Oil and gas company “Rosneft” in the Russian Federation

MBA-2 (Finance)   Strategic Management                             Liudmila Umarbeva B0297MAMA0411      

Strategic Management

Oil and gas company “Rosneft”

 in the Russian Federation.

Table of Contents

Executive Summary 3

1.About oil and gas company “Rosneft”. 4

2.Theoretical aspects of the Strategic Management 6

3.PESTanalyse 12

4.Porter’s Five Forces Model 15

5.Strategic Group Analysis  17

6.Porter’s Value Chain 21

7.Straegic resorces analysis 21

8.Portfolio analyse. Boston Matrix (BCG BOX) 23

9.SWOT-analyse 25

Conlusion. 28

References 29

Executive Summary

Actions of the organisations and their managers can not be reduced to simple response to occurring changes. It is wider recognise as necessary to use the conscious management of changes based on scientifically grounded procedure of their prediction, regulation, adaptation to the organization purposes, and to changing external conditions. In the same way the organization should react to changes in environment (including its customers). The modern instrument of management of organization development in the conditions of increasing changes in environment it is the methodology of strategic management.

The purpose of this work – to define and consider strategic management of the Rosneft petroleum company which led it to success and to popularity not only in Russia, but also in other countries.  In this work in aim to show the process of strategic planning we suggest this scheme: to determine goals and objectives, to determine the characteristics of environment, SWOT analyse, BKG Matrix, to determine strategy.

The modern oil company is something more, than the most difficult high technologies at all stages from exploration of oilfields to transportation and in addition not less difficult control system and decision-making. One of the most important tasks of Rosneft the careful using underground riches, their effective transformation into the final product necessary for the consumer and its timely delivery to destination.

Requirements and principles of the sustained development of the industrial companies, including the oil companies became now more topical for the majority of the countries of the world. Moreover, company in the list GLSEO (Government’s List of Strategic Enterprises and Organizations of Russia) therefore in my opinion consideration of this company is the most interesting.

1. About oil and gas company “Rosneft”

Rosneft is open joint stock oil Company it is owned by the state and is one of the leading enterprises of fuel and energy complex of Russia. Rosneft is formed in accordance with the government decree of the Russian Federation on September 29, 1995 N 971. The main activities of Rosneft are: search and exploration of hydrocarbons, oil and gas production and processing of raw materials, sale of oil, gas and implementation of products in Russia and other countries.

Rosneft is a vertically integrated company. The structure of the company includes all technological chain process: from search and exploration oil and gas to the processing and marketing of final products.

The head office of Rosneft is in Moscow, while its main assets are located in Western Siberia, Timan-Pechora oil province, in southern Russia and on Sakhalin Island.

The main competitive advantage of Rosneft is a dimension and also company has very good quality base of recourses. Rosneft, for example has reserves of hydrocarbon about 30 bln. barrels of oil equivalent that is the best characteristic among international publicly traded in this industry companies. Rosneft is leader in liquid hydrocarbon reserves. Company operates mainly conventional reserves that give opportunity to increase production of hydrocarbon. Also, Rosneft has a good base of two types of reserves: probable about 13.0 bln. barrels and possible about 11.0 bln. barrels that will be the most important resource of filling in proved reserve expansion in the prospect.

Rosneft was formed in 1993 as a governmental company. In 1995 government has transformed its decision Rosneft in a public company. In the period 1995-1998 was constantly changing direction of the company, as the result its assets were virtually without controls. In this period was dramatically decrease of oil production and petroleum extraction declined up to one third of producing capacity. To make Rosneft one of the key players in the Russian energy market, the Russian government in October 1998 decided to change the company management. The new team of managers eventually brought Rosneft out of the crisis and the company has become successful and beneficial. From 2000 it was a new period of growth of the company. The annual average increase in oil output exceeded 11%.

Enhanced management, consolidation acquired assets (new assets and existing), intensified financial control and also integration of improved science and techniques all led to a considerable increase in the rational use of resources and let Rosneft to increase and expand volume of their production. See Table 1 (www.rosneft.ru)

Table 1. Petroleum production, (mln tons) and refinery throughputs (mln tons)

It was a timely and proper change of the company strategic management that allowed reaching results such Rosneft has today. Therefore strategic management makes necessary decisions about the future plans of the company such as principles, resources and also how to make organisation more flexible in the interaction with the countries and spheres in which Rosneft operates.

