St. Petersburg University
Graduate School of Management
Master in Management
Vertical Integration and Internationalization Strategies of
Russian Oil Companies
Master’s Thesis by the 2nd year student
Associate professor, Olga L. Garanina
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПОЛНЕНИЯ
ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ РАБОТЫ
Я, Бондаренко Дарья Владимировна, студентка второго курса магистратуры
направления «Менеджмент», заявляю, что в моей магистерской диссертации на тему
«Стратегии вертикальной интеграции и интернационализации Российских нефтяных
компаний», представленной в службу обеспечения программ магистратуры для последующей
передачи в государственную аттестационную комиссию для публичной защиты, не содержится
Все прямые заимствования из печатных и электронных источников, а также из защищенных
ранее выпускных квалификационных работ, кандидатских и докторских диссертаций имеют
Мне известно содержание п. 9.7.1 Правил обучения по основным образовательным
программам высшего и среднего профессионального образования в СПбГУ о том, что
«ВКР выполняется индивидуально каждым студентом под руководством назначенного ему
научного руководителя», и п. 51 Устава федерального государственного бюджетного
образовательного учреждения высшего профессионального образования «СанктПетербургский государственный университет» о том, что «студент подлежит отчислению
из Санкт-Петербургского университета за представление курсовой или выпускной
квалификационной работы, выполненной другим лицом (лицами)».
_______________________________________________ (Подпись студента)
STATEMENT ABOUT THE INDEPENDENT CHARACTER
OF THE MASTER THESIS
I, Bandarenka Darya, second year master student, Master in International Business program
«Management», state that my master thesis on the topic « Vertical Integration and Internationalization
strategies of Russian oil companies» which is presented to the Master Office to be submitted to the
Official Defense Committee for the public defense, does not contain any elements of plagiarism.
All direct borrowings from printed and electronic sources, as well as from master theses, PhD and
doctorate theses which were defended earlier, have appropriate references.
I am aware that according to paragraph 9.7.1. of Guidelines for instruction in major curriculum
programs of higher and secondary professional education at St.Petersburg University «A master thesis
must be completed by each of the degree candidates individually under the supervision of his or her
advisor», and according to paragraph 51 of Charter of the Federal State Institution of Higher
Professional Education Saint-Petersburg State University «a student can be expelled from St.
Petersburg University for submitting of the course or graduation qualification work developed by
other person (persons)».
________________________________________________ (Student’s signature)
Бондаренко Дарья Владимировна
интернационализации Российских нефтяных компаний»,
Высшая Школа Менеджмента
и Целью данной работы является заполнение
Гаранина Ольга Леонидовна
российских нефтяных компаний и выявления
основныx логистических факторов и факторов цепочки
поставок, которые влияют на процесс выбора cтратегии
Сформулированы следующие задачи:
• выявить и описать основные логистические факторы,
которые влияют на выбор потенциального рынка для
• сформулировать управленческие применения для
компаний, работающих в этой отрасли
Результаты исследования показали, что логистичские
российских нефтяных компаний.
Российские нефтяные компании, интернационализация,
вертикальная интеграция, логистические факторы.
Master Student's Name
Master Thesis Title
« Vertical Integration and Internationalization strategies of
Russian oil companies»
Graduate School of Management
Main field of study
International logistics and supply chain management
Academic Advisor’s Name
Olga L. Garanina
Description of the goal, tasks
and main results
This paper aims to fill this research gap through an indepth case study of internationalization of two companies
Gazprom Neft and Lukoil, through the primary data obtained
via in-depth interviews with experts of industry (Baker
Hughes) and managers who represent companies (Gazprom
Neft and Lukoil) and analysis of secondary data obtained
from annual reports and data books. The objective of this
study is to display the peculiarities of internationalization
process of Russian oil companies, to understand what are the
main logistics and supply chain factors that influence the
process of internationalization, to indicate main logistics and
supply chain factors that influence the choice of the potential
market for internationalization, to formulate managerial
implications for the companies operating in this industry, to
create a theoretical base for the future researchers of supply
chain and logistical factors influencing the decision-making
process of Russian Oil companies. Research results revealed
that logistical and supply chain factors influence the choice
of internationalization and vertical integration strategy of the
Russian Oil companies.
integration, logistics and supply chain factors
TABLE OF CONTENT
INTRODUCTION .............................................................................................................................. 6
Chapter 1. INTERNATIONALIZATION OF OIL COMPANIES ............................................ 10
1.1 Theoretical approach to Internationalization ............................................................................ 10
1.1.1 Resource-based view theory on the Internationalization process of oil companies ....... 16
1.1.2 Internationalization trends of Russian Oil companies .................................................... 17
Chapter 2. VERTICAL INTEGRATION OF OIL COMPANIES .............................................. 21
2.1 Vertical Integration and Value Chain in Oil industry ............................................................... 21
2.2 Downstream sector: logistical aspect in transportation of Oil and Oil products ...................... 25
2.3 Factors affecting the choice of vertical integration strategy ..................................................... 26
2.4 Research gap ............................................................................................................................. 28
Chapter 3. METHODOLOGY ........................................................................................................ 30
3.1 Description of methodological research process. Methods of study ........................................ 30
3.2 Case selection............................................................................................................................ 33
3.4 Data Collection ......................................................................................................................... 33
3.5 Time horizons ........................................................................................................................... 36
3.6 Evaluation criteria and validity ................................................................................................. 37
3.7 Limitations of study .................................................................................................................. 37
Chapter 4. CASE STUDY ................................................................................................................ 39
4.1 Case of Gazprom Neft .............................................................................................................. 39
4.2 Case of Lukoil ........................................................................................................................... 42
4.3 Interview analysis ..................................................................................................................... 44
4.4 Application of logistical and supply chain factors in case analysis of Gazprom Neft ............. 52
4.5 Application of logistical and supply chain factors in case analysis of Lukoil .......................... 53
CHAPTER 5. CONCLUSIONS AND IMPLICATIONS .............................................................. 55
5.1 Conclusions ............................................................................................................................... 55
5.2 Theoretical contribution ............................................................................................................ 56
5.3 Managerial Implications ........................................................................................................... 57
5.4 Recommendation for future research and limitations ............................................................... 58
REFERENCE LIST .......................................................................................................................... 59
APPENDIX ........................................................................................................................................ 63
In recent years various changes happened in different industries worldwide. The quick
improvement of technology and its accessibility led to rapid increase of transformations. The share of
oil in world energy has a direct correlation with the world economic growth. The strategic significance
of the oil and the growth of its consumption has lead to the embellishment of the petroleum industry.
Variety of new factors arises across industries and changes the internationalization and vertical
integration strategies and their implementation while managing the business.
Oil industry is one of the most complex industries engaged in exploration, production,
transportation and processing of oil and oil products. The role of the industry in terms of scientific
and technological revolution is constantly increasing due to the development of transportation and
district heating production, causing the rapid growth of energy consumption. The largest oil reserves
(65%) are concentrated in the Middle East region, the main players on the market are: Saudi Arabia,
Russia, United States, Iran, Mexico, China. Russia owns a large reserve of oil and development of oil
industry and has traditionally been one of the largest exporters of raw materials on the world market.
At the same time the oil industry is a major component of socio-economic development of Russia
with the diversity of linkages with other sectors of the economy. Oil industry is one of the most
important sources of income for Russia. According to the International Monetary Fund Statistics on
2015, export of crude oil reached 10% of total GDP.
The paper examines the process of internationalization of Russian Oil companies (case of
Gazprom Neft and Lukoil). Russia has become a very important player in the market on a world scale.
The strategic consideration of internationalization and vertical integration are considered in this
research paper. Internationalization gives companies new possibilities for the development around the
world and creates additional value. Through internationalization company can develop world level
capabilities and can increase capitalization and gain a deeper control over all the processes of the value
chain, which in Oil industry are: exploration, production and sales. Research on the
internationalization process of Russian Oil companies has been increasingly performed in the last
decades, this particular paper examines the internationalization process of Russian Oil companies with
focus on the logistical and supply chain factors which influence the decision-making process of
internationalization and vertical integration of Russian oil companies.
In order to state the relevant research problem the literature review was conducted to evaluate
the process of Internationalization and vertical integration. The present paper offers common sense
bits of knowledge about the justification and factors which influence the process of
Internationalization and vertical integration of the Oil companies.
After the literature review was conducted, we identified that inspite of the colossal literature on
internationalization and vertical integration processes and factors which influence them, much less is
known about the supply chain and logistical factors influencing the choice of location or country for
potential internationalization and vertical integration.
Therefore, we are going to concentrate on outward operations so as to investigate the
internationalization procedure of Oil organizations in the downstream division and to identify the
main logistical and supply chain factors that influence the decision-making process for
internationalization and vertical integration strategies.
Purpose of the study
This paper aims to fill this research gap through an in-depth case study of two companies
Gazprom Neft and Lukoil, via the primary data obtained through in-depth interviews with experts of
industry (Baker Hughes) and managers who represent companies (Gazprom Neft and Lukoil) and
analysis of secondary data obtained from annual reports and data books. The cases were selected,
taking into account the following criteria: originated in Russia, but operating overseas, vertically
integrated, has refinery or production or distribution projects abroad, should represent both private
and governmental companies.
The goal of the study is to identify the main main logistics and supply chain factors that
influence the choice of the potential market for internationalization and vertical integration.
The objectives of this study are:
•! to display the peculiarities of internationalization process of Russian oil companies and to
understand which are the main logistics and supply chain factors that influence the process of
internationalization, to analyse the importance of this factors while Russian Oil companies
choose a market and strategy for internationalization.
•! to formulate managerial implications for the companies operating in this industry
•! to create a theoretical base for the future researchers of supply chain and logistical factors
influencing the decision-making process of Russian Oil companies.
