Gazprom, a state-owned energy giant, is one of the leading oil companies internationally. The company undoubtedly holds the largest gas reserves in the world. However, it has recently experienced several challenges owing to the ever-changing international markets, demand and competitions. The company’s management has, therefore, foreseen a scenario where the company’s fortunes are at stake due to international market demands.
The major goal of Gazprom is to become a leading global energy company. The company aims to achieve this through diversifying its business activities globally (Strategy 2003). Being a state-owned company together with geographical location of Russia, the company stands a better position to reach all markets in the world.
Gazprom has strategies to attain international business. According to the company’s management, their export strategy is based on their long-term system of contracts under the principle dubbed “take-or-pay”. Their gas price has been pegged to the price of petroleum product. The underlying principle set by the company based on their export strategy is the maintenance of the unified export channel.
The company exports oil and gas to regions such as Europe, CIS and Baltic States, America and Asia-Pacific (Strategy 2003). The company’s marketing and trading arm (Gazprom Marketing and Trading- GM&T) has been vital in enabling the company to reach its global markets. The entity has expanded the company’s markets reach from European markets to other parts of the world. The entity has also helped the company to monitor and respond to the ever-changing dynamic markets in energy operations.
The secret behind the operations of the firm is the adoption of the business forecasting software and advisory reports from Ventyx (Gazprom Marketing and Trading Success 2013). Ventyx keeps Gazprom at the highest levels of business developments as it analyzes potential opportunities. This ensures that the company trades in a continued, appealing profitability and creditworthy business (Gazprom Marketing and Trading Success 2013).
To address the challenges in international markets, the company has opted to use GM&T. The entity provides the company’s customers with integrated energy solutions. This has created a good rapport between the customers and the business. Indeed, the company has achieved a lot through this link.
To overcome the challenge of constantly changing international energy landscape, the company has employed experienced analysts. This team works tirelessly to satisfy their customers. This team monitors daily activities in the business as well as designs both the short term impacts as well as long-term investment strategies (Gazprom Marketing and Trading Success 2013). Through this, the company has maintained their customers’ satisfaction globally without making losses.
Other achievements that the company has achieved through its international strategies include:
- Exploration of all investment opportunities that exists in global markets.
- Potential long-term trade relationships with other states.
- International regulations that govern trade on energy so that the company is not barred from conducting its normal activities.
It is, therefore, evident how the company has evolved to maintain its customers and global markets.
Considering some of the successes of Gazprom, the company has achieved a lot in the global market. The company’s driving force is to seek international markets and therefore it has to take into account the local market’s situation. The government has supported the company’s rapid expansion internationally. The government has supported the company to control its own pipelines that deliver gas to their customers. This is a great achievement towards realizing international markets and their fit in the global competitions.
Through establishing of the oil business in other states, Gazprom has achieved good relations with the respective states. Countries where they have established their markets include countries like Germany, Singapore and the United States of America. This carbon trading has expanded the distribution scope, therefore, increase in their production income. This marketing strategy has been achieved as a result of the better liberal trade environments present in Russia’s economy.
The company has also achieved a steady rise in profits since their intrusion into the global markets. According to Peter Pham, Gazprom made a doubled income which was projected to be $10.1 billion. This was contributed by its aggressive involvement in international trade. This was despite the stiff completion from other companies that struggle to control the European markets. International trade has boosted the Russian economy due to gains made from foreign currencies. The profits earned from this, has been used wisely to improve the production level of the business, as well as its strategies in the international markets.
The other success as a result of international strategies is the development of retail sales of their natural gas. The company has, therefore, created a more affordable product that any consumer can acquire. This motivates the customers making them demand more. The final impact will be on the development and stabilization of the business markets in the international markets.
The company has also realized the need to produce high-quality products. They have brought to fruition some of the best-quality products into the market. This has been prompted by their competitors who try to overcome them in countries where Gazprom has settled its businesses.
