Factors that Will Improve Gazproms Competitive Advantage - Case Study Example

Background and Academic Context Gazprom was established in 1993. Gazprom is Russia’s largest company producing 83% of Russia’s natural gas. Gazprom is the world’s largest gas producer, and has control over 17% of the world’s reserves. Activities of the company include gas exploration, processing, transport, and marketing. Kalotay (2008) studied the implications of the recent rise of Russian translational corporations including Gazprom to global prominence for the paradigms of international investment. Gazprom has leapfrogged to global status and is a net capital exporter. The state plays a role in controlling natural resource-based firms. The eclectic paradigm with an extension on home-country factors is applicable to Gazprom for explaining outward foreign direct investment. Gazprom has 100 percent ownership in 66 companies, more than 50 percent stake in 43 companies, and ownership in 51 companies with lower stake. ArmRosgazprom in Armenia, Belgazprombank in Belarus, Eesti Gaas in Estonia, Gazum in Finland, ZGG, ZMB, Wingas, WIEH, and WIEE in Germany, Panrusgaz in Hungary, Blue Stream Pipeline Company in Italy, KazRosgaz in Kazakstan, Latvijas Gaze in Latvia, Lietuvos Dujos in Lithuania, Moldovagaz in Moldova, EuRoPol Gaz in Poland, YuroRosGaz in Serbia, SPP in Slovak Republic, Gazprom Marketing and Trading Ltd, Interconnector and Saltfleetby in UK, and Gaztransit in Ukraine are Gazprom’s investments in various countries (Thomas, 2006). The company is headed by Alexey Miller, and has over 221,300 employees. The Russian government has more than 50 percent stake in Gazprom, and enjoys approximately 25 percent of total tax revenues from Gazprom only (Hoovers, 2010). Gazprom’s net income was $0.74M from revenues of $3.5B in 2008 (Reuters, 2010). Table 1. Russian Gas Supplies to Europe (Thomas, 2006) 1990 1995 2000 2004 Russian gas (billion cubic meters) 110 117.4 129 140.5 Other gas (billion cubic meters) 220.5 263.5 329.8 378 Table 2. Prices Obtained ($/1000 cubic meter) (Thomas, 2006) 2000 2001 2002 2003 2004 Europe 103.2 120.1 105.9 134.1 139.6 FSU 53.34 48.34 53.19 49.77 54.22 One of the issues of natural gas relates to European energy security. There has been a rising demand for gas within the EU. Gazprom’s dispute with Ukraine that turned into an international crisis in 2006 and 2009 raises questions about the risks associated with EU dependence on Russian gas. Caspian nations including Azerbaijan, Kazakhastan and Turkmenistan, and Middle Eastern including Iran, Iraq and Egypt provide opportunities for foreign direct investment in the energy sector. A geopolitical analysis led to the conclusion that the ideal strategy for the EU would be to include two countries from the Caspian and the Middle East within its supply stream of natural gas (Bilgin, 2009). Eurasian natural gas delivery has been dominated by Russia, and the interdependence has put pressure on EU’s foreign policy. Gazprom has installed four new pipelines, and has plans to increase its market share. In response Europe has planned or has been building three new pipelines. Strategic gas reserves, anti-trust prosecution, political and financial inducements, and WTO membership for Russia have been recommended for concessions. Commitment has been considered critical for Europe to succeed or win the natural gas pipeline game, and focus on natural gas independence. The “Energy Action Plan” was proclaimed at the EU Spring summit of 2007. There has been an emphasis on interlinkage between global and traditional energy security concept, and regional political stability for securing energy supply. The Strategic Energy Review of November 2008 recommended new initiatives including infrastructure and other projects for enhancing the energy security and political solidarity. An implementation of these decisions will lead to drastic reduction in gas demand and freeze them at current levels. Thus, the EU resolution to decrease its gas demand, and diversify its gas imports will reduce Gazprom’s gas exports to a smaller EU gas market than forecasted (Umbach, 2009). The politics of energy market reform in the Russian Duma has been termed as “energy polarization.” Grigoriadis and Torgler (2009) tested the impact of energy production, party cohesion and ideology, and electoral mandate on policy decisions by Duma between 1994 and 2003. There was a strong divide between Single-Member District and Proportional Representation on gas production demonstrated by Gazprom’s key position through three Duma terms. Important legislative debates on oil privatization had oil production as significant concern in the two first Dumas. No constant left-right continuum existed as deputies’ proclaimed party ideology. Pro- and anti-reform poles were not connected with liberal and state-owned regulatory policies. A solid indicator of Russia’s polarized legislative dynamics is party switching that influences energy sector reform. Russian gas supply for export will continue to grow through the next decade. The intensity of growth will be related to production and internal consumption. The pace of growth will depend on gas reserves, and investments by Gazprom. The demand side