2. Theoretical aspects of the Strategic Management

Strategic management has many different approaches and theoretical concepts which are classified.

But one of the most popular, in my opinion, classification is Henry Mintzberg, Bruce Ahlstrand and Joseph Lampel which describe ten different "schools of strategy", that contain the main ideas about strategic management of the company: (Henry Mintzberg, 1994 P.3)

1) Prescriptive school: design, planning, positioning;

2) Descriptive schools: entrepreneurial, cognitive, learning, political, cultural, environmental, configurational.

The first three schools are peculiar strategies of the development organisation. They are prescriptive - their followers are interested in how to form the strategy, rather than how they actually were developed.

Rosneft uses prescriptive strategy. As were noticed Rosneft has several operational systems and the plan of each operational group is a part of common annual plan prepared. Each plan has to address how it confirmed with the Rosneft mission statement and objective with regard to market share capital investment also return on capital e.g. Plans are gathered together and presented by operating group to the Rosneft. (Henry Mintzberg, 1994 P.5, 6 , 10)

Design School: strategy formation as the construction and elaboration, as well as a conscious modelling. Primary sources of this school are from the end of the 1950s - 1960s. The most intensively the school began to develop after the publication of a basic textbook, "Business Policy", prepared by a group of general management of Harvard University and most popular known in writings of Kenneth Andrews in his book. The basic ideas can be traced back to Philip Selznick’s influential little book, Leadership in Administration. (Henry Mintzberg, 1994 P.5, 6 , 10)

School of design (design, construction, modelling) considers strategy as a model of correspondence between internal and external opportunities of organisation. The basic point of the school is to develop a strategy based on the results of the study of Strengths, Weaknesses, Opportunities, Threats or the assessment of the company and environment through a well-known SWOT-analysis, which within the school is the main method used in the formation of strategies. Also this takes into account such things as the distinctive competence, key factors of company success, value management and social responsibility of strategy, and the process of creating the strategy design school is considering how to achieve an optimal balance between internal strengths and weaknesses of organisation and external threats and opportunities for company that is, it needs to find correspondence between the characteristics of the firm and the opportunities that define its position in the external environment.

The model of strategic planning was presented by H. Igor Ansoff in his book "Corporate Strategy" (1965). This model supposes a consequential and unbelievably detailed planning program of objectives of the company, strategy development, product market position and allocation of resources. The plan is formed based on a colossal amount of analyzes, which usually should be combined for decision making.

Overall, strategic planning school adheres to the concept, based on the assumption that the process of developing a strategy this is a set of formalized procedures for designing, programming and planning. The strategic plan is formed as a result of forecasting, situational and scenario analysis of internal and external environment. The strategic planning process involves outlining the goals and objectives of the company, developing strategic and operational plans for the levels of the organisational structure. Since the school encourages the development of strategic planning objectives (tasks) of the organisation in a quantitative form that can be conveniently represented as graphs and tables, a special emphasis in this school is placed on the quantitative interpretation of the organization's objectives and the development of a sequence of steps and procedures (decomposition, generate various tables etc.). The only main difference between the school plan to the school of design is that a simple model of an informal school of design becomes part of the school planning in a well defined sequence of steps, almost automatically: a strategy here is the result of controlled, conscious process of formal planning is divided into separate steps, as shown schematically depicted in the form of checklists and supported by appropriate models. That is why the main tools of this school are called as growth vector (matrix "product - the market" by I. Ansoff) and the corresponding model based on the diversification of portfolio analysis. The leading role here is about professional "planners, strategists," the most important tools in this are called "scenario planning" software such as «Project Management» etc. After determining the objectives of moving to an external audit (or the analysis of external opportunities and threats), which are made in the various projections of the future state of the environment, and developed scenarios to predict the possible course of events, allowing to be prepared for any unexpected development of the past and reveal new perspectives. In parallel with the internal audit is conducted external audit of the organisation, including an examination of its strengths and weaknesses.

The founders of positioning school were military strategists, Sun Tzu, Clausewitz, and others (the first stage of position school, absorbing early writings about military strategy). Achievement of consulting firms Boston Consulting Group – BCG belong to this school (create and develop matrix "Market Growth / Market Share") and Mc Kinsey (second stage of positioning school, based on the imperatives of consulting).