In order to reach the objectives, the following research question was formulated:
1.! What logistical and supply chain factors influence the decision-making process while
Russian oil companies choose the strategies for internationalization and vertical
The research gap can be filled by answering research question through the conduction of
qualitative research, method of case study. The principal advantage of this type of research is that it
is flexible and adaptable to change, without losing the direction of the enquiry (Matthews & Ross,
2010). A case study is an empirical inquiry that analyses a сurrent situation within its real-life context.
Case study relies on a huge amount of sources of evidence. The main focus is upon the details of the
situation, the reality behind these details, the subjective meanings and motivating actions (Saunders,
2009). The study generally focuses on the analysis of 2 Russian Oil companies: Gazprom Neft and
Lukoil, both companies correspond to the main criteria, which are: Russian company, operating
abroad, have a vertical integration degree, has refining and production activities abroad.
Structure of the study
This research paper consists of 4 chapters, four main parts. The first chapter is devoted to the
literature review of the concept of internationalization process of oil companies, with focus on trend
of Russian Oil companies and main peculiarities. The second chapter analyses the information about
the phenomenon of the vertical integration of Russian Oil companies. The third part describes the
methods which are used in this research paper and the justification of used tools presented there. The
main research tool is case study complemented by in-depth interviews of experts in order to gain
primary data and analysis of documents to obtain secondary data. The fourth chapter contains withincase analysis of the case companies: Gazprom Neft and Lukoil, generalization and analysis of the
interviews, conclusions. The fifth chapter contains conclusions of the research paper, managerial
implications and suggestions for future researchers. This master thesis will be relevant in terms of
practical and theoretical application to analysis of feasibility of the internationalization process of
Russian oil companies with focus on supply chain and logistical factors which influence the decisionmaking process about future internationalization. This thesis will provide companies with practical
analysis and future researchers with the theoretical contribution for the potential expansion of the
Chapter 1. INTERNATIONALIZATION OF OIL COMPANIES
Prior to the research of academic articles and studies, that are considered pivotal in the chosen
thematic area, they were analyzed in order to understand and assess the state-of-the art of the issue of
the internationalization and vertical integration of Russian oil companies.The literature review is done
using the thematic approach, starting from the macro level, examining the general theories of
internationalization, logistics factors affecting the decision of internationalization of Russian Oil
companies. The current literature offers practical insights about the rationalization of
Internationalization of the oil companies in terms of vertical Integration of oil companies. We are
focusing on outward operations in order to analyze the internationalization process of Oil companies
in the downstream sector and to identify and analyse the main supply chain and logistical factors
which companies have to take into account developing strategy for internationalization.
1.1!Theoretical approach to Internationalization
For the following research we have to define the concept of internationalization.
Internationalization is a subject of research of such authors as: Hollensen, Turnbull, Buckley.
Hollensen explains that internationalization is a process which occurs when the firm expands its R&D,
sourcing, production, selling, marketing and other activities into international markets. (Hollensen,
2004). By Internationalization is also understood the process of business expansion abroad with partial
or full transfer of activities of business units which form an international company (Meyer, 2007).
Beamish defines internationalization as the activities through which the company increases it’s direct
or indirect influence on their international business operations (Beamish, 2001). According to
Bonaglia, Internationalization it is the process of adapting firms operations (strategy, structure,
resource, etc.) to international environments (Bonaglia, 2007). It’s also necessary to mention that
internationalization is a way to increase direct and indirect impacts on current and potential
international operations. To be international a business unit has to adapt its resources and strategies to
make them fit into the foreign markets. The decision of entering a new market is not based only on
the level of the market, its size or its economic situation, but also on the level of development of the
market also on the internal characteristics of the company. According to Fletcher international process
is mostly devoted to the factors that cause internationalization, like changes in the environment for
international business (Fletcher, 2001).
In the Table 1 Internationalization theories are presented, the vertical edge is «Alertness for
Internationalization» and the horizontal edge is «Industry Globality» (Katsikeas Constantine S.)
Alertness for internationalization
Table 1. Internationalization theories
Transaction Costs Economics is a theory based on a hypothesis that the company chooses the entry
market depending on the minimization of transaction costs. The main approach in this theory is that
costs are the main factors while choosing the market and entry mode. Transaction costs include the
evaluation process of the negotiation costs, research costs and monitoring costs, communication
charges, legal charges.
Network perspective claims that all the markets and industries are just a set of relationship which have
to be created in order to grow externally. That main idea of this theory is that it’s based on the social
Global Management Firms (OLI paradigm) when following this strategy have a widespread global
organization and huge international experience. Its members are characterized by a strong financial
development. OLI paradigm is one of the main frameworks for the analysis of the determinants of
internationalization process and international activities of multinational corporations. According to
OLI paradigm there are 3 factors that influence the company’s development: Ownership Advantages,
Location Advantages and Internationalization advantages.
•! O - Ownership factor. To obtain this advantage a firm has to develop special competitive advantage
on the domestic market and then go abroad.
•! L - Location factor. It measures through such geographical measure components as: climate, natural
resources, transportation costs. (Rodrik, 2002)
•! I - Internationalization factor explains the firm’s propensity to internalize cross-border structural or
endemic imperfections in the intermediate goods market (Dunning & Lundan, 2008). It explains
how the firm chooses the way to enter a new market: wholly-owned subsidiary, exports, licensing,
or joint venture. This three potential sources of beneficial factors that underlie a companies decision
to become a multinational.
Incremental Internationalization or better known as an Uppsala model, was elaborated in Sweden by
Johanson and Vahlne. The key aspects of Uppsala model imply that internationalization process is an
incremental and long-lasting process.
Traditionally, there are four main stage of the market acquisition:
•!No regular export activities
•!Export via independent representatives
Moreover, Johanson and Vahlne introduce the approach of “psychic distance” to clarify how the
companies decide where to expand (Johanson, Vahlne,1990). Solberg suggests that there are 2 main
points in this theory. The first one is that at the beginning of an internationalization process companies
choose those markets which are closer in terms of culture and distance. The second point is that the
company used to start their operations with the minimal expenses (Solberg, 2006).
The preceding discussion implies that the main idea of the model is that companies firstly are
supposed to earn experience from the domestic or national market and after, in order to enlarge profits,
increase their international commitment. Uppsala model highlights that the key difficulty of the
internationalization process is, thus, the unpredictability derived from a absence of knowledge; the
more a company becomes familiar with a particular market, the lower the risk becomes, and the higher
the investment will be and the more collaboration activities will be performed.
The choice of the mode of entry depends on a lot of factors such as: level of commitment,
costs, experience, ammount of resources, national and cultural special aspects and the giant part
depends on the companie’s strategy. In the Table 2 we can see possible entry modes, which are based
on the company’s peculiarities. There are 10 main Entry Modes and their variants
Table 2. Entry modes
Application and Description
1. Normal FDI
Entrant has facilities for a transportation and production
2. FDI in production
Entrant invests in production and owns it but outsource the
transportation and distribution
3. FDI in distribution
The entrant has export activities to his distribution facility.
Entrant exports to particular facilities.
Enrant shares technology to independent distribution facilities
6. JV in production
Entrant owns a production facility
7. JV in distribution
Entrant owns a distribution facility
8. JV exporting
Entrant exports to a jointly owned distribution facility
9. Mix of FDI and JV
Entrant owns foreign production and has JV with international
10. Mix of JV and FDI
Entrant owns foreign distribution and has a JV in international
Source: Buckley and Casson (1998)
It's also very important to categorize the factors which influence the internationalization
process of companies. Hollensen was the first to distinguish 16 factors of internationalization.
Hollensen (Hollensen, 2007) This factors can have positive and negative impact on the
internationalization process. All the factors are divided into 4 groups, Appendix 1. Hollensen
distinguishes 4 main groups of factors:
•! Desired model
•! Transaction-specific factors
•! External factors
•! Internal factors
As a matter of fact, the market influences the stimulation of international activities, the main
factors that drive internationalization are stagnation at home (national) market or fast development of
international market or decreasing demand for a particular product. Among other drivers of
internationalization globalization should be mentioned, because the higher the level of globalization,
the higher the development of international transactions and investments. (Hollensen, 2007)
Referring to Russian oil companies it should be mentioned that there are key factors that
influence the internationalization process of Russian oil companies, for example: Russia is considered
as an emerging market and companies coming from Russia are described as latecomer firms (Marinov,
2012). As leading latecomer firms internationalize fast and the internationalization process of firms
from emerging economies has posed questions concerning the influence of this process on the models
of developing of developed economies and their firms. Internationalization theory views firm
internationalization as an incremental learning process. In the Table 3 we can see the basic principles
of internationalization theory, all this aspects are connected. It’s necessary to analyze the
internationalization theories which could be used by companies in order to develop their
internationalization strategy trying to use their advantages depending on the industry they are
Table 3. The internationalization process
Source: Jan Johanson and Jan-Erik Vahlne
Static aspects include Market knowledge and Market Commitment which refer to the resource
commitment to the foreign market and the data and knowledge about the foreign market.
Market Knowledge in our model is a knowledge of interest. First of all it’s necessary to mention that
knowledge of risks and opportunities is the main driver in decision-making. Secondly, the assessment
or evaluation is based on some particular knowledge about market environment. In general, market
knowledge is the description of supply and demand in the market, channels of distribution in particular
market, law restrictions and other important features that vary from country to country. It’s also
necessary to differentiate general knowledge and market-specific knowledge. General knowledge is
all about common marketing methods, present context, common characteristics of types of customers,
while market-specific knowledge is characteristics of special national market- it’s business climate,
cultural patterns, characteristics of individuals. (Johanson,1997)
Market Commitment is based, among other factors, on two main factors:
•! The amount of resources commited
•! Degree of commitment
The amount of resources can be measured by the size of investments in this particular market
while the degree of commitment is related to the difficulty to find an alternative use for the resources
and transferring them to it. The more specialized the resources are to the specific market, the greater
is the degree of commitment to that particular market. We can also conclude that the market
commitment is the size of investment in the market, including investment in marketing, organization,
human resources and other spheres. (Johanson,1997)
We think that there is a direct correlation between market knowledge and market commitment.
