Abstract
In the context of the development of the oil and gas production sector in the economy of the Russian Federation, oil companies need investment resources, and investors are evaluating possible investment options. At the same time, investors are interested not only in the economic aspects of projects, but also in legal issues and compliance with industrial safety requirements, since oil production projects involve the operation of production hazard facilities. In this regard, the authors set a goal - to propose an optimal model of interaction between a large oil company and a small oil producing company from the standpoint of legitimacy and compliance with industrial safety requirements. The authors explore five options for developing partnerships between the parent company and the small operator company. The options vary for the ownership of personnel serving the development facilities, licenses for the operation of hazardous production facilities, their registration and rights to movable and immovable property. For each option, strengths and weaknesses, risks and opportunities are analyzed. As research methods, methods of system analysis and modeling, organizational management methods, SWOT analysis, adaptive and situational management methods were used. The article may be of interest to potential investors evaluating the possibility of investing in Russian oil production. The study was conducted on the basis of real data on the order of a foreign investor, assessing the potential benefits and risks and, in general, the possibility of further stay in the project.
Keywords: Parent companyoperatoroil productionpartnershipmodel
Introduction
In the process of formation, the Russian oil and gas business went through a whole series of restructuring: the transition from a state corporation to private business, from monoproduction to diversification, from the concentration of all types of oil and gas business within a vertically integrated company to the withdrawal of oil services beyond the vertically integrated oil companies (Aleksandrova & Nizamova, 2017). At the same time, the reasons for the restructuring at different time periods were different - from changing the legislation to the need to survive in crisis years and optimizing costs in the current period (Cherif, Hasanov, & Zhu, 2016).
One of the modern management models that some oil producing companies adhere to has become a model in which a large company acts as one of the investors in creating an oil production company in the form of a limited liability company that receives a license to develop a subsurface and acts as a production operator (Gajfullina, Nizamova, Musina, & Alexandrova, 2017; Kopytin, 2018). At the same time, the operator holds a license for development and production facilities, and business processes are organized by the parent company, which has experience and provides its personnel. The extracted products are also sold by the parent company.
Problem Statement
The presented management model is undoubtedly economically beneficial for the parent company, however, it raises a number of questions from other investors of the operator company. Investors' concerns are related to the fact that in the current situation the parent company is skimming the cream, then in the event of a crisis, all investors respond within their shares (Sovacool, Walter, Van de Graaf, & Andrews, 2016). Investors are interested in how justified this management model is in terms of industrial safety and legislation?
Research Questions
The study sets the following tasks:
study of the legitimacy of the current model for developing a licensed area of an operator company;
the formation of alternative options for the interaction of the parent company and the operator company;
selection of the best partnership option in the current environment (Nizamova & Musina, 2017).
Purpose of the Study
The authors aim to propose an optimal model of interaction between a large oil company and a small oil producing company from the standpoint of legitimacy and compliance with industrial safety requirements. Achieving the goal includes researching potential forms of partnership, taking into account the mutual interests of a foreign investor and a Russian company.
Research Methods
When developing alternative options for interaction between the parent company and the operator company, methods of system analysis and modeling, organizational management methods, and SWOT analysis were used. In order to select the best partnership option, adaptive and situational management methods were used. As an empirical method, the study of normative and methodological documentation was used.
Findings
The paper analyzes five options for interaction.
A list of possibly violations:
insufficient control on the part of the parent company over the activity of operator company;
the parent company has no procedures for admission of the contracting company to hazardous industrial facilities (employees of the operator operating the production facilities do not have access to work at this facility);
de facto: operator company is the company operating the facility, de jure: the parent company represented by its management (director and chief engineer) is fully liable for the activity of operator company;
the parent company as the legal operating company will be kept liable for any accidents and incidents;
de facto: Emergency prevention and response measures are taken by operator company, de jure: the parent company is liable for performance or failure to perform these measures;
different interpretation of the service agreement conditions by the parent company and operator company, also in the part of operating and maintenance documentation development.
If a decision is made in favor of this option, the parent company needs to perform a number of activities related to licensing of the operation of production facilities
Variant No. 3A “Full outsourcing”. All the facilities of the parent company are operated by regular staff of operator company within the framework of an operator agreement, according to which operator company itself shall register with Rostechnadzor the transferred hazardous industrial facilities and obtain a license for their operation.
In this variant operator company is a full-scale operating company and incurs full and sole liability for compliance with legal requirements of the Russian Federation to the full extent. The parent company is the subsoil user and the oil production owner (Nyameboame & Haddud, 2017).
Movable and immovable assets must be transferred to operator company for operation either under an operator agreement or a lease agreement. It is necessary to issue an acceptance report for movable and immovable assets transfer and to make operator company responsible for notification of the equipment owner about any failures of the equipment and organization of prompt repair. To establish liability for improper maintenance of movable and immovable assets.
The cost of operation services must be fixed depending on the produced and treated quantities. Discussing the cost of operation services, it is necessary to request from operator company calculations justifying the service cost.
Strong points: operator company is fully liable for any accidents at the facilities. Simple financial reports to shareholders. No need to develop and integrate documentation support for industrial safety management systems at the facilities of the parent company.
Weak points: The procedures of forest (land) plots transfer from the parent company to operator company require an in-depth study of the subsoil use incense terms and conditions. High cost of operation services.