However, the intensive development the positioning school has got since the publication the book (1980) one of the founders of the third stage of positioning school (dedicated to the development of empirical doctrines) Michael Porter's "Competitive Strategy", when the school of design and planning is gradually began to lose its meaning. School of positioning is largely uses achievements of these two schools. Michael Porter proposed and detailed three interrelated concepts, bringing them to the level of practical techniques:

1) Competitive Analysis (Industry analysis);

2) Competitive advantage and build on the its basis the competitive strategy.

3) Value chain

School of positioning, in contrast to the schools of design and planning, proposes to limit to each organization, operating in a particular industry standard number of strategies that can give the desired results, allowing the company to provide competitive position in the industry, in other words this are specific advantages, which the company receives in the market. Initially, for each organization within a particular industry has a limited number of generic (or competitive) strategy, and further school of positioning narrows the most appropriate of them to several key positions in the aggregate is just representing the typical strategy of competition, selected through a formal (industry or competitive) analysis of the situation in the industry. This methodological approach for the design and choice of strategy involves using of such models, as already mentioned above, the model of "growth - share," or model of BCG (Boston Consulting Group); impact of market strategy to profit (model PIMS) (Profit Impact of Market Strategies); competitive analysis model of Michael Porter.

There are three core areas which are taken the view of the prescriptive approach: strategic analysis, strategic development and strategy implementation. According to prescriptive approach they are linked together sequentially. Therefore it could be used the analysis area to develop a strategy and then the strategy is implemented. So, by this approach the strategy is prescribed.

Strategic analysis of prescriptive approach divided into three elements:

1. Analysis of the environment

2. Analysis of resources

3. Identification of vision, mission and objectives. Some strategists argue that this element should be before the other two elements.

The objective function begins with the establishment mission of organisation, which expresses the philosophy and meaning of his existence. Mission - a conceptual intention to move in a certain direction.

“A mission statement describes the organisation’s basic function in society, in terms of the products and services it produces for its customers” (Henry Mintzberg and Quinn, 1997),(http://www.scribd.com/doc/22539717/Mission-statement)

Rosneft’s mission is “To answer society’s needs for energy resources through innovative, environmentally safe, and feasible solutions. Thanks to its unique resource base, high level of technology and team of committed professionals, the Company ensures stable growth of its business and an increase in shareholder profits. Our activities promote social stability, prosperity and progress wherever we are located”. (www.rosneft.ru)

Rosneft’s vision of the future is “Rosneft as a leading global oil and gas company”.

Goal - specification of mission in of the organisation in a form accessible to manage of their implementation. Main characteristics of goal are as follows: a clear focus on a certain time interval; specific and measurable; consistency and coherence with other missions and resources; targeting and accountability.

Rosneft’s goals

-“strengthening company’s position among leading global energy corporations”;

-“maintaining prime positions by operating indicators”;

-“entering the top group by financial indicators and level of capitalization”.

Based on the organization mission and goals the strategy is formulated and the policy of organisation is determined.

The next step is analysis of environment. This work has exploratory features and often performed by outside organisations. The obtained results of the environmental analysis are often forced to once again clarify the mission and goals of the company, so that the planning process again returns to the initial stage. (Lynch, R 2009, P.37)

The strategic analysis is one of the key elements of the procedure of forming a strategic plan for the development of any socio-economic system. In its content it is a pre-planning research, which systematically analyses the factors of environment and resource potential (internal opportunities) of the organisation to determine the "current (initial) state," or "situation" and to identify the conditions for further successful functioning and development.

3. PEST analyse

It is important to study environment which in strategy is everyone and everything outside of company. There are two main techniques that can be used make analyse of general environment: PEST (Political, Economic, Socio-Cultural and Technological) and scenarios.

PEST - the environment analysis

Scenarios:

P: The oil and gas industry is extremely important for development national economy and the world economy, and often the government share in the capital of the companies of this industry is fixed and has a high level (for example, government share in Rosneft is about 75 %) that allows the government to make essential impact on industry development. The active government intervention led to stability of development of this industry. Even in case of change in legislation or other possible types of regulations, the enterprises operating in this industry, will not have threatens, because it is not have special  difficulties to adapt to arising changes.