Knowledge is an intangible resource, the better the quality of the knowledge about the market, the
more beneficial and valuable this resource is, so the higher and stronger is the commitment to the
By dynamic aspects we understand the changing aspects as current activities and decisions to commit
resources to international operations.
Current business activities are the prime source of experience. This experience can be gained
through the hiring of human resources with experience or throught advice or consulting suggections
from those who already have experience. As a result, both types of gathering knowledge can be
implemented, both experiences are compulsory. It’s also necessary to mention that the more the
activities are production oriented, the easier it will be to substitute hired personnel or advice for current
The second factor in Dynamic aspects is the decision to commit resources to international
operations and assets. It can be assumed that this types of decisions depend on which decisions are
made and how they are taken. Another approach shows that Russian Oil companies use REM model
of internationalization. according to Liuhto in REM model, the R-factor is the reason for
internationalization, this factor creates the base for the model because it's literally the answer why the
firm decided to internationalize. The E-factor is devoted to the process of making a choice of business
environment. There is a long list of factors which influence the environment selection. The M-factor
is responsible for the explanation of how firm implements internationalization. The REM model has
been designed in order to have a tool for the deep analysis of internationalization in the company's
level. It’s necessary to analyze the internationalization theories which could be used by companies in
order to develop their internationalization strategy trying to use their competitive advantages
depending on the industry they are operating in. (Johanson,1997)
1.1.1! Resource-based view theory on the Internationalization process of oil companies
In addition to home country specific advantages, the literature also highlights differences in
institutional endowments between developed and emerging market economies. Russia is an emerging
market and exportation of oil is one of the main economic activities. Porter assumes that firms within
the industry are identical in terms of strategically relevant use of resources which they control, that’s
why it’s logical to analyze the Resource-based view. As Cumberland says Resource-based theory
looks at the enterprise as at a unique set of activities with specific resources and capabilities which
are very important for the diversification of the company. The Internationalization strategy depends
on its assets and capabilities (Cumberland, 2006). Company is supposed to consider its specific
resources and the demand of the market which it plans to enter. According to Rothaermel the resourcebased view (RBV) is a framework which sees resources as the main criteria to evaluate the firm’s
performance. If a resource exhibits VRIO (Value, Rarity, Imitability, Organization) the resource
enables the firm to gain and sustain competitive advantage (Rothaermel, 2008). RBV is a way to
access to achieving competitive advantage through resources (tangible or non-tangible). The two
critical assumptions of RBV are that resources must also be heterogeneous and immobile:
•! competences, capabilities and other resources that organizations possess differ from one company
•! capabilities and resources are not mobile and do not move from company to company, at least in
short-run period of time
Over the last years, a lot of literature about the strategy has described resources as the firm's
principal driver of profitability and as the main strategic advantage. This transition in academic and
managerial attention from an Industrial Organization (IO) economic view towards a resource-based
view of strategy has occurred recently. In case of Russian Oil&Gas companies, in a continuously
developing environment, firms must acquire, develop and upgrade their resources and capabilities if
they want to continue growing not only in domestic market, but also in the international. (Kostopoulos,
2008). From the resource-based view perspective, innovation does not come simply from scanning
the external environment for growth opportunities, but from looking inside and build on the resource
endowment and core competencies of the organization. Moreover, the RBV takes into account not
only resources possessed by the company, but also knowledge and learning processes in order to create
a competitive advantage. In other words, Resource-based View strategy admits the value and effect
of intangible knowledge resources in gaining a competitive advantage. Finally, the resource-based
view (Barney, 1991; Kogut and Zander,1996) considers the factors, which determine firm’s vertical
integration. RBV sees firm’s boundaries, growth, diversification decisions as the main factors and
base of firm’s competitive advantage.
1.1.2! Internationalization trends of Russian Oil companies
As we are analyzing Russian Oil&Gas companies it’s necessary to describe the Country of
origin - Russia and its impact on the internationalization processes of companies in that industry.
Among emerging economies, the Russian Federation is the second largest outward investor
(UNCTAD, 2015). The Russian government supports and stimulates the expansion to international
markets. The size of country of origin has a direct impact on the expansion. The larger the national
economy (country’s GDP), thus, faster is the process of expansion.
From the point of view of Value Chain, Russian National oil companies have access to resources,
speed and flexibility are crucial not only for the exchange of physical goods and services but also for
information flows within GVCs. High level of rivalry among Oil&Gas companies oblige oil giants to
look for the strategic solutions about investing abroad in order to satisfy the final customers and to
reach a higher level of vertical integration in the international operating markets. A particularly
important driver for upgrading in GVCs is investment in knowledge-based capital. The highest level
of value creation in a GVC is often found in certain upstream activities such as new concept
development, R&D or the manufacturing of key parts and components, as well as in certain
downstream actis marketing, branding or customer service. (OECD, 2013)
During last decades Russian Oil&Gas companies have participated in outward investment,
ensuring their control over the value chains of their products in natural resources (mostly oil). The
sanctions are intensifying difficulties already faced by Russian companies following the onset of the
financial crisis. In addition, as the amounts involved in large international transactions require the
active participation of banks and other financial institutions, the ongoing crisis is intensifying
difficulties already faced by Russian companies following the onset of the financial crisis. Sanctions
against State-controlled banks such as VTB, Sberbank, Gazprombank and Vnesheeconobank, as well
as other big financiers of Russian MNEs investing abroad, represent one of the biggest threats of
internationalization of Russian companies. There is a threat of restricted access to long-term lending.
It’s common knowledge that such Russian companies as Gazprom and Lukoil have already
become globally known, but there is a constant change in their international strategies due to current
activities in economic situation.
Main players in the market
PJSC Gazprom is supported by government and it’s vertically integrated. It is engaged in all
the activities: exploration, production, transportation, storage, processing, and marketing of gas and
other hydrocarbons. Gazprom generally operates in Russian market and delivers its products to
Central Asia and Europe. Gazprom operates in the next segments: production of gas; production of
crude oil and gas condensate; transportation; gas storage; distribution of gas; refining; electric and
heat energy generation and sales; and other (Market Line). The activities related to the improvement
of the company's oil reserves are centralized within Gazprom Neft and are primarily taking place in
the Yamalo-Nenets and Khanty-Mansi Autonomous Areas, Omsk, Tomsk, and Irkutsk regions.
Gazprom Neft refineries occupy dominant positions in the Russian oil refining sector. The
company exports oil products to Europe and Commonwealth of Independent States (CIS) countries.
Gazprom Neft's major refinery asset is Omsk Oil Refinery, one of Russia's most advanced and one of
the world's largest oil refineries. The capacity of the installation is 20 million tons of crude oil per
year. Gazprom Neft also is the owner of the Moscow Oil Refinery. In European market Gazprom is
the owner of NIS's oil refineries in the cities of Panchevo and Novi Sad (Serbia), and an oils and
lubricant plant in the city of Bari (Italy). It’s also necessary to mention that Gazprom Neft has access
to the possibility for the refinition in Slavneft-Yaroslavnefteorgsintez thanks to its interest in NK
PJSC Lukoil is a vertically integrated oil and gas company based in Russian Federation. The
key activities are presented through the whole chain: from the exploration of oil and gas till the
production and marketing of the products. Lukoil is the largest private oil company in the world. The
exploration and production processes are directly related with the exploration, development, and
production operations of oil or gas. These activities are generally located around Russia, but PJSC
Lukoil also has some activities in Azerbaijan, Uzbekistan, Kazakhstan, the Middle East, South
America, and Northern and Western Africa. The main exploration and production processes of Lukoil
are located in Western Siberia.
Lukoil is the owner of some refineries in Ukraine, Bulgaria, Romania, and a 49% stake in ISAB
refining complex (island of Sicily, Italy) and a 45% stake in TRN refinery in the Netherlands.The
marketing campaign of Lukoil is huge and is presented in more than 26 countries: Azerbaijan, Belarus,
Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Finland, Georgia, Hungary, Italy,
Latvia, Lithuania, Luxembourg, Macedonia, Moldova, Montenegro, Poland, Romania, Serbia,
Slovakia, Turkey, and Ukraine in Europe and it’s presented in US as well.(Lukoil Annual Report,
2015) The retail network capacity in Russia is 2,336 filling stations (including franchises) and 109
tank farm facilities and in international markets there are 3,658 filling stations (including franchises)
and 74 tank farms.
Current international projects of Russian Oil Companies
Table 4. Current International Projects of Russian Oil Companies
Name of the project
hydrocarbons in the territory of Serbia,
Angola, Bosnia and Herzegovina, Hungary
The company owns two refineries with
total refining capacity of 7.3 million tons
per year in Pancevo and Novi Sad, more
than 400 petrol stations and tank farms. In
general, the company sells about 2.5
million tons of petroleum products a year.
In 2013, NIS has produced 1.3 million tons
of oil and 0.6 billion cubic meters. meters
of gas. On the NIS refineries processed 2.5
million tons of oil.
Participates in the development and
exploration of deposit “Badra“, «Garmian»
blocks (share - 40%), deposit “Shakal”
(share - 80%) and deposit “Halabja” (80%),
located in the south of Iraqi Kurdistan.
Venezuela In order to study the geological features
five platform were built for drilling
exploratory wells, the first exploration well
Development of infrastructure.
West Qurna 2
hydrocarbons. The second Field reactivation.
Venezuela Joint venture created between PDVSA and
Russian companies ti rejuvenate Junin-6
block nearby by Zuata
Source: Composed by author
In this chapter we have analysed the main strategies of internationalization of oil companies
and came up with the conclusion that the main goal of the internationaliazation is to gain access to a
new market and specific resources.
The theoretical overview was made given into account the motives and obstacles to
internationalization, different internationalization strategies and entry modes were analyzed. Special
attention was given to the trend of internationalization of Russian oil companies and its main projects
The literature review was conducted in order to understand and analyze the main theories of
internationalization of oil companies. In order to perform well in the international arena, it’s necessary
to formulate an international strategy fot the firm in each particular country, taking into account a
number of additional factors.