The company has also achieved balance of trade equilibrium. Through its involvement in international trade, the state has earned trade surplus. This motivates the government to invest more in the firm by supporting its operations (Black 2013, p. 47). Russia, as a result of annual trade surplus from the oil trade, has experienced an immediate and straight addition to her Gross domestic Product. It is anticipated that producers gain from the production that maintains goods and services at a cheap charge. The government has, therefore, increased her infrastructure geared towards developing Gazprom to become one of the leading oil and gas exporters globally.
Gazprom has also managed to diversify its risks through its international strategy. To trade on a single currency dependent solely on one market seems to be riskier than trading in several currencies (Lane 1998, p. 98). This is due to the unpredictable disasters that may attack that particular country where the company operations rely only on the domestic market. In the case of a disaster such as earthquakes, the company that operates in local markets is faced with great loss and even subject to collapse.
Through involvement in international trade, Gazprom seems to overcome such risks. In the case of Russia faced with a disaster, the Gazprom will not incur a total loss, but at least secure some of its business assets in other countries such as Ukraine. The business may end up being saved by all the revenues that it generates from other states such as United States. It is, therefore, evident that Gazprom has strategized so well to overcome such risks. This risk diversification is a great success in the company’s operations.
Finally, the greatest success of Gazprom is its ability to withstand competitions from other related companies. The company’s strategy to expand its operations to other countries relies on its ability to withstand such competitions. it is, therefore, a crucial factor for Gazprom to strategize its businesses in order to benefit from low competition. This advantage of less competition from other firms is as a result of the unique products that Gazprom produces. Gazprom has created lifeline for its business for being in low competition. This success has enabled the company to boost its sales potential and even allowed the firm to flourish.
Despite these several successes evident in Gazprom, there are other factors that have really affected the company’s international strategy. These include factors like political influence, unstable profits from other countries, unstable gas price in the global market and international trade laws.
Looking at the country’s political relations with other countries, it is a great challenge operating a business in countries where Russia does not have good political relations. In the case where President Putin decided that Gazprom constructs one or two gas pipelines to China rather than constructing a liquefied natural gas plant that was designed for exports to the United States of America. This shows how politics influences the operations of Gazprom in other countries.
Being a state owned business, politics has also played a major role in its management. In every business where there is division in the management team, the result has ever been poor operations. It is, therefore, trading at risk should Russia’s political stability be compromised.
The other challenge that the business has faced is the unstable profits from international investments. This results from the unstable trading fuel prices in other countries. There are several aspects to be considered when the business trades internationally. The currency exchange rate is among these aspects which are unexceptional in international trade. Through this, the company is faced with the risk of not getting best profits from international markets should the Russian Ruble trades worst.
The company’s international strategy has also faced the challenge of fluctuating gas prices internationally. This has affected the company’s objectives in that the business cannot project specific product prices.
Conclusively, Gazprom has achieved a lot through its international trades. A lot of profits, foreign earnings and hence the stability of the business have been realized by the company. This has boosted the economic and social standards in Russia. The international trade strategy has also benefited other countries socially and economically, where the company has established its businesses, for example, Armenia. Hence, the international strategy was the best strategy that the company formulated.
Legal Risks in a Joint Venture with Gazprom
A joint venture simply refers to the involvement of two or more businesses that aim at pooling resources and expertise together in order to achieve a particular goal in business (American Bar association 2006, p. 61). There are several reasons that can lead to the formation of joint ventures. Some of these reasons include the desire to expand the business, developments of new products and the need to venture into new markets globally. In the case of a joint venture formation, there is normally some complications that may arise from both the business operations and legal perspectives. At the pre-formation of the joint venture, the entities should consider and evaluate the business benefits and legal risks.
In the case of international companies such as Gazprom and Chevron carrying out a joint business, the legal risks might arise from the following:
- Sharing of price information.
- Customer information.
- Cost information.
- Marketing and strategic plans.
- Technology.
- Bidding information.
- Future plans and forecasts.