E: the economic situation in the some countries and in the world can make considerable impact on development of petroleum and gas industry. Episodically arising crises can lead to emergence of new risks which can threaten of abilities to survive for a number of the oil and gas companies. In view of that the economy develops cyclically, it is possible to assume that in the next some years the global crises aren't planned (last were in 2008). From this it is possible to draw a conclusion that soon the situation in this industry can improve, or remain in a stable condition. But even the crisis period not always harmful effects on the organization: «crisis forced the company to analyse very carefully available problems, to estimate risks, to reveal weaknesses and look for the ways of their elimination. And a lot of things were done successfully».  (Rosneft report 2010)

S: In general, the oil and gas companies fully realize the importance of the human capital. Value of human life — the main priority at interaction of the companies with workers therefore labour protection, industrial safety, health safety have a primary attention for the company. Rosneft follows national law for protection environment. In future Rosneft can improve the social policy to promote social and economic development of regions, and also will give more attention for creation optimum working conditions.

T: The success of the growth oil and gas industry depends on level of the development technological innovations. Nowadays, development proceeds have moderate rate, so development doesn't stop. From time to time new technologies are developed therefore it can be as some kind of guarantee of stable development of this industry.

Therefore results of PEST analyse and discussed scenarios show that oil and gas industry has low level of turbulence which means that occurring changes can be predicted. Moreover Rosneft has 75% government shares that allow government to influent on many factors of environment surrounding the organisation.

4. Porter’s Five Forces Model

Nowadays there are about twenty petroleum companies in Russia, but the largest of them are "Lukoil", "Gazprom Neft", "Surgutneftegas", "Rosneft". (http://www.ngfr.ru/)

Oil and gas dimensions of the largest oil and gas companies of Russia (2011)

 
In order to develop competitive advantage of Rosneft it is necessary to use Porter’s Five Forces Model (competitive strategic analysis). 

The threat of potential new entrance. Threat of potential new entrance of new competitors into petroleum industry is smallest, because to exist in this industry needs huge capital investments (on purchase and development of expensive new technologies, development of new fields and so on). Besides, there is a certain consumer’s commitment to production of already functioning companies. Also existing companies in this industry have already worked out sales channel that needs considerable expenses (difficulties to make traders interest to new players, so anybody yet known and unchecked companies let prevent new entrance of potential competitors).

Competitive strength of suppliers. The structure of Rosneft includes a large number of the oil and gas extraction enterprises (for example, Yuganskneftegaz plc., Rosneft-Purneftegaz Oil Company, Severnaya Neft and others), the relations with which are already enough well worked out that provides uninterrupted and timely delivery of raw materials. Existence of the long, well regulated communications reduces possibility of threat from suppliers.

Goods substitutes. There is a possibility of appear and a wide use of alternative power sources in long-term prospect that will reduce need for gasoline use for cars and other technical devices. But speed of development and development of these sources isn't so great, so now the oil companies don’t have problems with sale. So in general companies and this industry threaten nothing.

Competitive strength of consumers. Production of the company is standardized, consumers are well informed, and costs of transition to other supplier are low but that generally doesn't prevent consumers to choose production of other company. But as well as in any other industry the quality of production is very important also consumers commitment to production of any concrete company is important as well.

5. Strategic group analysis

                        Market share

                                    17,9 4

                                    15,3 1

                           14,8    2

14,4                             3

12,8    5

  9,2 6

                                                  12000   25000             68000     94000  sales volume

                  Oil production

               116,3  2

                                    92,2 1

                                    70,2 3

                           59,6 5   

29,9     4

26,1  6

                                                  977          4847  6139    10252    17504 17694       proved oil reserve

   Number of gas service

      stations                 2170 1

                                    1760 2

                            950      4

                                      700   3

  520       6

303       5 

                                                   5        13 14                26                 44 45 sales companies

According to strategic groups analysis 6 large oil companies make 4 strategic groups. In one group are Tatneft and Surgutneftegaz, in another – Rosneft and TNK-VR, and the in third and in fourth groups are Lukoil and Gazprom Neft companies. According to this analyse we can see existence of direct dependence between sales volume of the company and company’s market share. It is obvious that Gazprom Neft is in the leader, on second place is Lukoil, and on the third position is Rosneft.

The strategic group analysis based on such indicators as number of the sales companies as a part of the company and number of gas service stations, also there is existence of direct dependence between two specified indicators. Therefore as many sales companies have company (as company’s part), as more number of gas service station company will have. Lukoil and Rosneft are leaders in this area and they incorporated in one strategic group. Gazpromneft is second. TNK-VR and Tatneft companies which are included also into one strategic group are third and Surgutneftegas has the smallest number of sales companies.