Chapter 2. VERTICAL INTEGRATION OF OIL COMPANIES
2.1 Vertical Integration and Value Chain in Oil industry
There is a vast majority of theories that describe and support idea of vertical integration and
explain it’s main goal as the deeper control over the value chain processes. Vertical integration in Oil
industry is the process when a company coordinates different stages of the value chain. According to
Porter (Porter, 1985) “value chain” is a list of actions that add value to the activities. Vertical
integration, from the point of industrie’s perspective vertical integration’s main idea is to spread risk
and capture the potential profits. According to Al-Moneef (1998), profits of single phases of vertical
integration (exploration, production, trading, distribution and marketing) fluctuate up and down
asymetrically. Vertical Integration helps to balance the company’s operations anf protect it from
market instability. Thus, when the crude prices are low, refining and marketing margins are expected
to be positive.
From the point of view of the Russian oil companies, vertical integration has many advnatages,
among them we can name the following:
•! Helps to capture the value added from refining and marketing
•! Gives a possibility for oil giants to keep their share in the market and provide them
with potential growth
This list of actions includes both upstream and downstream activities, such as finance, R&D,
planning, procurement, production and distribution. In the Table 5 we can see the existing theories of
vertical integration with its authors and main ideas.
Table 5. Theories of Vertical Integration
Name of the theory
Transaction cost theory
Authors of the theory
The main idea of this theory is
that it’s a result of market
failure and it focuses on single
Competence based view on the Barney 1991; Hall 1992;
The main idea of this theory is
advantage through the vertical
Global Value approach
Gereffi 1994, Kaplinsky 1998, The main idea of this theory is
Gibbon and Ponte
that the authors focus in the
value chain by itself without
paying attention to the external
Property Right Theory (PRT)
Grossman and Hart (1986)
Emphasize the importance of
incomplete contracts and ex
post opportunistic behavior on
ex ante relationship-specific
Transation cost theory. The foundation of transaction cost economics theories is the admission that
contracts are incomplete and that contractual incompleteness can lead to fair risks that adversely affect
investment incentives and the efficiency of performance. Contractual incompleteness and its
interaction with different types of transactional aspects, including asset specificity, involvement, and
ambiguity, occupy a central role in the interpretation of the relative costs of governance through
market-based bilateral contracts versus governance through vertical integration. The managerial and
incentive costs associated with internal organization are the other side of the estimation of costs and
assets. (Hollensen, 2007)
Competence based view on the firm. This is the capacity or competence of the company to rule the
company from the resource based view point, by this is meant the usage of the resources in an effective
way in order to increase the effectiveness and company’s performance. By resources we understand
all the possible assets, information, knowledge which can influence the company’s performance.
There is a tendency to focus more not on general resources, but on company’s specific resources that
lead to the creation of competitive advantage. (Hollensen, 2007)
Global Value approach is one of the most modernized theoretical approaches that are related to the
vertical integration. Global Value chain approach is devoted to the fact that geographical factors
influence the development of business. Global Value chain approach describes the full list of
international activities that should be taken into account in order to bring additional value. The main
assumption of the Global Value Chain approach is that it doesn’t take into account any expert’s
opinions or external data, but is straight relying on the value chain investigation. A company can
create value if understands the specifications of each target group. A Value Chain is a systematic
approach to examining the development of competitive advantage and was created by M. Porter. The
chain by itself consists of a components or activities that create value for the company. (Porter, 2010)
In the Petroleum value chain consists of 3 main components: upstream, midstream and
downstream. (Figure 1)
Figure 1. Sectors in Petroleum Industry
The upstream sector main duties are: searching for potential underground or underwater crude
oil and natural gas fields, drilling of exploratory wells. On this stage oil companies collaborate a lot
with service companies like Schlumberger and Baker Hughes. Most of the oil production in the world
is made by national oil companies. These companies are controlled by the Government, and carry out
their activities mainly in their country. Midstream operations are usually included in the downstream
category. Downstream sector usually refers to the refining of petroleum crude oil and the processing,
as well as the marketing and distribution of products derived from crude oil and natural gas. In addition
to the downstream refining, distribution and sale of petroleum products also include storage of oil and
oil products. (American Petroleum Institute, 2014) The MNEs like Gazprom and Lukoil are
performing in upstream and downstream sectors, they are highly vertically integrated. These oil giants
basically cover all the activities, so all the value chain, which gives a possibility to obtain sustaining
superior performance. The processes are the following:
Figure 2. Activities of oil companies.
Gainsborough also states that vertically integrated Oil company gains a potential advantage
within the oil industry by having great control all over the chain, through the vertical integration.
(Gainsborough, 2006) The right position of the downstream segment can reduce the bullwhip effect.
According to Hall, the usage of right transportation mode and the placement of inventory and the
possibility of permanent invetory control and management increases the consumer’s satisfaction,
because additional value can be created and faster availability of the product can be achieved (Hall,
2002). In Oil Industry the optimization of Supply Chain is a chance to cut costs and enhance the
flexibility. Rivalry among firms depends, among other things, on whether companies can use all the
resources in a timely and cost-efficient manner. Vertical integration is studied by a lot of authors, like
Hart and Tirole (1990) and Bolton and Whinston (1993). From the perspective of the petroleum
industry vertical integration has a lot of benefits, it extends the process of searching for value creation
and diversifies the sources of income. The vast majority of the companies in the industry use vertical
integration strategy, they have international assets, but the use of the strategy and its processes differs
from company to company. (Schweller, Sowar, 2010) Moreover, vertically integrated companies tend
to have a deeper internal access to a broader firm-specific knowledge and accordingly vertical
integration is a valuable strategic priority. The choice of vertical integration is more likely to protect
imitable resources and there is a positive relationship between vertical integration and financial
performance. There are particular criteria for integration decisions, Table 6.
Table 6. Principles of integration decision
Information collection Possibility
Supply or outlet Capacity utilization
In the Oil industry two types of Vertical Integration are possible, see Figure 3.
Figure 3. Types of Vertical Integration
The Oil company can integrate downstream throught the acquisition of pipelines, refineries in
order to integrate into producing, trading and distribution of the products, while the upstream
integration is considered as the prosses of aquisition of oil- producing fields and exploration leases.
In the literature downstream and upstream vertical integrations are also named Forward and Backward
integration, where Forward integration is about the extension of activities in in retailing, tightening
and Backward integration is focused on the control over the exploration, production and refining,
throught the Backward integration company gains more advanatges controolling the source of
materials and aumenting its control over the supply chain. (Lin, Parlakturk, Swaminatham, 2012).
2.2 Downstream sector: logistical aspect in transportation of Oil and Oil products
In the oil industry, the supply-chain network is composed of shipping via vessel, oil tankers,
and pipelines that are running across a huge number of countries countries. This network is used to
transport crude oil from reservoir to refinery for refining, to transport between multi-site refining
facilities, and to transport finished products from product repository to distribution centers and finally
to the consumers. Any disruptions emerging in the global supply chain can have vast adverse effects
in achieving operational performance, controling quality, profitability, and customer satisfaction.
The adverse events can happen because of the uncertainty in supply of crude, demand,
transportation, market volatility, and political climate. Hence, Shah, Li, and Ierapetritou (2011)
identify that to effectively model a supply-chain design problem, the dynamics of the supply chain
ought to be considered and data aggregation techniques for the extensive data set should be employed.
With the increase of production of oil the transportation has increased as well. The transportation
methods have been improved for the last decades. The main transportation methods of the oil and oil
products are the following:
Pipeline transportation. This type of transportation is the cheapest one and eco-friendly. The oil is
moved at a speed of 3 m / sec under the action of the pressure difference created by pumping stations.
This stations are placed at intervals of 70-150 kilometers, depending on the road topography. At a
distance of 10-30 kilometers in pipes the valves are placed, which allow to block some parts of the
accident. The inner diameter of the pipes is usually from 100 to 1,400 millimeters. They are made of
superplastic steels that can resist temperature, mechanical and chemical influences. Now the
popularity of reinforced plastic pipes is increasing because they do not corrode and have a virtually
unlimited service life. The peculiarity of the modern oil such that they can be stretched in any
environment, whether it is the bottom of the sea or ocean, or underground.
Railway transport. Geography of railroad oil transportation from production to refineries to storage
or consumers depends on so-called oil basin. The global volume of oil transportation through the
railway increases each year by 3-4%, while in Russia it’s 6% of growth per year.
Road transportation. It’s profitable when distance is 300-400 kilometers, which determine their local
character - from the tank field to a gas station and back.
Air transportation. It’s the fastest way of transportation, but it is very expensive, moreover requires
special security measures. This method of delivery is used rarely - in case of emergency, for example,
for military purposes, or in cases of actual unavailability to deliver by road or railway.
The policy of the transportation tariffs is determined by public authorities in order to ensure
the balance of interests of the state and all the participants of the transportation process. The tariffs
depend on the direction of the transportation, supply volume, distance to destination and some other
Over the last 10 years the export strategy in the field of oil of Russia has changed, the main
aim was to reduce transit through neighboring countries. The transportation via sea terminal of the
Baltic States and the CIS countries has decreased. The Baltic Pipeline System (BPS-1) is used now
in order to increase oil exports to Europe.
2.3 Factors affecting the choice of vertical integration strategy
According to Shan, Li and Ierapetritou (2005) any disruptions arising in the global supply
chain can have terrific adverse effects in achieving operational productivity, maintaining quality,
profitability, and customer satisfaction that's why while choosing a country and strategy for potential
internationalization activities companies should concentrate on Oil-industry factors and Oilcompanies levels. In order to understand the main factos of vertical integration in both Oil industry
and oil companies levels, author has developed Table 7.
