow. com/investors/joint_venture/sadara. htm   [ 1 ]. http://pennysleuth. com/global-oil-problems/ [ 2 ]. http://pennysleuth. com/global-oil-problems/ [ 3 ]. http://www. ipaa. org/issues/international/docs/IPAAInternationalPrimer. pdf [ 4 ]. http://www. sasolchevron. com/company. asp