According to group analyse based on such indicators as oil production and proved reserves leaders are Rosneft and Lukoil companies. Also one group includes Gazpromneft and Tatneft. And separate groups make TNK-VR and Surgutneftegas which has the smallest amount of proved reserves.

The main competitive advantages of Rosneft are:

1.A huge number of consumers in Russia and in the world – until number of consumers will remain at stable level or grow, the industry will remain attractive and highly remunerative;

2. Government regulation – the problems arising in industry, can have the enormous size and solve such problems can only the government. Only the government can influent on actions of different economic player, follow the law, protect of the government and public interests. Implementation of these functions possibly can be made by realization of scientific and technical, tax, budgetary and price policy, and also participation in the international organizations and agreements. Government regulation provides stability for such kind of companies;

3. Technology, innovation –as more developed technologies of company as more competitive advantages company have. It will give opportunities to develop techniques of oil production and raw materials processing more effectively. As a result it will give to company considerable incomes and improved competitive position of the company;

4. Capital investments – oil and gas industry needs very considerable volumes of investment for successful development. All large projects connected with development of new fields, development and introduction of new technologies would be impracticable without support of investors. The large number of strategic investors this or that company, the bigger number of projects it possesses, and consequently can become more successful;

5. Developed infrastructure – directly depends on it success of the company. If company can provide own production, independent sale the production, without help of mediators, brokers, agents or competing companies company will save money on these processes. Therefore it is so important for companies in this industry to think over carefully all aspects of the activity, everything in details put in a plan and follow the plan.

Porter’s Value Chain

Value chain of the company allows us to define the main activities that create value for consumers, and at the same time is an important tool for strategic analysis of the expanses of the company. Also, the elements of the value chain can become a competitive advantage. In the company Rosneft identifies five key processes that create the value of the finished product.

7. Strategic resources of Rosneft

To make assessment of strategic resources of the company it necessary to use mark system, in which:

5-the highest position, very high probability of implementation of possibility of using of the necessary type of resources;

4–high possibilities;

3–average possibilities or difficulty of realization of possibility of using resources of available quality and quantity;

2–weak or low possibilities;

1–the weakest position means lack of necessary resources for implementation of possibility.

Strategic resources analyse shows that the company is provided with sufficient resources for implementation of operational activity, achievement goals, and also for effective functioning in the conditions of changes. The strongest positions have financial, technical and technological resources. These resources are present at the company in that quantity and quality which is necessary for implementation of a production activity in the conditions of instability, changes of demand and other factors. Also strong position has HR that gets huge attention in the company (programs of a HR, training etc.). Development of other resources should have also attention in order that the company always can have a possibility to invest own funds, to make the policy adequate to developed conditions and to justify trust of consumers.

8. Portfolio analyse. Boston Matrix (BCG BOX)

Portfolio analysis is based on the premise that resource allocation should be in accordance with the optimal structure of the activities (in terms of the maximum potential income of the enterprise as a whole). The advantages of portfolio analysis may include visibility, emphasis on qualitative advantages, and ease of processing.

BCG matrix, which is listed below is based on this data. The size of the circles indicating the products depends on the market share. From the matrix shows that liquefied hydrocarbon gases are the least profitable products, they are in the lower right quadrant of the matrix. In this quadrant are the "Dogs." They have weak growth prospects, lagging position in the market and finding the back of the leaders on the experience curve limits the size of their profits.

Diesel and gasoline production are one of the best positions in the matrix. They are in the quadrant of "cash cows". While “cash cows” are less attractive in terms of growth prospects, this is a very valuable business unit. Additional inflow of funds from them can be used to pay dividends, finance acquisitions and to ensure investments in developing stars and problem children, from which future stars may grow. All the efforts of corporations should be directed to the maintenance of “cash cows” in arising level as long as possible to use their ability to generate financial flows. It should be the goal of promoting and protecting the market position of “cash cows” during the period when they are able to earn money to be spent on the development of other units. Fuel oil, having a higher rate of growth of demand than the gasoline and diesel fuel has moved higher and is in the quadrant "cash cow" and the "Stars." This type of product should be given more attention, since it may be moving in any of the right-hand quadrant. If fuel oil goes into the category of "Stars", he could make big profits and growth prospects. From these productions depends the general condition of the economic portfolio of the corporation. "Stars" are usually needs of significant investment to expand production capacity and increase working capital.