Table 7. Industry and firm-level factors for Vertical Integration
Oil Industry-level factors
Demand dependence on oil or oil products use in
Oil Companies -level factors
Lack of control over final goods quality
Pressure from downstream compression
The level of profitability is not sufficient
Domestic market saturation
There are operating margins
High level of competition, oversupply in the
Addition of the value to the final product
Source: Composed by author
The main goal of the analysis of Oil-industry-level factors and Oil companies-level factors is
to come up with the conclusion that Oil industry-level factors influence the Oil company-level factors
and affect decions whether to integrate vertically or not. For example, in the Oil industry, a vertically
integrated company means to own oilfields, refineries, tankers, trucks and gas (petroleum) filling
stations and to have a total control over all the processes. In the petroleum industry vertical integration
is supposed to save costs on: storage, refinery design and most of the transaction. It’s necessary to
mention that a vertically integrated company has a benefit of planning capital investments in different
stages with excellent coordination. According too Griffin and Steece vertically integrated companies
have dominance in the logistics of handling fluid flows.
The petroleum industry is involved in global supply chain that includes national, international
transportation, control, import and export activities that’s why additional attention should be payed to
the logistics factors that could influence the performance of Russian Oil company abroad.
According to Schweller, Sowar logistics and supply chain factors are those factors which
charactareze the way resources are obtained, stored and moved to the location where they are
required. Logistics and Supply chain factors how accessible and effective they are and establishing
profitable supply chain.
Schweller and Sowar state that the following logistical and supply chain factors should be
taken into account while choosing a strategy of internationalization and vertical integration as:
•! Constrained Infrastructure
•! The number of warehouses depends on the geographical size of the distribution area
•! Transshipment points
This factors influence a lot on the decision of the internationzalization process, on the choice
of the country. After a transcript of interviews with experts of the industry we came up with the
conlcusion that there are a lot of significant logistical factors that are not analyzed and little or no
research at all has been done. Iyer states that despite the vast literature on internationalization and
performance of supply chain in the petroleum industry, much less is known about the logistical
factors influencing the choice of the country for the internationalization. (Iyer, 2011) Author
concludes that this research gap has to be fulfilled.
2.4 Research gap
The analysis of existing literature of internationalization and vertical integration with focus on
Russian Oil industry has lead us to the conclusion that there is a research gap in the logistics factors
which influence the internationalization and vertical integration strategies of Russian Oil companies,
the following research questions were formulated:
1.! What logistical and supply chain factors influence the decision-making process while
Russian Oil companies choose the strategies for internationalization and vertical
The research question in a qualitative study is a statement that identifies the topic area and
explains the reader the main peculiarities of this particular topic.
Vertical integration is an approach which the company uses in order to achieve control over its
Supply Chain (distributors and suppliers). The main aim to integrate vertically is to increase the
company's power, reduce transaction costs and improve efficiency, it may reduce risks and optimize
the costs by consolidating inputs and processes under a control of a single company. From the
perspective of petroleum industry, vertical integration is spreading risks and takes profits at every
stage of the chain between wellhead and the gasoline station.
When an Oil Company chooses to internationalize it has to integrate and the most common way
for the companies in Petroleum Industry is to integrate vertically. As soon as the company decide to
inegrate backward, exploration and production of its own crude engages. Backward integration
reduces uncertainty and enables the refiner to select the appropriate amount of crude materials and is
important that the company can control its expenses and quality. The most successful type of
internationalization is through vertical integration, this type of integration creates an essential element
for the creation of competitive advantage- reliable source of supply. It’s common knowledge that the
more uncertain the supplier of crude oil is, the higher the refiner’s propensity to allocate more
resources to secure an adecuate flow of the crude material. Therefore, vertical integration reduces
uncertainty and enables the refiner to create appropriate supply chain. It’s also necessary to mention
that vertical integration is one of the most expensive strategies to coordinate. It’s all because the
strategy is based upon sequential interdependence where resource flows from one division to the next
must be coordinated.
Chapter 3. METHODOLOGY
This chapter describes the methodology that has been used in this master thesis. This research
is based on a qualitative research. It’s common knowledge that qualitative research is used to work
with approximately law number of case studies and we pay much more attention to the details. The
topics of case study research vary greatly, like the topics of the research. This type of research permits
different types of collecting and analyzing data. We can choose a case study in order to get necessary
data. One of the main advantages of case study is that there are many alternative sources of data.
3.1 Description of methodological research process. Methods of study
A case study is an empirical inquiry that analyzes a present-day within its real-life context. Case
study relies on a huge amount of sources of evidence. In a qualitative inquiry it’s important to obtain
as many perspectives on a topic as possible
Our research is a multiple case study and we justify it because this type of study is relevant for
the chosen topic, each study is analysed integrally to prevent result adjustment. The multiple case
study best enables to answer “what” and “how” questions, that’s why it perfectly suits for our research.
In the multiple case study the main focus is upon the details of the situation, the reality behind
these details, the subjective meanings and motivating actions (Saunders, 2009). According to the Yin
there are 5 components of a research design which are very important:
It’s propositions, if any
its unit(s) of analysis
the logic linking the data to the propositions
the criteria for interpreting the findings
The first component «Research’s question» has been already explained and analyzed in the
Chapter 1 and 2. The second component «Propositions» is responsible for including an importance
of theoretical issue. This condition reflects that sometimes may have an official reason for not
having any propositions. The third component is «Unit of analysis» and its main goal is to define the
problem by itself. The unit of analysis might be the economical situation of the country, particular
industry, economic trade or policy.etc The forth component «the logic linking the data to the
propositions» and the fifth component «the criteria for interpreting the findings» will be developed
during the study. (Yin, 1994)
This particular research is aimed to fill the gap in the existing theory about internationalization
and vertical integration theories of Russian Oil companies, specifically what supply chain and
logistical factors influence the decision-making process of the choice of internationalization and
vertical integration strategies. It will also provide the managerial vision on the findings. This research
is based on the case study approach to define and to evaluate the current situation in the
internationalization strategies of oil companies. In order to visualize the research method it’s
necessary to create a research framework. In the Figure 4 we can see the main methods used in this
Multiple case study
2 cases of
Figure 4. Research Framework
Starting from the purpose of the research, the research can be descriptive research, which
portrays profiles, events or situations, exploratory research, which is the study of a new phenomenon
to understand what is happening, and finally explanatory research which focuses on cause-effect
analysis (Saunders, 2007). This research can be considered as exploratory. The principal advantage
of this type of research is that it is flexible and adaptable to change, without losing the direction of the
enquiry (Matthews & Ross, 2010). Saunders underpin that exploratory research can be conducted
through a literature review, interviewing experts and analysing the data. Bryman and Bell, on the other
hand, suggest that there can be more than one ways used (Bryman and Bell, 2007). Thus in this study,
apart from the literature, the researcher is conducting interviews with experts in oil industry.
Case study is reliable in the real-life context and its main goal is to use singularity of each case
and to obtain understading of a complex issue. As in each method of research there are a lot of benefits
and disadvnatges, among the main advantages we can name:
•! Usable form
•! A lot of sources are applicable
•! Deep analysis of the subject
There are also some clear disadvantages that are:
•! Problem of validation of managerial implications
The framework for the case analysis (Table 8) was developed and it’s necessary to follow it in
order to have the same criteria for comparison.
Table 8. Case study framework
Aspect to consider
•! Date of establishment
•! Operating foreign markets
•! Main goal of Internationalization
•! Strategy focus
•! International strategy
Production and Refining data
•! Total Oil production
•! Export of Oil, total
•! Refinig volume
•! Net Income
•! Net Debt
•! Free Cash Flow
General overview of transportation segment
3.2 Case selection
The choice of strategy “is guided by the research question(s) and objectives, the extent of
existing knowledge, the amount of time and other resources available to the researcher” (Saunders,
2007). Each strategy can be used for exploratory, descriptive and explanatory research (Saunders,
2009). The most common research strategies are the experiment, the survey, the case study, the action
research, the grounded theory, the ethnography and the archival research (Bryman and Bell, 2007).
This research used the strategy of the case study. The case companies for this study have been chosen
with purposeful selection. Purposeful selection «is a strategy in which particular settings, persons, or
activities are selected deliberately in order to provide information that can’t be gotten as well from
other choices» (Maxwell, 2005) The selection method of this study is also known as theoretical
selection, as the cases are chosen for theoretical and not for statistical reasons (Eisenhardt, 1989).
“The cases may be chosen to replicate previous cases or extend emergent theory, or they may be
chosen to fill theoretical categories and provide examples of polar types” (Eisenhard,1989).
The choice of companies was based on the presumable possibility to gain the best insight to
internationalisation process of Russian Oil companies posed for the selection of companies, to engage
in the replication logic within multiple case studies.
In order to select an appropriate case we need to list the main criteria, they are the following:
•!Originated in Russia, but operating overseas
•!Vertically integrated oil company
•!Has refinery or production or distrubuition projects abroad
The criteria were identified in order to fulfill the research gap and research questions requierements.
The following companies were selected: Gazprom Neft and Lukoil. Both companies correspond to
the main criteria.
3.4 Data Collection
Normally, the data are gathered from a variety of sources, by using several different methods to
gather data like, for example: observations, surveys, interviews. According to Corbin and Strauss, in
any study, the researcher can use one or several of these sources alone or in combination, depending
upon the problem to be investigated. (Corbin and Strauss, 2008) Other considerations can be the desire
to obtain various types of data on the same problem, such as combining interview with the
The data, upon which this study is based was obtained mostly via disccussions and interviews
with the industry specialists and executivies of the largely integrated oil companies. In this particular
research a case is a company. We have used multiple case studies in order to develop the deeper
research. Each case is chosen in order to conduct a deep analysis and a clear answer to the research
questions. Robert K. Yin (1994) defines the case study method as a research strategy and explains it
as an empirical study that covers contextual conditions.
Moreover, case studies can be used for theory testing. A case can be any subject - a firm, a
business unit, a network. We have used multiple case studies in order to develop the deeper
research. Each case is chosen in order to the deep analysis and a clear answer to the research questions.
Robert K. Yin (1994) defines the case study method as a research strategy and explains it as an
empirical study that covers contextual conditions.
Primary data collection and analysis (interview).
