Essay About Russian Oil Industry And Acquisition Of Russian Oil

White Nights and Polar Lights – Investing in the Russian Oil Industry
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WHITE NIGHTS AND POLAR LIGHTS: INVESTING IN THE RUSSIAN OIL INDUSTRY
Abstract
This paper aims at investigating the feasibility and strategies to be adopted by Western firms
potentially interested in the Russian Oil Industry. Bringing evidence from three real cases, our study
will deeply analyze possible courses of action and define a suggested one.
We will start from a presentation of the industrys opportunities and threats using Porters Diamond of
the determinants of National advantage, which will allow us to esteem importance and value of the
acquisition of Russian oil to a Western oil firm. The second section of the paper will deal with an
examination and comparison of the strategies adopted by Phibro, Mobil and Conoco in their
developments during the early 90s, highlighting positive and negative decisions theyve taken at that
time. Primarily based on those findings we will clarify our view about Russian Oil sector and
measures to be implemented by Western companies in order to hedge or protect their investment.
INDEX
1. Russian Oil Industry
1.1 The origins
1.2 The transition
1.3 The acquisition of Russian Oil and Western companies
1.3.1 Incentives
1.3.2 Risks
1.3.3 Valuation of Acquisition of Russian Oil
2. Phibro, Mobil and Conoco : when, why and how
2.1 Phibro
2.2 Mobil
2.3 Conoco
2.4 A comparative look
3. Ways to protect investments in Russian Oil
1. Russian Oil Industry
1.1 The origins
1870s-1900s:
The first large-scale entrepreneurs of Russian oil industry were foreigners, while the state only
intervened to collect taxes from foreign ventures.
By the turn of the century, Russian oil was a major factor in the world market.
1900s-1980s
Foreign investors were pulled out after the Revolution was launched and Russian oil stayed under the
sole direction of the state for 70 years since 1917. Responsibilities for the industry were divided
among several ministries. Hierarchical authority, conflicting goals and split responsibility pushed the
industry towards inefficiency and over-production.
By the mid-1980s, production fell by 1/3 while exports by 1/2.
1.2 The transition
1980s-now
After the collapse of the Soviet empire, Russia reopened its oil industry to the outside world. It was
virtually virgin territory for the oil firms, comparable in many ways to the earlier great discoveries in
the Middle East and Africa. If the major firms didnt establish themselves quickly in Russia, they
risked being permanently excluded from one of the worlds largest single sources of crude petroleum,
which was a serious disadvantage since most of the other large sources of crude were located in the
perpetually unstable Middle East.
1.3 The Acquisition of Russian Oil and Western Companies
Lets now list the incentives and risks associated with a potential expansion in Russian Oil market by
Western Companies.
1.3.1 Incentives
1. Russia was the worlds largest single producer of crude petroleum. Its reserves of petroleum were
the seventh largest in the world, and its reserves of natural gas the largest.
2. Close to European and Japanese market, boasted an existing network of pipelines and refineries
capable of serving Western Europe.
3. Rising inflation counterbalanced the currency risk from the exchange
Taking the opposite standpoint, Western oil firms were needed for their capital, technology and
managerial talent. They were expected to restore the production level of long neglected fields and
provide the government with a valuable source of hard currency to finance industrialization and
political reforms.
1.3.2 Risks
1. Hierarchies of control were complicated and changed rapidly
2. Legal system was underdeveloped
3. Cultural distance and new market development
4. Taxes on oil sector were unpredictable and very heavy;
5. Oil sector remained price controls, so that domestic fuel prices were far below international levels
and even below the cost of production.
1.3.3 Acquisition evaluation
Evaluating an investment in Russian Oil by a Western company is not an easy task due to the high
level of involved uncertainty which calls for extensive trade off assessments. This can be done either
in qualitative terms, as already done in previous points, or using a more quantitative approach
exploiting traditional valuation techniques such as the DCF methodology, or newer