Sharing pricing information between the two companies dealing in the same products seems to have some legal implications. When the two companies share crucial information such as their pricing policies, it is possible that one company will not comply with the other’s policies. Pricing information could include crucial data concerning the past, present, or the company’s projected price trends. The information can also include one company’s strategies to offer discounts, rebates and even payment terms. Gazprom, being a state-owned business, may not give complete information on the price. This might lead to the other company feeling challenged, which might result in the company seeking legal action against Gazprom.
Customer information can also lead to legal risks between the two international companies. Customer information includes their customers’ identities and the relationship between the company and customers. If there were legal bindings between Chevron and its customers, a joint venture could worsen their relationships. Some customers may also opt to terminate their services from the company. This may create an unhealthy environment between these two companies, and Gazprom may seek to walk out of the venture. Sharing this sensitive information about the customers seems to have a legal implication in the joint venture.
There are other legal risks that may arise from technology issues. Technology information that can be shared between the companies includes their on-going production research, and the manufacturing techniques. Also, the companies are bound to share information on the involved cost.
This entails the costs that are normally attributed to their specific products and services. This may also include information about their suppliers and even the sources of raw materials. Lastly, the bidding information that the company work with is also shared. The bidding information may contain the terms of the bid and allocation. All the above-mentioned information seems to have a legal binding between the two companies.
Another legal risk is the international laws on pricing of the oil products. One company may be favored by law while the other disadvantaged. Take, for example, the European Union regulations on the oil pricing may be an advantage to Gazprom. The other international company, operating at high production cost will have to sell their products at a higher price. When the two companies agree to form a joint venture, they will have to harmonize their prices. This will lead to slight hike in the Gazprom products. Gazprom domestic customers may shift their tastes in turn. The legal risk that might arise from the international laws will have a great implication in the operation of the two companies.
The ownership of Gazprom also puts it at legal risk if the company decides to form a joint venture. Being a state-owned property poses a major legal challenge to the agreements that will bind the two companies. The people of Russia may sue the company for having involved in such a venture. They may challenge the commitment of the company to provide energy efficiently. The management of the joint venture might also be challenged since the public may also have an interest.
Mitigation Measures
There are several legal risk-mitigation measures that may assist international contracts irrespective of the jurisdictions. The first mitigation measure is to choose a counterpart with a lot of care. This implies that Chevron will have to understand all the operations of Gazprom before they enter into a joint venture. This goes concurrently with understanding ones’ clients and their relations.
To ensure the success of the joint business, there are several techniques that can be employed. These techniques include structuring the transactions in respect to the allocation of realizable companies’ assets, ensuring efficient and effective security structures, and supplementing structural deficiencies accompanied with highly credible collaterals.
In the case of sales or purchases made, there should be a thorough legal diligence activity that will mitigate any risk that may result. Full negotiation of a given sale of warranties has been proved helpful in mitigating legal risks of joint ventures. The two companies should, therefore, negotiate full warranties to help them judge any risk between them in the most appropriate manner.
There should be explicit choice of law and the companies’ jurisdictions to govern their contract. International arbitral tribunals have been used widely to mitigate unfamiliarity with some of the foreign court systems. Therefore, the local courts of the respective companies should be involved to ensure that any future legal dispute does not arise.
When Gazprom and Chevron consider all these mitigation measures, the two companies will realize the best business environment that will enhance their international trade. The two companies will reduce the risks that might arise from the relationships. Otherwise, the joint venture will be of great impact to the two companies because they will share some of the risks that are involved in international ventures. The companies will also learn a lot from each other’s production skills and marketing strategies.
References
American Bar Association 2006, Section of Antitrust Law, Chicago, IL.
Black, K 2013, Business cycles and equilibrium, Wiley, Hoboken, N.J.
Gazprom Marketing and Trading Success. 2013. Web.
Lane, M 1998, Customs modernization and the international trade superhighway, Quorum, Westport, Conn.
Pham, P 2010, Gazprom’s Monopoly Faces a Triple Threat. Web.
Strategy. 2003. Web.