The main goal of this type of data collection is to get as much information as possible. This part
includes in-depth analysis of the interview. Interviewers give a lot of additional information that can
be obtained only from the primary source. This study consists of several methods which were used to
analyze the topic deeply. It’s necessary to show the process of primary data collection, Figure 4.
The interview method of research, typically, involves a face-to-face meeting in which a researcher
makes individual questions. During the interview it’s very important to pay attention to the following
Lofland states that one of the central obligations that reseacrhers have to respect is
confidentiality, “assurance of confidenciality” is important, where the real names of persons, places
and so forth will not be used in the research report.
Literatre highlights 4 types of interviews (informal, general, open-ended, fixed-response).
(Corbin and Strauss, 2008) In this study The Open-ended type of interview was chosen because it’s
flexible and provide uniformity. From our point of view, the first 2 types of interview can’t be used
because they don’t correspond to the type of study, and the third type was rejected because answers
can’t be predefined. The main threat and disadvantage of the interview method is that it requires your
communication skills to be on a high level.
Figure 4. Primary data collection
The main goal of an interview is to get information from the first source. Before the interview,
I have sent a brief description of my research, it helped experts to know what my thesis is about and
to be ready for the interview. All the interviews were carried in March-April 2016. The language of
all the interviews was Russian. They all were based on the Interview framework (Table 9).
Table 9. Framework for the interview with experts
What in your opinion is paramount influence on the choice of internationalization
What are the geographical criteria while selecting the target country? Does the country's
remoteness influence the potential international development of the company?
When purchasing a refinery abroad, what are the main factors to which initially the
company pays attention?
Which logistics factors influence the internationzalization process of the company?
How critical are the differences of the transportation system between countries in the
selection of the target country?
Does the company pays attention on the economic development of the host country?
Does the company pays attention on the host and home countries relationship?
Does logistics and supply chain process influence the internationalization decision?
As an outcome of the interview we have the transcript, the description of international activities
of the firms and some additional documents.
The interviews were held with the managers of Oil companies: Gazprom Neft and LUKOIL, and one
service company: Baker Hughes, the managers represented the following departments:
•!Supply Chain deparment
It’s also very important to mention that the qualitative research can be deductive and inductive
and abductive as well. Abductive reasoning is a way of logical reasoning which goes from observation
to a theory. I took notes on all the answers and in case I need more information I send my questions
via email. It’s necessary to mention that the collaboration between the students and companies is on
a very high level. What is very important is that the case study method allows to use different methods
such as interviews to obtain primary data. In the interview the direct citation is used in order to obtain
the transparent data.
Secondary data collection: Observations of documents
The method seems to be very useful because observations allow to analyze specific data on
performance of oil companies, of profits and company’s performance and to make particular
Generally speaking, these notes are made by the author according to the primary data collected
from the industry respresentatives and the secondary data was obtained throught the analysis of such
documents as: annual reports of the companies, market description, databases.
3.5 Time horizons
Regarding the time horizon of the research this analysis is considered as a cross sectional one.
According to (Saunders et al, 2007), in terms of time, the research can either be cross- sectional, time
horizon or longitudinal which is more like a “day-to-day” perspective. Qualitative studies are
supposed to be long-term studies. However, this analysis could not be a long-term one, due to time
limitation since it is conducted for academic reasons which makes it necessarily time constrained. In
addition, this research is trying to build a theory based on the data that are present at the particular
moment of the writing and the literature. The research is being made at a specific period of time, and
the time perspective is fairly cross- sectional.
3.6 Evaluation criteria and validity
“Vаlidity is a goal rather than a product; it is never something that can be proven or taken for
granted” (Maxwell, 2005). Vаlidity is involved in the “objective truth” and there is no eventual
аccurаcy thаt cаn resolve whether аnаlysis is useful. The most important is to identify and obtain
desirable effectiveness in a study. The vаlidity of this pаrticulаr reseаrch will be estаblished on Yin’s
four criteriа for case studies: Construct validity, Internal validity and Reliability.
Construct validity can be maximized by a lot of sources of evidence which is also called data
triangulation. In this paper the validity is increased by 8 experts, 8 interviews were conducted. The
qualitative data collected will рbe compared to company publications to increase construct validity.
The interviewees have furthermore been asked to review a draft of the case study report, to establish
a chain of evidence.
Internal validity is only used in causal and explanatory research – which is the case in this research,
as this study tries to identify and explаin the factors behind internаtionalisаtion of Russian Oil
Reliability represents the validity of replication of the study. The researcher will be an active part of
the research and be influenced by the data collected. Therefore, researcher-bias and influences are
unavoidable, and the results of the findings and conclusions cannot be replicated identically. It is
important to understand the influences and use them productively. (Maxwell, 2005).
3.7 Limitations of study
It’s necessary to explain some limitations of the research analysis. To begin with, there was
limitation of time and sample. The limitation of time affected the sample that was limited too. If there
was not a short deadline we could even extend the research not only to the Russian companies
operating in the industry but also to the international oil companies and we could have more results
and opinions on which logistical and suppy chain factors influence the decision-making process while
choosing a strategy for internationalization. Only 8 interviewes were conducted because the strategy
and supply chain departments in Oil companies are not that big. 8 interviews were conducted with
experts from the following companies: Gazprom Neft, Lukoil, Baker Hughes. There may be some
subjectivism from the research because the conclusions that were made are based on the qualitative
Chapter 4. CASE STUDY
The case study deals with vertically integrated Russian oil companies. Margins for
performance of this companies varies widely in the industry depending on such factors as geographical
location, distance, the business relationship.
4.1 Case of Gazprom Neft
According to the Global energy company Gazpron Neft occupies the 43d place in the world.
Сurrently, Gazprom Neft operates crude oil refining facilities. It’s major refining facility is situated
in Omsk, Russia, its capacity is 19.5 million tonnes per year. The company also controls 33.3 % of
shares of Moscow Oil Refinery (its capacity is 12.2 million tonnes per year). Gazprom Neft also is
the owner of 50% of two refineries Slavneft-Yaroslavnefteorgsintez and the Yaroslavl Oil Refinery.
Gazprom Neft distributes its refined products in central Asia through three subsidiaries: Gazpromneft
Asia, located in Kyrgyzstan, Gazpromneft in Tajikistan and Gazpromneft in Kazakhstan. Gazprom
Neft Exports to 25 foreign countries: Germany, Ukraine, Italy, France, Belarus, Turkey, Czech
Republic, Hungary, Slovakia, Poland, Austria, Finland, Romania, Bulgaria, Moldavia, Lithuania,
Greece, Croatia, Yugoslavia, Latvia, Slovenia, Estonia, Switzerland, Bosnia and Macedonia. Planned
production in Iran, Turkey and Asia.
Gazprom Neft has a strategic plan up to 2025, where its mentioned that the main goals are:
•! Geographical Expansion
•! Increase of Scale
•! Retention of Leading positions
•! Development of better marketing strategies
•! Higher efficiency in the transportation of oil and oil products
The main way of expansiom is through acquisitions. In april 2009 Gazprom acquired oilproducing facility in Bari (Italy). The capacity of the refinery is 30.000 tonnes of oils. The main feature
of this refinery is that the production facility is 150 types of oil used in cars and transport and oils for
industrial use. The second important acquisition is the expansion in the Serbian market throught the
purchasing of 51% of Naftna Indusrtija Srbije (NIS) in January of 2009. NIS still neds a lot of
investments in order to produce the oil according to the European standarts. NIS is one of the biggest
vertically integrated companies in Central Europe and throught this acquisition Gazprom Neft got a
posibility to expand to the Eastern Part of Europe. NIS is the owner of the refineries in Pancevo and
Novi Sad, with a total capacity of 7.2 million tommes annually and produces 85% of oil products
consumed in Serbia.
Gazprom’s internationalization can be characterized by two concepts: their inherited
internationalization and pipeline internationalization. Gazprom is following the pipes in its
internationalization. Besides following the existing routes, the company is constructing, via strategic
alliances, new connections. When the westward routes have been put into practice, it would allow
Gazprom to decrease its transit through the Ukraine. Currently, the main development of production
and refining activities of oil is taking place in Cuba and Venezuela.
"Gazpromneft-Transport" - a subsidiary, part of the structure of the company "Gazprom Neft",
provides services for the delivery of petroleum products by road. The broad geography of activity
allows the company to quickly provide fuels and lubricants materials consumers across Russia.
"Gazpromneft-Transport" has its offices in Omsk, Moscow, St. Petersburg, Yaroslavl, Chelyabinsk,
Yekaterinburg, Tyumen, Novosibirsk, Kemerovo. The Corporate Center is located in Yekaterinburg.
On the basis of "Gazpromneft-Transport" integrated whole benzovoznaya machinery company
"Gazprom Neft", excluding units owned marketing enterprises of CIS countries, the Middle and Far
abroad. Car companies include modern tankers. For delivery of oil-tankers used trains and tankers,
tank trucks of leading European manufacturers of 17, 23, 32, 38 m³. The presence of multi-tank trucks
can carry multiple types of products at the same time for one or more clients. Benzovoznaya
equipment is certified and complies with all requirements of the Russian legislation. Highly driving
part has all the necessary permits. The main feature of this company is that they don’t operate overseas.
Production and Refining data
Table 10 represents the data on production and refining data during 2012- 2014 and export in
volume and refining in volume.
Table 10. Production and Refining data
Total production, mln tons Export, mln tons Refinig in Russia, Refinig abroad,
Source: Eikon datastream
Table 11 shows the financial data of the company during 2012-2014. Company shows the
growth of positive Free Cash Flow.
Table 11. Financial performance
EBITDA, mln rub Net Income, mln rub
Net Debt, mln rub
Free Cash Flow
Source: Eikon datastream
4.2 Case of Lukoil
Lukoil is one of the largest oil companies in Russia and according to the Global energy company
rankings it’s the 13th in the world. The company is vertically integrated, it’s operating in all the
sectors, exploration, production, marketing. The company was founded in 1991 and now owns around
1.1 per cent of global oil reserves. Top managers of the company own around 27% of the shares and
it’s important to mention that Russian Government has very reserved influence on the company.