will depend on management of Russia’s gas savings. In the most positive scenario, diversification of exports will be possible. In the worst scenario, the opportunity for Russia would be much lesser for the development of an export diversification strategy (Fernandez, 2009). Russia being the world’s biggest producer of natural gas, its ability to maintain timely and reliable supply for meeting global demand has been in question following the episode with UkraineA quarter of European gas is supplied from Russia. There has been an increase in presence of Gazprom in European downstream operations including Germany, Hungary, and other CIS states. . Several observers have been concerned that underinvestment in the gas sector will lead to systematic failures. Also, there has been an increase in relations with Algiers, which is another major supplier of gas to Europe. This has prompted Europe’s policy makers to react demanding the independence of the region on Russian gas (Grigoryev, 2007). Russia has a dual pricing system, and hidden subsidies for natural gas. Dual pricing has been attributed to domestic environmental policy to reduce conventional air pollutants, and economically justify health risks that are avoided. Short term economic damage is caused by substitution of coal for natural gas, but could result in significant health risk. The price differential can diminish over time as Russia makes a transition to market based economy (Dudek et al., 2006). Advantages of unified Russian gas pricing to Russia and Europe have been overstated, and EU security of supply might worsen under unified prices. There is a need in the EU policy to express the interdependence between Russia and Europe, not push Russia towards unified gas pricing, and not consider easy increase in Russian gas exports to Europe (Spanjer, 2007). The present European gas demand is 540 billion cubic meters. The demand is expected to rise to 800 billion cubic meters by 2030. As a significant proportion of European gas demand is supplied from Russia, some analysts have expressed fears that this could lead Russia to use this as a foreign policy tool. An assessment of production, domestic consumption, and investment indicates that there will be difficulties for Russian supply to match the growing domestic and European demand. The threat to European gas supply could be attributed to a lack of investment in Russian upstream sector, and not geopolitics. Factors conducive for Russia to meet domestic demand and export commitments for natural gas include higher domestic gas prices, efficiency in production, and increase in non-Gazprom production (Goldthau, 2008). Industry analysts believe that a fully competitive European gas market will provide incentives to change export behaviour. In order to maintain its market share, Gazprom will have to increase its production capacities. Industry analysts believe that continued low domestic prices will affect Russia’s ability to meet its long term export commitments. Also, Gazprom could reduce exports if the domestic market becomes more profitable by Russian prices approaching European net-back levels (Sagen & Tsygankova, 2008). Research Objective A study has been envisaged with the aim of identifying Gazprom’s practices, and analyse factors that will influence Gazprom’s competitive advantage. Factors include internal and external. The objective of the study is to test the following hypotheses. Growth is expected in natural gas supply for export during the next decade. Growth will depend on gas reserves, production, internal consumption, European demand, geopolitics, and investments. The null hypothesis is: H0: Investments in the upstream sector has no influence or lesser influence than geopolitics on Gazproms ability to increase natural gas supply for export. The alternative hypothesis is: H1: Investments in the upstream sector has a greater influence than geopolitics on Gazproms ability to increase natural gas supply for export. Russia provides subsidies for natural gas resulting in dual pricing system between Russia and Europe. The EU has been pushing Russia towards unified pricing citing advantages. The dual pricing mechanism has been attributed to environmental policy for the reduction of air pollutants caused by the use of other resources such as coal. The null hypothesis is: H0: As a result of Russias move towards unified pricing, Gazprom will gain significant competitive advantage. The alternative hypothesis is: H1: As a result of Russias move towards unified pricing, Gazprom will not gain significant competitive advantage. Methods Gazprom has leapfrogged to become a global player within a short time of two decades. Gazprom’s positioning to meet future demands is of interest to consumers and policymakers in Europe and worldwide. The study has been designed to investigate factors that will influence Gazprom’s competitive advantage. A literature review will be conducted to determine factors that influence Gazprom’s practices. A survey will be designed to examine the factors identified in the review of literature. The survey will seek the opinion of professionals and executives in the industry. The findings from the survey will be analysed qualitatively and quantitatively. Appropriate