Abstract

LUKoil as an establishment of the Russian government has risen over the years since its inception in 1991, to become the second largest oil and exploration company in Russia, with its key markets in Western Europe and America. With a mission to a constant production of gas and oil, the company is also involved in the daily exploration of oil from other reserves, such as in Egypt and Iraq. However, like any other establishment of the government, Lukoil has had to grapple with trade restriction imposed on it by governments, notably Lithuania and Estonia, following fuel price wars with the Russian government (Skelton 2008). Consequently, the company had to embark on an international expansion, by finding new exploration sites and markets outside of Russia, in a bid to exert its image as a competitive and private company. Other expansion methods such as strategic partnerships and mergers would also suffice, as different markets calls for different entry strategies.

Introduction

LUKoil is the second largest oil producing company in Russia, and a leading gas and Oil Company in the world, with its headquarters in Moscow, Russia. The company has its primary operations in Western and Eastern Europe, as well as the United States. The company is involved in oil exploration, production, refining, and the marketing of gas and oil, employing over 148,600 people. For the fiscal year ending December 2006, the company had revenues amounting to $ 68.1 billion. The company was set up following a consolidation of three oil producing companies, which were located in Kogalym, Langepas and Urai cities of Western Siberia; hence the name originates from the initials of these cities (Alexander’s Gas and Oil Connections 2001).

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Moreover, the company has placed priority on increasing its production and sales volumes in both the local and foreign markets. The company is committed to a constant production from its traditional operation regions, while also being actively involved in the development of oil production, refining, and the marketing. The federation of Russia not only controls, but also partly owns and has a massive influence over a lot of the enterprises and companies found within the federation. This includes Lukoil. Having been a creation of the Russian government, Lukoil has not escaped trade restrictions form the government. A case in point is in 2005 when, the Russian government raised the prices of fuel (The economist 2004).

This was a culmination of inflation of 3.1 percent in Estonia, coupled with serious threats over the supply fuel and gas to some of Latvia’s major cities. These are two of the Western Europe’s key markets for Lukoil. In addition, the rise in fuel process from Russia led to Lithuania’s economic minister reaching a decision of not buying gas and oil from Russia (Cooper 2006).

 When LUKoil wanted to acquire the Mazeikiu Nafta oil refinery of Lithuania as one of its international expansion strategies, the country instead opted to sell it to Yukos, a gas company from America.

As it were, Lukoil happened to be the main oil supplier to Mazeikiu Nafta oil refinery. As a result of its being sold to Yukos, the government of Russian discontinued its oil supply to the company, leading to its breakdown, and a struggle by the Lithuania and Slovak government to purchase back those assets they had sold to Yukos. Following these developments, the two countries and other Western European countries had every reason to be worried the moves of the Russian government, and this was later to undermine the hitherto good trade relations Russia had with its trade neighbors (Rozanova 2003).

LUKoil’s international expansion methods.

 LUKoil has been involved in the exploration of gas and oil inside and outside of Russia. At the Caspian Sea, the largest oil fields in Russian and over which the company has a controlling stake, the company has identified 5 new prospects that are waiting drilling. In addition, the company is also exploring oil in Iraq.  LUKoil is also involved on improving production and marketing outside of Russia. The company has planned on boosting its output from the Azeri sector, which is active with a majority of the Western oil companies, such as BP. In addition, the company is poised to increase its overseas oil production five-folds, while also engaging in market expansion activities. LUKoil is also committed to an international acquisition of assets. For instance, in the month of March 2006 LUKoil acquired the larger stake in Suomen Petrooli and Teboil, two Finnish companies to which they added 421 more service stations (Pew Global Attitudes Project 2006).

In the December of the same year, Lukoil undertook the management of 376 stations formally owned by ConocoPhillips that were located in several European countries. LUKoil has also set its eyes on expanding to the Baltic States (Lithuania and Estonia), as well as the Balkan region (Bulgaria and Romania). The acquisition of a Priolo refinery in Sicily, Italy earlier this year is another achievement by Lukoil (Business spectator 2008). This global expansion strategy so adopted by Lukoil is specifically fuelled by a diversification from upstream production (exploration and the search for oil) to downstream production (oil refineries, distribution of gas and oil, and operation of oil and gas retail outlets).

Has the company selected the most appropriate development method?

Although LUKoil is greatly expanding by way of acquiring gas stations, this is in a sharp contrast to what a majority of the other competitors are doing. Esso and Shell are both notably reducing their ownership of gas stations across Europe, owing to squeezed fuel retailing margins. Why then, would LUKoil be so passionate about an aggressive expansion? Perhaps this could be due to the presence of an expanding retail outlet in Western Europe, buoyed by the company’s growing refinery capacity (Remington 2006).  Given that the company has interests in both the upstream and downstream oil and gas production, this development method adopted by LUKoil is appropriate, as the company has leverage over its competitors with regard to reduced economies of scale.

Other suitable expansion methods for the company

LUKoil would be most suited by entering into strategic partners in the areas of downstream oil production. This way, the company will have a competitive advantage over its rivals, through benefiting form such resources of the partner as technologies, capital, people and markets (Lissovolik 2004). LUKoil could also merge with some of the companies in the retail business, thus benefiting from economies of scale such as finances, and bulk buying. Moreover, mergers would also let LUKoil face international competition threats, increase their efficiency and invest more in research and development.

Different methods for different markets

No two markets are ever exactly the same. In this regard, LUKoil would be better placed by using different methods for different markets, depending on the target market, as well as the goals of the company. For example, the company could enter into a strategic partnership in a new market, and in which the identified strategic partner has a wealth of experience, as a cushioning effect against failure. Mergers and acquisitions could also be undertaken in areas that the company deems as having a potential for expansion (Cooper 2006).

 Conclusion

LUKoil came into being in 1991, following the unification of three Western Siberia companies; Kogalym, Langepas and Urai. As an establishment of the Russian government, LUKoil has not been without the interferences of the government, with regard to the raising of oil and gas prices. This has forced the company to lose on several trade deals. Consequently, the company has moved more into the downstream production of gas and oil by acquiring gas stations all over Europe and America. The company could also do with strategic partnership and mergers, to penetrate new markets and enjoy the benefits of economies of scale.

Bibliography

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       Retrieved October 17, 2008.

Cooper, W. (2006).  Russia’s Accession to the WTO. Accessed from

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  The Economist (2004). ‘Ivan at the Pipe’. 11 December: 67-69.

Lissovolik, B. 2004, ‘Russia and the WTO: The Gravity of Outsider Status’. Accessed from:

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         Retrieved October 17, 2008.

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        2008.

Remington, T. 2006, Politics in Russia. New York, NewYork: Pearson Education Inc.

Rozanova, J. 2003, Russia in the Context of Globalization.  Accessed from:

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Pew Global Attitudes Project (2006).  Russia’s Weakening Democratic Embrace.  Accessed from: http://pewglobal.org/reports/display.htp?ReportID=250 . Retrieved October 17, 2008,

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