The Company’s strategy is to consistently increase the value of LUKOIL stock, by continually
increasing efficient oil and gas reserves and production abroad in priority countries and regions of
activity. The Company’s main goal is to lead its peer group of transnational corporations in terms of
main performance indicators, production volume and scale of operations.
The Internationalization of Lukoil was basically the way to biger profits and more economic
advantages. Abroad the company is operating in all the stages: exploration, production and marketing.
The main countries of operation are 1. Azerbaijan 2. Belarus 3. Belgium 4. Bulgaria 5. Cameroon 6.
Croatia 7. Côted’Ivoire 8. Cyprus 9. Egypt 10. Finland 11. Estonia 12. Georgia 13.Italy 14.Iraq
15.Kazakhstan 16.Latvia 17.Lithuania 18.Luxembourg 19.Macedonia 20.Moldova 21.Montenegro
22.Netherlands 23.Norway 24.Poland 25.Romania 26.Russia 27.Saudi Arabia 28.Serbia 29.Sierra
Leone 30.Spain 31.Turkey 32.Ukraine 33.USA 34.Uzbekistan
Development of the transport segment helps the company to improve logistics management
and control transport costs. Lukoil delivers its oil and petroleum products via infrastructure of partner
companies (Transneft, Gazprom, etc.) and its own infrastructure. The Company is continuing to
develop its own export terminals, which significantly reduce transport spending and make transport
arrangements more flexible. Thanks to development of its own transport capacities and creation of a
highly efficient and flexible logistics system, the Company has succeeded in the last 3 years in keeping
growth of transport costs per barrel of production on a level with growth of tariffs for transport through
pipelines of Transneft (the Russian pipeline monopolist). This is a significant achievement, since tariff
increases for transport by alternative routes have been much greater than Transneft tariff increases,
and transport volumes have grown more quickly than production due to increase of international trade.
The right transportation in the marketing segment is crucially important to Lukoil, because it
provides guaranteed outlets for Company products. The key objective in this segment is to create
additional value by selling to the final consumer at the maximum market price and ensuring reliable
cash flows by reducing price volatility. Lukoil sells crude oil, petroleum products, gas processing
products and petrochemicals wholesale, and also carries out retail sales of petroleum products and
petrochemicals. The Company's strategic aim is to increase the share of retail sales, generating extra
income and competitive advantages. International trade is another distinct business within LUKOIL.
It enables the Company to sell its own products efficiently and to obtain extra profit from sales of
third party production.
LITASCO (Lukoil International Trading and Supply Company) has been the sole agent
for the Company's international trading operations since 2000, carrying out all Lukoil Group deliveries
and trading operations outside Russia. Transfer of all export operations to a single Company simplified
export arrangements, optimized export flows and assured transparency of Lukoil’s oil and petroleum
product exports. LITASCO is consistently increasing margins on trade operations by optimizing
management of Lukoil’s delivery channels and by increasing the volume of trade with third parties.
LITASCO has offices in 9 countries and its main trading offices are in Switzerland, the USA,
Germany, the Netherlands, Sweden, UAE and Singapore. Expansion by LITASCO to new markets in
Central America, China, and the Middle East has helped to make Lukoil into one of the leading oil
companies in the world.
Production and Refining data
Table 12 represents the data on production and refining data during 2012- 2014 and export in volume
and refining in volume.
Table 12. Production and Refining data
Source: Eikon datastream
Table 11 shows the financial data of the company during 2012-2014. Company shows
Table 13. Financial performance
EBITDA, mln $
Net Income, mln $
Net Debt, thousands Free Cash Flow,
Source: Eikon datastream
4.3 Interview analysis
In-depth interview revealed new perspective on the topic of logistical factors that influence the
decision of vertical integration and internationalization, factors which influence the choice of
particular country. Apart from the logistical factors which were mentioned in the literature review,
experts in the industry have mentioned additional logistical criteria. Thanks to their participation and
support additional logistical factors were identified.
Following Table 14 is summarizing general factors mentioned by experts (managers of the
companies). Thus helping to distinguish most influencial factors that Russian Oil companies take into
account while making decision about internationalization and vertical integration. Managers and
expert’s names and positions are hidden because of non-disclosure agreement and the experts are
coded by numbers and 3 letters (i.e Exp). In our interview participated 8 experts, 5 of them are
representatives of Gazprom Neft, 2 of Lukoil company and 1 representative of Service company Baker
Hughes. All the managers are experts in their sphere and are responsible for the decision-making
operations in their company.
Pluses in the Table 14 indicate that the manager agreed that this particular factor is significant
and is important in decision-making process of vertical integration and internationalization.
In order to interpret obtained results and to come up with managerial implications there is a
detailed description of each factor presented below. A factors have to be established for approaching
this question for potential observation.
The factors, listed by the managers can be divided into 2 categories:
•! General Factors
•! Specific: Supply Chain and logistical factors
Among the general factors which were mentioned by the experts and managers we can indicate the
•! Home country’s remoteness
Remoteness increases the natural protection afforded to industries within an economy because
high transport costs limit activities in some or all markets. This means that remoteness may reduce
the expected level of internationalization
•! The presence of competitors
Competition, the process of rivalry between firms striving to gain sales and make profits, is
the driving force behind markets. Competitive markets allow a nation’s resources to be used to best
effect in the production of goods and services. For example, both theoretical and empirical research
in recent years has emphasised the productive and dynamic efficiency gains from competition.
Competition gives firms continuing incentives to make their production and distribution more efficient,
to adopt better technology, and to innovate.
«The presence of competitors in theory is not important, but in practice it is very important.»
- Manager of the Strategy Development department
•! Legal and Regulatory Environment differences
Business activity tends to grow and thrive when a nation is politically stable. When a nation is
politically unstable, multinational firms can still conduct business profitably. Most firms prefer to
engage in the export business rather than invest considerable sums of money in investments in foreign
«Is not critical. Expensive lawyers are easily hired and everything is structured. »
- Manager of the Strategy Development department
•! Economic development of the host country
A variety of historical and geographical conditions, the combination of material and financial
resources available. To somehow estimate the level of economic development of the country, there
is a whole system of indicators, among which stand out above all the following:
-! GDP / per capita;
-! structure of the economy;
•! Political issue
Political issue is considered by the management as one of the main factors that influence
decisions of oil companies.
Level of protection of the environment
Another factor mentioned by experts is safety of industrial processes and the proteccion of the
environment. Contributions that deal with new developments in safety or environmental aspects of
plant or processes and that can be given quantitative expression are encouraged.
Pluses in the Table 14 indicate that the manager agreed that this particular factor is significant
and is important in decision-making process of vertical integration and internationalization. The more
the pluses in the cell “Total”, the more important is the factor.
In the part of General Factors we can identify the following:
•! The presence of competitors
•! Political issue
•! Protection of the environment
Table 14. Factors influencing the internationalization process of oil companies
The presence of competitors
Legal and regulatory environment
Economic development of the host +
Protection of the environment
Information technology development +
Present of crude oil storage as a +
Presence of mainland or trunk pipeline +
The owner of the pipeline
Expenses on transportation to the +
Supply Chain and logistical factors
The transportation infrastructure
in the host economy
The location of refinery
Control over supply chain
Previous experience of supply chain +
Specific factors: Supply Chain and Logistics factors
Among the specific factors, the intervieweres were foucused on the supply chain and Logistics
factors, because of the peculiarities of this particular research paper, the experts and managers
named the following factors:
•! The transportation infrastructure
The indirect contribution of infrastructure to internationalization process of Russian Oil
companies arises through a multitude of channels, including the enabling of productive private
investment, the creation of new activities (supply chains), or the reshaping of economic geography.
Evaluating this factor there are particular challenges, especially:
1.! Lack of clear and commonly agreed definitions for a number of critical terms used;
2.! Lack of critical data;
3.! Absence of methodst o estimate missing data;
4.! The lack of clear definitions and common practices to measure transport infrastructure
spending hinders meaningful comparison between countries and across spending options,
leading to less-informed decisions.
•! Information technology development
Experts mentioned it as one of the very important factors, because in today’s competitive
market on international scale, it’s necessary to have the monitoring of supplier deliveries, to provide
supplier with information from inquiries. Experts state that this factor is important because the
complex nature of the oilfield supply chain and the contemporary business environments consists of
high levels of uncertainty and complexity in terms of what methods and balance of practices should
be considered in controlling and managing international supply chain and it's one of the important
factors on which is necessary to put attention.
Factor of the development of the technology
development is important, whether it is inventory management or reduction in lead times across the
various functions of supply chain, control plays a very important role when it comes to implementing
the plan or a system because planning and operational controls remain significant responsibilities of
management but for SCM, it is fundamental and is considered as a key activity of management (Boddy,
•! The availability and location of the refinery
Few experts mentioned it as a significant factor. In terms of refinery in supply chain the
opinions were the following:
“The company pays attention to the following aspects of the refinery: At invest attractiveness
of the project for synergy, the growth of the regional market, the country's market, guarantee ofthe
safety of investments, tax regime, and its preservation on the privileges and preferences”
- Manager of the Supply Chain department
«NPV, personal agreement between the CEO, cultural differences, the ability to integrate.»
- Manager of the Strategy Development department
•! Crude Oil Storage
As soon as the project is attractive there is no difference if there is a Crude Oil storage,
companies, while internationalazing don't consider it as a relevant and important factor.
