Paper / essay - Figure 6.7 - Gazprom Exam Case
Organizational Structure (EBP670C05)
Rijksuniversiteit Groningen
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Gazprom Exam Case
Organisational Structure Group 3
Submission date: 8 November 2013
Table of Contents
- › Table of Contents
- › Chapter 1: Gazprom overview
- › Chapter 2: History
- 2 Prehistory
- 2 Inception of Gazprom
- › Chapter 3: Ownership structure
- 3 Management and stakeholders
- 3 Company structure
- › Chapter 4: Strategy of Gazprom
- 4 Miles and Snow's four strategic types
- 4 Porter's competitive strategic types
- corporations 4 Barlett and Ghoshal's four strategic types of multinational
- › Chapter 5: Internal Environment of Gazprom
- 5 Human resources
- 5 Organisational Culture
- 5 Knowledge management
- › Chapter 6: External environment
- 6 Main competitors
- 6 Competition
- 6 Terrorism
- 6 Uncertainty
- › Chapter 7: Efficiency & Effectiveness
- 7 Efficiency
- 7 Effectiveness
- > Chapter 8: Recommendations
- › Resources
Gazprom Exam Case › 4
› Chapter 2: History
2 Prehistory
A Soviet gas industry was created in 1943 (the time that the Soviet Union was in power in Russia) in Russia. But just after the Second World War production and export of gas became really important; in 1946 the first gas was exported to Poland. The export of oil and gas really went up in 1967 after the first construction of pipelines to Bratislava in Czechoslovakia. The capacity of this pipelines were 1 billion m3 per year. Poland, Austria and Czechoslovakia were the first to connect to these pipelines. A lot of other countries were willing to have gas of the Soviet gas industry too. In the 70’s Bulgaria, DDR, German Federal Republic, Hungary, France, Italy and Finland were connected to the Soviet gas pipelines. On top of this large natural gas reserves were discovered in Siberia, and the Ural and Volga regions in the 70’s and 80’s. So the Soviet Union was able to become a major gas producer.
2 Inception of Gazprom
Gazprom was founded on August 1989, when soviet general secretary Gorbachev merged the ministries controlling the oil and natural gas sectors in a unified entity. The intentions of Gorbachev were to innovate and streamline the Soviet Economy.
Viktor Chernomyrdin was appointed as Minister responsible for Natural Gas. He moved quickly to consolidate the power and reach of Gazprom as an independent corporation away from explicit government control, after chaos was created within the company by government leadership. Chernomyrdin transformed his section of the Ministry into a Joint Stock Company. The government was still in control of the oil company, but now the company got its control through stocks (the government was owner of 100 percent of the stocks). After the change Chernomyrdin changed his position to Chairman of the companies new board of Directors and it’s CEO. So Gazprom became responsible for all companies and concerns involved in production, transportation, refining and storage of natural gas. The new chairman increased the export share of Gazprom and lead Gazprom to become the regional and European gas power it is today. At first he managed this by negotiation with Poland and Germany, which resulted in an agreement in 1990. A lot of other countries in Europe followed this. It was required for Chernomyrdin to do this, while the prices of gas were to remain fixed at a pre-inflation rate in the domestic country; most other goods were allowed to float. So in order to gain profit, Gazprom made the right move. Still Gazprom was in the power of the government, but was allowed to go in the international sphere under certain conditions: Gazprom had to supply natural gas at a subsidized rate in Russia and had to pay taxes (around 25 percent of the total government income).
The Soviet Union collapsed in 1991, where after economic reforms became a major point. The new Yeltsin government came up with the government’s privatization campaign. Chernomyrdin was appointed as Deputy Minister and stifled any restructuring of Gazprom. Gazprom’s interests were well taken in account because of Chernomyrdin’s position. Soon here after, in November 1992, Gazprom transferred in the quasi privately owned Russian Joint Stock Company (RAO). A few months later, in February 1993, Gazprom changed in an open Joint Stock Company (OAO). This meant the privatization of the company, but 40 percent share was granted to the government. Trading of Gazprom’s shares was highly monitored; foreigners were prohibited to own more than 9 percent of the shares.
