LUKOIL, a vertically integrated oil company, and carries out exploration, acquisition, integration and subsequent efficient development of oil and gas fields outside the Russian Federation to facilitate the transformation of LUKOIL into a transnational energy corporation. LUKOIL operates in 25 countries (the most major of them are Russia, Azerbaijan, USA, Georgia, Turkey and Czech Republic).
Net income in 2013 is $3.105 billion. Basic earnings per share – $4.11. The Company’s 2012 net income rose by 6.2% and reached record $11,004 billion. EBITDA (earnings before interest, taxation, depreciation and amortization) rose by 1.7% and reached $18,915 billion. Sales revenues were $139,171 billion (+4.1% y-o-y).
In 2013 Forbes estimated LUKOIL as #43 in Sales, #34 in Profit, #254 in Assets, #139 in Market value. According to these data we can assume, that LUKOIL is successful Russian company with a lot of strengths, like good prospects regarding financial indicators. And fortunately, it doesn´t need any financing. Usually, the company invests in different projects regarding environmental protection and employee´s support.
2. Mission and Vision
Mission:
“The Company’s mission consists in increasing shareholder value through the exploration and production of hydrocarbons outside Russia.” My vision of the situation is that company wants to be a reliable supplier of hydrocarbons on the international market. Moreover, Lukoil has a purpose to support economic growth and social stability in long-term prospects. Thus, it has some main aims such as to achieve reputation of a reliable and dependable hydrocarbon supplier in the world; to deliver high-quality petroleum products to end-users; to ensure long-term sustainable growth; to reach leading position on the market;
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My formulation of the mission:
Lukoil as a company in the oil and gas industry using natural energy recourses is trying to be a leader in the international market by reducing costs, increasing operations and stabling social aspects. Vision:
“The company wants to be world’s leader in oil and gas sector by first-class services to our customers, effective HR policy, reliable and positive image of the company, effective environmental policy, optimization of the operational efficiency, decrease of the operational costs, sustain high-profit level.” In conclusion, company’s mission determines a purpose within the organization; provides standards for allocating organizational resources; establishes a general organizational climate; shows purpose and direction. Consequently, mission and vision are clear and give a lot of advantage.
3. Macro-environment (PESTLE)
At the beginning of this part, it is necessary to mention some relevant facts:
Population in Russia: 139mln
Area: 17mln sq. km
Time zones: GMT +2 to +11
9th largest economy in the world in terms of GDP, reaching USD 2014,8 bn 2013 Exports and Imports exceed 50% GDP
Highest GDP per capita among BRICS countries
Winter Olympic Games 2014 in Sochi 2012 and FIFA World Cup 2018 are coming 1. GDP
Figure 2.1 Real GDP
As we can see on the Figure 2.1 Real GDP has a tendency to grow up. Moreover, the present value of Real GDP is about 2014.8 USD billion which is the highest point during the history. Real GDP had been increased up to more than 6% in comparison with the previous period Contemporary situation in economy, especially in Real GDP, shows the opportunity for a company to increase production, because higher GDP means higher consumer expenditures; in turn, it is an alleviating competitive pressure within industry, then it’s the potential for expansion. As we can see GDP is constantly growing that means an opportunity to have higher revenues for LUKOIL Company because people have a higher profits and respectively higher consumer expenditures.
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2. Interest rate
The interest rate in Russia was last recorded at 5.50 percent. Interest Rate in Russia is reported by the Central Bank of Russia. It is quite high interest rate in comparison with for instance European countries. The average interest rate in Europe is 0.25%. For LUKOIL it is a threat of decreasing the company’s sales, because during high interest rate potential consumers tend to spend less (borrowings become more expensive).
Therefore the consumer purchasing power is quite low and company’s sales will be decreased.
Figure 2.2 Russia interest rate
3. Inflation rate
Figure 2.4 Russia inflation rate
Figure 2.5 Petroleum price RUB per liter
As we can see Figure 2.4 and Figure 2.5, the oil price and rate of inflation are connected directly: when oil price goes up, the inflation follows in the same direction. We can explain it by that the oil is the major input in economy (oil is used for manufacturing and transportation).
The inflation rate in Russia was recorded at 6.30 percent in October of 2013. It has a positive impact on Oil and Gas industry. LUKOIL can estimate future profit more accurate and eliminate several risks which effected by the oil price and inflation rate. 4. Unemployment rate
Figure 2.5 Russia unemployment rate
At the moment the rate is 5,5%. And the tendency has a declining character. Thus it could be opportunity to find high-qualified employees. There is a competition on a labor market.
5. Reservoirs of oil
Russia is the first country in the world in crude oil production. Its share is 12%. This indicator makes the country attractive for the investors. Consequently, LUKOIL could use positive investment climate of Russia as the company’s benefit.