conclusions will be drawn, and recommendations included. The findings from the study will hopefully clear some of the misconceptions surrounding Gazprom’s competitive positioning, and provide an objective view of factors influencing Gazprom’s practices. Research Ethics This study will be based on voluntary participation. Executives at various firms would be sought for the study. Participants of the survey will be briefed about the study, its objectives, and outcomes of the study. Participant information will be kept confidential, and the findings would be assessed as a group. Timescale and Resources The study has been envisaged in several stages. The stages have been illustrated in table 3. Stage one is the preparation of the proposal, stage two is the review of relevant literature, stage three is the design of the study, stage four is the survey, stage five is an analysis of the findings, stage six is the development of conclusion and recommendations, and finally the dissertation would be prepared. Table 3. Timescale Stage Activity Date Deliverable One Preparation of proposal 04/01/2010-10/01/2010 Study Proposal Two Review of literature 18/01/2010-31/01/2010 Literature Review Three Study design 01/02/2010-14/02/2010 Questionnaire Four Survey 15/01/2010-07/03/2010 Survey Results Five Analysis of findings 08/03/2010-14/03/2010 Discussion of Findings Six Conclusion and recommendations 15/03/2010-21/03/2010 Conclusions and Recommendations Seven Preparation of dissertation 22/03/2010-28/03/2010 Dissertation Resources required for the study include human resources and physical resources. Human resources include faculty for guidance and advice, library assistants for guidance on finding appropriate literature, computer laboratory assistants for guidance on the use of computing resources, and participants. Physical resources include the library, and computing resources. Appropriate textbooks, journals, and other publications such as reports, news articles, and political commentaries would be used for the study. Computing resources include computing stations with data processing tools such as MS Excel, and word processing tools such as MS Word would be used. The data will be analysed using statistical tools such as Megastat. The survey will be executed by using paper based mechanisms or electronic tools such as Surveymonkey. Printing and photocopying resources available in the computing laboratories will be used. The resources available at the University have been considered adequate for the study. Conclusion Growth in gas supply for export during the next decade will depend on gas reserves, production, internal consumption, European demand, geopolitics, and investments. It is expected that investments in the upstream sector will have a greater influence rather than geopolitics on Gazproms ability to increase natural gas supply for export. It is also expected that the dual pricing mechanism will continue into the foreseeable future. The advantages of unified pricing have been overstated, and Gazprom will not gain significant competitive advantage as a result of Russias move towards unified pricing. References Fernandez, R. (2009). Russian gas exports have potential to grow through 2020. Energy Policy. 37 (10), 4029-4037. Bilgin, M. (2009). Geopolitics of European natural gas demand: Supplies from Russia, Caspian and the Middle East. Energy Policy. 37 (11), 4482-4492. Dudek, D., Golub, A. & Strukova, E. (2006). Should Russia increase domestic prices for natural gas? Energy Policy. 34 (13), 1659-1670. Goldthau, A. (2008). Rhetoric versus reality: Russian threats to European energy supply. Energy Policy. 36 (2), 686-692. Grigoriadis, T. & Torgler, B. (2009). Energy polarization and popular representation: Evidence from the Russian Duma. Energy Economics. 31 (2), 322-334. Grigoryev, Y. (2007). Today or not today: Deregulating the Russian gas sector. Energy Policy. 35 (5), 3036-3045. Hoovers. (2010). Gazprom Company Profile. Available: http://biz.yahoo.com/ic/52/52477.html. Last accessed 9 January 2010. Kalotay, K. (2008). Russian transnationals and international investment paradigms. Research in International Business and Finance. 22 (2), 85-107. Reuters. (2009). Financial Statements. Available: http://uk.reuters.com/business/quotes/incomeStatement?stmtType=INC&perType=ANN&symbol=GAZP.MM. Last accessed 9 January 2010. Sagen, E. & Tsygankova, M. (2008). Russian natural gas exports—Will Russian gas price reforms improve the European security of supply?. Energy Policy. 36 (2), 867-880. Saunders, M., Lewis, P. & Thornhill, A. (2009). Research methods for business students. Prentice Hall. (5th edition). Schaffer, M. (2008). The great gas pipeline game: monopolistic expansion of Russias Gazprom into European markets. Foresight. 10 (5), 11-23. Spanjer, A. (2007). Russian gas price reform and the EU–Russia gas relationship: Incentives, consequences and European security of supply. Energy Policy. 35 (5), 2889-2898. Thomas, S. (2006). Gazprom: Profile. Available: http://www.epsu.org/IMG/pdf/Gazprom_profile_May.pdf. Last accessed 9 January 2010. Umbach, F. (2009). Global energy security and the implications for the EU. Energy Policy. Available online on sciencedirect.com Read More