As the Prime Minister of Russia, Chernomyrdin was able to manage that Gazprom was not closely regulated. As a result Gazprom evaded a lot of taxes and the government received little money in the form of dividends in the end of the nineties. On top of this the management board of directors launched a massive asset stripping, and parts of Gazprom’s property was parcelled out to them and their relatives. All of these illegal activities were under the lead of Chernomyrdin and Gazprom’s CEO Rem Viakhirev. Chernomyrdin returned to the chairman of the board of directors on 30 June 1998.
Gazprom Exam Case › 5
On June 2000 Vladimir Putin became the President of Russia. He had a major impact on Gazprom. And established a few things: strategic companies have to be in state control, mismanagement and personal pilfering of state assets were harshly attacked. Putin also replaced Chernomyrdin and Viakhirev for Dmitry Medvedev and Alexei Miller (who is still the CEO of Gazprom). Both men had previously worked with Putin in Saint Petersburg. Their first job was to rebuild the damage done.
3 Company structure
OAO Gazprom is a strongly verticall integration. In this sense OAO Gazpr operating in up-and downstream acti is engaging in sideline activities thro Gazprommedia. The vertical integrat its processing and marketing as well power generation. Moreover, industr also exclusively in control of Gazpro In order to understand the firm vertic sales in general, it is important to kee be enclosed in detail in strategy. Furthermore, besides the high vertica divisionalisation is strongly related to the sheer number of subsidiaries and middle management, namely the man Gazprombank, which is in sole owne The amount of control over its subsid is located in the headquarter in Mosc While operational and day-to-day bu strategic and long-term decision mak structural aspect of state control is es leverage can be applied. Graphic 2, d activities, especially to its attractive E
Graphic 2 gazprom-mt/Who
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4
Gazpr
ally integrated company that greatly emphasizes up- and zprom, as the parent corporation, comprises of docents o ctivities. Additionally, Gazprom holds stakes in several s rough subsidiaries in finance, marketing and news such ration of Gazprom includes the extraction and productio ell as transportation, warehousing and importantly also th stry crucial activities such as drilling, pipeline engineerin prom. A detailed list of all subsidiaries can be found in th rtical integration of Gazprom and its tight grip especially keep in mind that the Russian Federation owns the contro
tical integration, a great emphasise on divisionalisation c d to the diversification of products that Gazprom promot nd despite the wide range of activities, the control is hard anagers of Gazprom's subsidiaries. This limitation is be nership of Gazprom, and whose CEO is Alexey Miller a sidies supports the centralisation of the company, where scow. The special nature of the centralisation, is the feat business decision making is certainly conducted by the C aking is in the hand of the current president, namely Vla especially important in downstream marketing activities , depicted below, provides an image of the structure of G e European market.
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zprom Exam Case › 7
nd downstream s of subsidiaries that are al sideline businesses or ch as Gazprombank or tion of crude gas and oil, o thermal and electric ering and building are the appendix 4. lly on exporting and ntrolling stake which will
n can be observed. This otes. However, despite ardly allocated to the best displayed by r as well. ere key decision making eature of state control. e CEO and the board, Vladimir Putin. The ties, where political f Gazprom's export
Gazprom Exam Case › 8
› Chapter 4: Strategy of Gazprom
4 Miles and Snow's four strategic types
Raymond E. Miles and Charles C. Snow classify organisations into one of four strategic types, called: defender, prospector, analyser, reactor, based on the rate at which they change their products or markets. Gazprom belongs to the analyser. At first, Gazprom is stable, because is a Russian state controlled corporation hence in a stable internal environment. Gazprom is also flexible to a limited extent because it invests in new markets and owns the largest network of pipelines globally. For example, Gazprom is starting production at Kirinskoye which is the first time that a subsea production system will be used by Gazprom. Stability and Flexibility are the goals of an analyser. Moreover, Gazprom takes over companies and includes them in the corporation vertically or even non- core entities such as television stations.