•! Presence of mainland or trunk pipeline
The availability of the pipeline is a significant factor during the process of decisionmaking about internationalization and vertical integration, while the owner of the pipeline is
not that signifant because the companies can collaborate on profitable and beneficial base for
•! Transportation time required
Includes the time after the loading to reach the final destination. Experts mentioned it as one
of the very important factors, because in today’s competitive market on international scale, it’s
necessary to have fast and reliable transportation system
•! Previous experience of Supply Chain disruptions
Supply chain risks and disruptions can be caused by natural disasters, unexpected accidents,
operational difficulties, terrorist incidents, and industrial or direct action. In any case, supply chains
need to be flexible enough to recover from any disruptions at the earliest possible time. Moreover, it
is possible to consider two different types of flexibility within the supply chain context;
volume/capacity flexibility that allows to decrease or increase production according to the observed
demand and delivery flexibility that allows to make changes to the deliveries, e.g. adapting new
delivery amounts or delivery dates. In line with these ideas, Schutz and Tomasgard (2009) analyse
volume, delivery, storage and operational decision flexibilities in a supply chain under uncertain
demand and arrive at a trade-off between volume and delivery flexibility and operational decision and
“Because of Current instable situation in the world, the companies should pay attention to the
previous experience in the supply chain disruptions because otherwise risk to loose control
over the supply chain is to high.
After the Table 14 was finished, all the factors were graded by the experts in order to range the
factors and highlight the significant and insignificant ones.
The main logistical factors which influence the decision-making process about internationalization
and vertical integration are (Figure 2):
•! The transportation infrastructure
•! Transportation time
•! Presence of mainland or trunk pipeline
•! Control over supply chain
Figure 5. Significant Supply Chain and Logistical factors
Supply Chain and
Source: Composed by author
All the managers indicated logistics and supply chain is one of the most crucial aspects which
influence the decision-making process of Internationalization and Vertical Integration of Russian Oil
companies. Experts state that efficient integration between various components of a supply chain i.e.
suppliers, manufacturer’s, warehouses and stores is very important. The main challenge being the
coordination of activities across the supply chain so that the organization can improve performance:
reduce cost, increase service level, reduce the bullwhip effect which is based on demand amplification
(Forrester 1961), better use of its resources, and respond effectively to changes in the market.
4.4 Application of logistical and supply chain factors in case analysis of Gazprom Neft
As the result it's common in Gazprom Neft to take into account supply chain and logistics
factors during the process of decision-making about internationalization and vertical integration.
In order to validate in practice, the factors, which according to the literature review and experts
are significant we have developed the following framwework in order to show in practice the validity
of this particular factors. We have chosen recent projects of internationalization and vertical
integration of companies and analysed if supply chain and logistical factors were taken into account.
Project: Naftna industrija Srbije
Logistical and Supply Chain factor
Control over supply chain
The company owns two refineries with total
refining capacity of 7.3 million tons per year in
Pancevo and Novi Sad, more than 400 petrol
stations and tank farms. In general, the company
sells about 2.5 million tons of petroleum
products a year.
The transportation infrastructure
According to the Logistics Performance Index
(LPI)1, in 2014 Serbia was in Top-50 countries
with best infrastructure.
Presence of mainland or trunk pipeline
No presence of mainland or trunk pipeline, even
though there were a lot of projects focused on
the construction of pipeline in Serbia.
Transportation time required
Serbia was a perfect step in internationalization,
because of its close geographical location to the
target cuctomers (countries). The project was
successful in terms of the fact that Gazprom had
a possibility to sell product directly in Serbia
without transportation costs.
4.5 Application of logistical and supply chain factors in case analysis of Lukoil
As the result it's common in LUKOIL to take into account supply chain and logistics factors
during the process of decision-making about internationalization and vertical integration.
Project: ISAB refinery in Sicily, Italy
Logistical and Supply Chain factor
Control over supply chain
Acquisition of 49% of the in the JV of ERG SpA
and ISAB. Increase of refining capacity by 13%
and refining capacity abroad by 60%. Control
Balkans,Turkey and Western Europe.
LPI is an interactive benchmarking tool created to help countries identify the challenges and opportunities
they face in their performance on trade logistics and what they can do to improve their performance. The LPI
2014 allows for comparisons across 160 countries.
The transportation infrastructure
According to the Logistics Performance Index
(LPI), in 2014 Italy was in Top-20 countries with
Presence of mainland or trunk pipeline
Two trunk pipelines: Central European Pipeline
and Transalpline Pipeline
Transportation time required
Italy was a perfect step in internationalization,
because of its close geographical location to the
target cuctomers (countries). The project was
successful in terms of the fact that Lukoil had a
possibility to sell product directly in Italy
without transportation costs. This JV brought a
lot of benefits, notably improved earnings via
improved local networking.
CHAPTER 5. CONCLUSIONS AND IMPLICATIONS
The research in this paper derives the trends and strategies of vertical integration and
internationalization of the Oil companies. Despite a number of well-established theories and a
prominent on the internationalizzation and vertical integration of Russian oil companies there is little
evidence on the logistical and supply chain factors which are taken into account while making a
decision about the choice of the expansion strategy.
We have concentrated on outward operations so as to investigate the internationalization
procedure of Oil organizations in the downstream division and to identify the main logistical and
supply chain factors that influence the decision-making process of internationalization and vertical
We have reached the main aim of the paper which was to fill this research gap through the indepth case study of two companies Gazprom Neft and Lukoil, through the primary data obtained via
in-depth interviews with experts of industry (Baker Hughes) and managers who represent companies
(Gazprom Neft and Lukoil) and analysis of secondary data obtained from annual reports and data
books. The case study was complemented by 8 experts.
We have reached the objectives stated in the beginning of the research:
•! Have displayed the peculiarities of internationalization process of Russian oil companies
and to understand which are the main logistics and supply chain factors that influence the
process of internationalization, to analyse the importance of this factors while Russian Oil
companies choose a market and strategy for internationalization.
•! Have indicated the main logistics and supply chain factors that influence the choice of the
potential market for internationalization
•! Have formulated managerial implications for the companies operating in this industry
•! Have suggested the potential theoretical studies for the future researchers of supply chain
and logistical factors influencing the decision-making process of Russian Oil companies.
The research gap was filled by answering research questions through the conduction of
qualitative research, method of case study and in-depth interviews.
The primar focus of the study was based on the international activities of 2 Russian oil
companies. Results of the research allowed to come up with managerial and theoretical implications.
5.2 Theoretical contribution
The thesis contributes to the sphere of Russian oil companies and process of their
internationalization and vertical integration and idendification of the logistical and suppy chain factors
which are taken into account while choosing a strategy of internationalization and vertical integration.
Theory of internationalization and vertical integration is developed and there are a lot of scientific
papers devoted to this topics, however there were little research done about the logistics and supply
chain factors influencing the decision-making process whether to choose one oir another strategy of
vertical integration and internationalization.
As a theoretical implication we can list the following, first of all we have identified the supply
chain and logistical factors that influence the decision-making process while choosing a strategy for
internationalization and vertical integration. This theoretical input was made thanks to the experts
opinions and scientific articles which highlight this particular topic. Furthermore, the traditional
general perspectives of internationalization theories which were discussed in conjuction with the
vertical integration of Russian oil companies in order to identify the list of factors which influence the
choice of internationalization and vertical integration strategies and then out of this factors we have
listed the most important ones from a theoretical and practical point view. The list of identified factors
have demonstrated that theoretically, similar factors influence the choice of strategies of
internationalization and of vertical integration. It was concluded that 4 supply chain and logistical
factors determine the choice of the strategy of internationalization and vertical integration.
5.3 Managerial Implications
Today’s companies are forced into functioning in a challenging business world with extensive
uncertainties. Frontrunners turn out to be those companies that are able to foresee the market swings
and react swiftly with minimal adjustment costs and effective response strategies. In order to choose
the right strategy of the internationalization and vertical integration for the Russian oil companies it's
necessary to analyze all the factors that could influence the succesful performance in the international
market. Oil industry is a very competitive one and special attention should be payed to the supply
chain and logistics factors. Supply chain is a stage in the value chain where there is a development of
flexibility in adapting to sudden changes in global markets, resource availabilities and outbreaks of
financial and political structures. Supply chain management presents an especially important domain
where such flexibility is critical to achieving a consistently succesful performance,that's why Russian
oil companies should pay attention to the following factors:
•! The transportation infrastructure
•! Transportation time required to deliver crude oil or oil products to the destination
•! Presence of mainland or trunk pipeline
•! Control over supply chain
Managerial implications of undertaken research have a practical usage of logistical concepts
and systems allows companies to accelerate the turnover of working capital, reduce production costs,
to ensure full customer satisfaction in the quality of goods and services. Logistics and Supply chain
potential improves organizational and economic sustainability of the company in the market, that's
why it's crucial to pay attention to logistical factors while planning internationalization and vertical
The information by itself can be useful for the managers of strategic departments and supply
chain departments of Oil companies especially when they plan to internationalize to a new country.
This research paper can be useful and can help to understand to which logistical factors the oil
company should pay attention and which factors are critical, so it will give the companies a possibility
to gain additional advantage on international market. It’s also important to highlight that this report
and this key finding can be usuful for both government and private-owned companies, as our research
was made on the cases of Gazprom Neft (Government-owned) and Lukoil( 100% private-owned
company) .The managerial implication of this paper are proved by the managers and experts who were
5.4 Recommendation for future research and limitations
Further research is required on a bigger list of companies, both Russian and international in
order to understand the world tendencies in this sphere, moreover more logistical and supply chain
factors should be identified in order to have a possibility to run a Factor analysis and understand which
factors are more significant and which are less significant.
Although there is no general agreement on how to define and evaluate the supply chain and
logistical factors, specifically in oil industry, so, the area has tremendous potential for researchers
providing opportunities for modelling and application of flexibility and evaluation of the supply chain
factors, interrelationships and trade-offs between different types of flexibilities, industry-specific or
business function-specific impact of supply chain factors, and potential barriers to the implementation
of the identified factors.
Limitations of this research can be connected to the 4th part of this research, where the main
logistical and supply chain factors where identified. While searching for the quantitave information
and data to analyze the current situation of the case companies there were very small of relevant and
In order to validate the identified factors author had to create a theoretical framework while the
Factor analysis would be more useful in this particular research. The Factor Analysis is impossible to
run because the sample size should be large enough to yield reliable estimates of correlations among
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