6. Taxes
Nowadays there are three main taxes which have influence on economic in Russia: a) Corporate tax rate – 20%
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b) Personal income tax rate – 13%
c) Sales tax rate – 18%
Accordingly to these indicators the corporate tax rate is quite low in comparison with Japan – 38,01%, United Arab Emirates – 55%, US – 35%. Therefore, it is opportunity to increase a profit (low taxes increase net profit).
We are analyzing oil and gas industry in Russia. Fortunately most of deposits are situated in cold geographical areas like Tyumen Region, called Extreme North or Far North. Government gives a lot of benefits like people who work there are used to receive an extra grade of payment, referred to as the “Northern Bonus”, as well as other benefits, including extra vacation, extra disability benefits, extra retirement benefits, and housing benefits. LUKOIL won’t increase outflow of money into pension funds etc.
4. Technological factors (PESTLE)
New technologies are an important competitive advantage of LUKOIL Group. Key technological aspects:
1. The company conducts R&D to develop new technologies and upgrade the existing ones. 2. Cooperation with national projects is actively developing, including the Skolkovo innovation project and the RUSNANO Corporation. 3. Great attention is paid to developing information technologies and improving business processes. 4. The total financing of scientific and technical works in 2012 amounted to US$ 150 million. It is opportunity to use own technology and ability to exclude costs for using technologies from elsewhere.
5. Environmental factors (PESTLE)
Waste disposal
Russia drowns in 60 million tons of garbage a year. It is serious problem in waste disposal issue. Today, only 11% of the whole volume is recycled. Unfortunately, it is substantial evidence of contemporary problem and the threat for environment. LUKOIL uses chemicals for production, which could be statutory restrictions by the government for environmental protection. It is the threat for company of activities’ restriction.
Pollution
Oil and Gas industry damages nature by pollution. Many risks occur like spilling of oil into the sea or into the ocean. In this case LUKOIL will pay damage to nature and spoil its reputation. Consequently, LUKOIL should take into account all risks and try to avoid them.
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Climate
There is the dominance of the continental climate on the territory of the country. Russia faced to one serious problem during springs. It is flood. For oil industry it could be a relevant threat because it directly depends on transportation, for instance if roads are damaged it is becoming complicated to transport oil to different regions.
6. Political factors (PESTLE)
Strictly speaking, two of the most dangerous threats are the high level of corruption and terrorism.
High level of corruption
Russia is ranked 127th out of 175 countries in Transparency International’s Corruption Perceptions Index in 2013. This score indicates the perceived level of public sector corruption in a country or territory. Terrorism
There is a terrorist war aimed at destabilizing Russia politically and economically. Few weeks ago there was the 3rd terrorist attack in Volgograd during last 2 months.
Membership in World Trade Organization
In August 2012, Russia officially became a World Trade Organization member. Moreover, European Union contributes half of Russia trade flows. It is opportunity of simplified international market access with the purpose of trade and it is opportunity of hiring professional and administrative staff on fixed term contracts.
Index of Economic Freedom
Index of Economic Freedom in Russia is 51.3 out of 100 and it ranked as mostly unfree. These ranking means that the country is not attractive to do business and indicates a low possibility of obtaining investment. Thus, it is a threat for LUKOIL, it will be difficult to attract foreign investors.
Protection of property rights
It is an opportunity to protect LUKOIL’s innovations and to get patent.
7. Legal factors (PESTLE)
The following laws of the Russian Federation form the main legal framework of the oil and gas industry:
Constitution of the Russian Federation.
Federal Law On Subsoil (Subsoil Law).
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Federal Law On Gas Supply in the Russian Federation (Gas Supply Law).
Federal Law On Natural Monopolies.
Federal Law On the Continental Shelf of the Russian Federation. Federal Law On Energy Saving and Energy Efficiency.
Federal Law On Production Sharing Agreements.
The following federal laws are also relevant to the legal framework of the natural resources industry of the Russian Federation: The Codes of the Russian Federation, including the Civil Code, Land Code, Water Code, Forest Code, Tax Code, Code on Administrative Violations and Criminal Code. Federal Law on Environmental Protection.
Federal Law on Ecological Expertise.
Supreme Council Regulations on the Procedure of Enactment of the Provisions on the Procedure of Licensing of the Subsoil Use of 1992 (Subsoil Use Licensing Regulations).
The fundamental rights that are guaranteed to each Russian citizen are: All people shall be equal before the law and court.
The State shall guarantee the equality of rights and freedoms of man and citizen, regardless of sex, race, nationality, language, origin, property and official status, place of residence, religion, convictions, membership of public associations, and also of other circumstances. All forms of limitations of human rights on social, racial, national, linguistic or religious grounds shall be banned. Man and woman shall enjoy equal rights and freedoms and have equal possibilities to exercise them. That means that Lukoil should take into account all this rights and keep it in mind when hiring the employees.