Another aspect of an analyser is that the environment is changing, not only is Gazprom's environment changing according to Russia's position in the world but also changing and fluctuating energy markets are becoming more and more common. “Gazprom's strategic goal is to become a leader among global energy companies by developing new markets, diversifying business activities and securing the reliability of supplies.” 5 This is another reference to the analyser because Gazprom is looking for new markets and at the same time being reliable of supplies; they minimise risks when they are looking for new markets.
corporations 4 Barlett and Ghoshal's four strategic types of multinational
When related to Barlett and Ghoshal's theories, Gazprom fits the international strategy best. It is strongly based in its home market and exports its goods across borders. However, it also divisionalised and shows characteristics of multi-domestic companies through export subsidiaries in Europe for example. Yet, the strong centralisation and the non existing autonomy or independence of any foreign subsidiary absorbs any muti- national character of Gazprom. Further, the strong embedded political ties in Russia direct the company's operations and export is rather a necessity and crucial than an entrepreneurial-international expansion.
They extract crude gas/oil and locate their value chain mainly in Russia, all development and production is in Russia, they only sell the processed gas/oil to foreign markets. Another oil company, like Royal Dutch Shell, works internationally since they operate in a lot of markets through entrepreneurial subsidiaries in host countries and therefore shows strong characteristics of a multi-domestic strategy. A straight comparison between the two companies with similar portfolios reveal that this is not the case for Gazprom’s whose local responsiveness is much lower. The internationalisation of Gazprom occurs only downstream, because the only operation Gazprom conducts internationally is selling their products. All upstream activities are strongly vertically integrated in Russia and partially in state ownership as well if not incorporated in the Gazprom group.
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5 Unknown. (-). Strategy. Available: gazprom/about/strategy/. Last accessed 1st Nov 2013.
Gazprom Exam Case › 10
› Chapter 5: Internal Environment of Gazprom
5 Human resources
When employees work effectively, improve their skills, and extend knowledge, the employees guarantee long- term success for Gazprom. For this reason Gazprom places high accent on professional development of teams and employees. More than 3,000 employees of Gazprom subsidiaries annually attend career development and professional retraining programs 8. Gazprom also cooperates with prominent Russian higher educational institutions to train young specialists. Another important aspect for Gazprom is cooperation. It is important to be able to process and transport gas in the way Gazprom does it right now. The management uses high international standards in its social and personnel policies, and values every employee’s work, trying to ensure comfortable and safe labour conditions and possibilities for growth and development. The different divisions need to support each other according to Gazprom’s standards.
The key labour and industrial safety priorities and goals of Gazprom and its subsidiaries are the following: - absolute priority of life and health of employees; - maximum safety working environment for employees; - securing reliable performance of hazardous industrial facilities.
The Company’s current social policy is intended to provide social security of employees, motivating them to lasting efficient work for the company and is executed by granting benefits, guarantees and compensations, healthcare and medical resort services, various types of private insurance, creating comfortable and safe labour conditions as well as paying supplementary pensions.
All in all the high education levels of employees and safety work conditions are really important for Gazprom, therefore Gazprom provides the resources and standards to keep the education level and work conditions at the right level.
5 Organisational Culture
Gazprom is not a company that a lot of people trust, this is because of the history that Gazprom has. Gazprom’s image problems date back to Viktor Chernomyrdin, the man that had close relationship with the President Yeltsin. Chernomyrdin managed to get generous taxes benefits, and to set the groundwork for making Gazprom a state within a state.
After Chernomyrdin was succeeded by Rem Viakherev. Under his lead the company was implicated in a number of corruption schemes. Apart from this a lot of other corruptions can be mentioned. Gazprom has a hard time to win the trust of people especially because the company’s reputation as a bully and its non-transparency.
On top of this Gazprom belongs also to the national champions, a concept in which large companies in strategic sectors not only seek profit but also advance Russia’s national interests. This makes it harder for Gazprom to make a clean and responsible image to foreign countries.
A risk of large companies, like Gazprom, is that people are inclined to follow each other instead of thinking for themselves. Top-down communication is often well developed, but from the bottom up the acceptation of new ideas is often not supported, which makes that good innovations, from lower personnel, do not reach the upper levels. These opportunities for the company will be missed and provide no improvements for the company. Gazprom should have a boost to improve the upward exchange of ideas.
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8 Unknown. (-). Education. Available: gazprom/careers/education/. Last accessed 3rd Nov 2013.
5 Knowledge management
Innovation is a major priority for Gaz advancement of its technological lev sustainable development of the petro
Gazprom invest a lot in research and globally in the top ten.
Graphic 4 Scope of R&D carried out for Gazp
The company has different ways of i ‘Gazprom Group’s innovative activit of the domestic fuel and energy comp to improve extraction of natural reso
Gazprom VNIIGAZ is the research i network. The workforce of Gazprom has more than 170 domestic patens a areas: an experimental and prototype
In the year 2008-2009 Gazprom spen investment in R&D in the industry is most other companies in the business
Gazprom has 13 research organizatio schools and universities. It has partne organisations.
Gazpro
Gazprom. Gazprom views development of the innovative level as key to gain profit in the future but also to make e troleum sector and the entire fuel and energy complex of
nd development: it is number one in terms of investing in
azprom Group, RUB billion (net of VAT)
f innovations according to their website: ivity includes elaboration of ambitious plans and program mplex, development of the feedstock base and shaping o sources’.
h institute of the company. This institute conducts R&D, om VNIIGAZ consists of 1300 research associates, exper s and round about 70 in foreign countries. They have dif pe base, research centers and an R&D and design affilia
pent 1 percent of its operating profit in R&D, in compa is 2 percent. But the difference is that Gazprom has h ess.
tions that include 1,000 employees and is also closely lin rtnership with 5 academic institutions, 15 universities and
prom Exam Case › 11
ive activity and e efficient and of the country.
g in R&D in Russia and
rams for sustainability g of new technologies
D, testing and design perts and specialists. It different types of work liation in Ukhta.
parison the average s higher revenues than
linked to different and 28 research-based
Gazprom Exam Case › 13
Graphic 6 Bloomberg edited by Ruben Koldeweij
In order to understand the big influence of the graphic depicted, it is crucial to understand, that Gazprom heavily relied on high Gasprices to be profitable (graphic 6) and that Gazprom did not hedge for falling prices, but quite the opposite. The fracking/shale gas boom took the companies official utterly unprepared, as recent as 2010, Gazproms CEO Miller called shale gas a myth.
However, the correlation between the shale gas exploitation that is illustrated by the falling gas imports in the US and Gazprom's crumbling quity are obvious.
Although it is certainly true that there is not direct physical connection between Russia and the US, the ballooning US gas extractions forced the gas price to fall significantly.
Graphic 6 is a combined chart of both the fluctuations of the gas price (red) and Gazprom's share value (blue).
Besides small derivations, the two graphs are vastly interrelated, showing just how vulnerable Gazprom proves for competitive pricing. Despite Gazprom's forecast to become the world's valuable company in 2012, their shares actually fell from a high of around $15 in 2008 to just over $4 in 2013 10. -missing politics now.
Graphic 5 Thomson Reuters Datastream
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10 Unknown. (2013). Gazprom OAO. Available: bloomberg/quote/GAZP:RU. Last accessed 28th Oct 2013.
Gazprom Exam Case › 14
6 Terrorism
Some of the parts of the external environment of Gazprom come with a big risk. For instance, terrorism, theft and subversive activities are big threats for Gazprom. Gazprom themselves is placing these external risks under: “Risks relating to exploitation of operating facilities”.
In the past, Gazprom has already been victim of thefts. In 1999 2 billion cubic metres of natural gas disappeared while being transported through Gazprom their pipelines in Ukraine. These thefts of natural gas are pressing the profits of Gazprom. On the other hand it is very hard for Gazprom to close the pipeline to prevent thefts from happening. These pipelines in Eastern Europe are needed to transport the gas to customers such as The Netherlands and Germany.
When taking the history of Gazprom and the biggest shareholder, the Russian government, in consideration the risk of a terrorist attack on Gazprom is relatively high. As for nowadays a large part of the former communism satellite states are used as transportation countries to Western Europe, the risks for vengeance arises. Especially when the Russian government is using the pipelines of Gazprom as a political tool. They tend to shut the pipelines for some countries as they oppose against the Russian government with excuses such as bills that aren’t paid for.