8. Socio-cultural factors (PESTLE)
Age structure:
0-14 years: 15.7% (male 11,498,268/female 10,890,853)
15-24 years: 12.4% (male 9,031,057/female 8,662,557)
25-54 years: 45.8% (male 31,894,116/female 33,432,996)
55-64 years: 13.1% (male 7,926,184/female 10,711,347)
65 years and over: 13% (male 5,622,464/female 12,847,828)
Most of population is in “capable of working” age. There is a competition on labor market. It is an opportunity to find employees corresponded to the
standards of the company.
Main religion: Christianity
No requirement in the organization of labor. Thus, it is opportunity for LUKOIL to organize manufacture easily. High level of education
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Opportunity to attract well-qualified personnel.
9. Porter’s 5 Forces
1. Threat of New Entrants (Low)
The LUKOIL is protected by high barriers to entry. Therefore the threat of new entrants is very low Huge amounts of capital expenditure are needed to perform the activities, for example the cost of refinery is almost $7 billion, the price of petrol station is $600 000. Large amounts of fixed are require for the development of oil fields and the installation of production facilities Costs for entering the industry: drilling costs, oilfield services, skilled labor, scientific research, materials and energy Only companies that operate economies of scale can survive, for example LUKOIL has been searching for oil since 1991. They invest a huge amount in up-to-date technologies making it difficult for new entrants to compete. Russia allows only national companies (or foreign companies in partnership with the national company) to exploit oil reservoirs, because it is owned by the state. It is barrier to entry.
2. Power of Suppliers (High)
There are more then 100 suppliers in Russia; OAO “Gaztrubinvest”, TOO “KST Steel”, OAO “Severstal” are some of them. But their products are unique: tubular products, electric centrifugal pumps, oil cable, spurt steel framework. What gives them high bargaining power to dictate conditions. Moreover there are no substitutes, because the equipment needed for oil industry is special and impossible to replace.
3. Power of Buyers (Low)
The main buyers are government and car owners. Product differentiation is low and customers don’t have opportunity to choose, only to buy. The market share of LUKOIL is almost 17% and it has contracts with government, because they have a big chain of petrol stations. Consumers’ willingness to pay is the only power buyers have. Only very large buyers of oil such as big countries like US may influence oil price. Overall the buyer power is low
4. Threat of Substitutes (Low)
At the moment customers can not switch from using oil and gas for other sources of energy. Only some European countries introduced renewable sources of energy instead of gas and oil. But there are many alternatives of energy: coal, solar, and wind power. Instead of this fact, we notice the demand for oil increases every year and there is no chance of decreasing in consumption.
5. Industry Rivalry (High)
LUKOIL has 4 serious competitors: Rosneft (22% share of market), TNK-BP (14%), Surgutneftegaz (12%), Gazprom neft (6%).
Even though there is a very strong rate of growth in oil and gas sector the rivalry remain small due to large switching costs, required investments for a new entrance, size of competitors, and political barriers. There is no place for small companies because of few market leaders. Also there is no possibility that competitors will offer a lower price. LUKOIL is second company that operates in Russia. The leader is Rosneft and its main competitor. LUKOIL has 17% share of Russian market, Rosneft 22% respectively.
10. SWOT analysis
Strengths
Weaknesses
– 1st among the largest private oil and gas companies in the world. – 1.3% oil reserves of total reserves of oil worldwide – and second in terms of volume proven hydrocarbons reserves – about 2% of total global reserves; – Increase in oil index price in the world.
– High entry barriers in the market, which eliminates small competitors.
– Very sufficient technology of research and exploration.
– Geographical business diversification (30 countries).
– Large amount of oil reserves(17%)
– Superior oil related technology.
– Fully vertical and horizontal integrated.
– Well supported by Russian government.
– Constant increase in demand for gas and oil in Russia.
– Constant research and innovation.
– Production costs are relatively high compared with levels achieved by its main competitors. – The company’s communication both inside and outside is slow and bureaucratic. – Cost of environmental hazards.
Opportunities
Threats
– Increase in oil and gas demand in Russia.
– New exploration projects.
– Investment into new businesses.
– Iraq oil project.
– Corruption.
– Terrorism.
– Floods.
– Decrease sales (high interest rate).
– Competition on the market
Internal analysis
Revenue $139.2 billion
Employees 150.000
Recommendations
Despite having a relatively good position in the regional market of Central and Eastern Europe, LUKOIL faces strong competition. In this context, LUKOIL should increase its market share through an offensive strategy of territorial expansion and to attract new customer segments. In addition, LUKOIL should ensure implementation of new technologies for modern and efficient production in terms of cost and continues its efforts to improve product quality and competitiveness, in order to meet international standards, including API and ACEA. Another important trend is the application of marketing strategies on the downstream, taking into account the factors influencing consumer choice of stations: location, value for money, image, service, the existence of ancillary services. These strategies are reflected in the mix of marketing, in which both product and promotion play a central role.