6 Uncertainty
In the external environment of Gazprom there exist a couple of uncertainties. One of the uncertainties is the price of natural gas. As shown before, the stocks of Gazprom rely for the bigger part on the price of natural gas. With a low gas price Gazprom will not be able to attain the profits that are expected with an average gas price. This situation already happened in 2008 when the gas price dropped rapidly.
Another uncertainty is competition from a rather unexpected side. The renewable sources of energy, such as solar energy or wind energy, could be considered as a threat for total sales of Gazprom. The natural gas is often used as fuel for power plants, which will become obsolete when the use of renewable energy sources becomes more common. However, the greater threat to Gazprom at the moment are not the renewable energy change per se, but in fact the construction of the energy market as a result (in particular Germany, as Gazprom's biggest client in Europe). As a number of issues of German news outlets such as "The Spiegel" and others featured and elaborated, the shutdown of nuclear plants accompanied with a specific German law the EEG (engl.: renewable energy allocation law) put the energy market in great turmoil with utilities writing down their plants 11. This apparent paradox is caused by the EEG, which subsidises renewable energies and forces the grid to serve renewable energies first. Now, with renewable energies that are in fact cheaper than fossil powered plants, utilities are forced to shut down plants or at least shut down gas fired plants, that are more expensive to run than coal fired plants. This odd paradox can be a big issue for Gazprom, especially since gas fired plants are widely regarded a pillar for energy generation change, because of their better efficiency and the reduced hazardous particles emitted. So, Gazprom as other gas exporters could face a reduced demand in gas for utilities in opposition of their actual expectations.
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11 SSU/DPA. (2013). Vattenfall schreibt Milliarden auf Kraftwerke ab: spiegel/wirtschaft/unternehmen/vattenfall-
schreibt-milliarden-auf-kraftwerke-ab-a-912630. Last accessed 2nd Nov 2013.
Gazprom Exam Case › 16
7 Effectiveness
The effectiveness of Gazprom can be assessed on a few different elements in the company. Gazprom itself is effective as a company. They produce, transport and sell natural gas to both their home market and foreign markets. With the sales worldwide Gazprom makes profit. Also inside Gazprom they try to make processes as effective as possible, for example Gazprom is working together with Microsoft 13 to come up with software solutions for the marketing and trading department of Gazprom. The system allows the sharing of knowledge to ensure that the employees can work as effective as possible. With the implementation of the new software there is an increase in the staff effectiveness. Furthermore Gazprom is planning to build a new pipeline bypassing Ukraine 14. This pipeline is not just to avoid the political issues with Ukraine but, according to the article, also to improve the effectiveness of the existing network of pipelines. As said before, Gazprom is as company effective. They also try to improve their effectiveness if they can or try to make ineffective activities more effective.
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13 Unknown. (2011) Gazprom Marketing and Trading Available:
microsoft/casestudies/Case_Study_Detail.aspx?casestudyid=4000011406. Last accessed 3rd November 14 Unkown. (2013) available: en.for-ua/news/2013/04/04/105715.html. Last accessed 3rd November
Gazprom Exam Case › 17
> Chapter 8: Recommendations
There are a number of issues that Gazprom can change for the better. First of all they should lose the government control, which makes it inefficient and corrupt. The company loses its focus that it really needs in this kind of business and acts as a political instrument.
The prices in Russia's domestic market are also below average and Gazprom sometimes delivers on quota instead of satisfying actual demand, so generating hardly any profits in their domestic market with rising competition.
Another big issue is the sheer size of the company combined with the strong centralisation that invites corruption and inefficiency on a massive scale. A first step to force Gazprom to operate in a more competitive environment was the abolishing of its exporting monopoly and some experts demand that the next step was be a divestiture of the corporation. If not a divestiture, decentralisation and a stricter control on a subsidiary basis is mandatory and should be done. However, if changes occur is questionable as long as the controlling stake is in state possession and politicians decide Gazprom's future.
In short, there are numerous things the company has to change, but it is only possible when they shift their attention to doing business rather than other political games that have brought severe troubles for Russia's energy giant.
nullnullPaper / essay - Figure 6.7 - Gazprom Exam Case
Vak: Organizational Structure (EBP670C05)
Universiteit: Rijksuniversiteit Groningen
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