Possibilities: Simplification of the control system.
Risks: Legal risks caused by supervising authorities to the operating company are possible only for direct breach of legal industrial safety requirements committed by regular staff of operator company in the process of the parent company oil & gas production facilities operation.
The parent company as a subsoil user will be liable only for compliance with the subsoil use conditions.
Variant No. 3B “Hybrid variant”. This variant is applied to all oil & gas production facilities of the parent company. The specific feature of this variant is simultaneous application of the “Working model” to hazardous industrial facilities of class III and IV (the well stock of West-Yaraktinsky subsoil block) and “Full outsourcing” to industrial facilities of class I and II (high and extremely high hazard).
Strong points: Control of hydrocarbon production costs. A simple control system. No changes in the existing business-processes of the parent company and operator company are required when working at the functioning hazardous industrial facilities. The parent company has a license to operate oil & gas production facilities (for operation of facilities like the Well stock of hazard class III). The parent company is not liable for operation of hazardous facilities of class I and II, at the same time remaining to be their owner.
Weak points: The procedures of forest (land) plots transfer from the parent company to operator company require an in-depth study of the subsoil use incense terms and conditions. High cost of operation services.
Possibilities: Stable development of the parent company.
Risks Legal risks caused by supervising authorities to the operating company are possible only for direct breach of legal industrial safety requirements committed by regular staff of operator company in the process of the parent company class I and II oil & gas production facilities operation.
As a subsoil user, the parent company is liable for compliance with the subsoil use conditions; as an operating company, it is liable for “direct” violations of legal requirements committed by regular staff of the parent company in the process of oil & gas production facilities operation.
Conclusion
As part of the work, almost all partnership models were considered.
Each of the examined operation management variants has advantages and disadvantages of its own and conforms to the laws of the Russian Federation.
The key advantage of the first variant is independence of the Company that enables it to avoid legal complications when applying the requirements of the Russian legislation to the operating company. If this variant is chosen, the parent company will be fully liable for violation of the requirements of the Russian legislation both as the soil user and as the operating company. Minimum legal risks caused by supervising authorities to the operating company; penalties are possible only for direct breach of legal requirements committed by regular staff of the parent company in the process of oil & gas production facilities operation.
The second variant “Working model” also conforms to the laws of the Russian Federation. Its practical application does not ensure compliance with the industrial safety requirements in the process of facility operation, also in the part of proper documentation support for the operated facilities (there will be a need for duplication of the internal regulatory guidance documents of operator company for the parent company, etc.). If this variant is chosen, it will be necessary to make amendments to the existing agreement.
Variant No.3A “Full outsourcing” will be possible in case of revision of the existing service agreement with operator company. When making the agreement, considerable attention shall be paid to the section describing contractual obligations of operator company towards the parent company. It is also necessary to investigate the legal aspects of transferring the forest plots to operator company for performance of their obligations.
Mutual relations between the partners and hence the efficiency of their contractual relations will depend largely on the signed agreement (contract). It is connected with exact regulation of rights and obligations in the regulatory legal documents of the Russian Federation applied to:
companies – owners of oil & gas production assets (Wicaksono, Bin Arshad, & Sihombing, 2019);
companies holding licenses for subsoil use (subsoil users);
companies having registered their hazardous industrial facilities and operating such facilities (operating companies);
companies holding licenses for operation of explosion-, fire- and chemically hazardous production facilities of hazard class I, II and III;
contractors.
References
- Aleksandrova, O., & Nizamova, G. (2017). Applying of public-private partnership mechanisms in chemical industry of the Russian Federation taking into account risk component. Naukovedenie, 9(1), 96-100.
- Cherif, R., Hasanov, F., & Zhu, M. (2016). Breaking the oil spell: The Gulf falcon’s path to diversification. Washington, D.C.: International monetary fund.
- Gajfullina, M., Nizamova, G., Musina, D., & Alexandrova, O. (2017). Formation of strategy of effective management of fixed production assets of oil company. In Karpov, A.Yu., Martyushev, N. (Eds.), Proceedings of the International Conference on Trends of Technologies and Innovations in Economic and Social Studies 2017. Advances in Economics, Business and Management Research, AEBMR, 38, 185-190. Atlantis Press.
- Kopytin, I. (2018). European and American super majors: Business models transformation. Contemporary Europe, 5(84), 110-119. https://doi.org/10.15211/soveurope52018110119
- Misund, B., Mohn, K., & Sikveland, M. (2017). Exploration risk in international oil and gas shareholder returns. Journal of Energy Markets, 10(4), 1-22. https://doi.org/10.21314/JEM.2017.167
- Nizamova, G., & Musina, D. (2017). Assessment of availability of foreign investment resources to the Russian oil and gas companies. Eurasian Law Journal, 4(107), 356-358.
- Nyameboame, J., & Haddud, A. (2017). Exploring the impact of outsourcing on organizational performance. Journal of Global Operations and Strategic Sourcing, 10(3), 362-387.
- Sovacool, B. К., Walter, G., Van de Graaf, T., & Andrews, N. (2016). Energy governance, transnational rules, and the resource curse: Exploring the effectiveness of the extractive industries transparency initiative (EITI). World Development, 83, 179-192. https://doi.org/10.1016/j.worlddev.2016.01.021
- Wicaksono, F. D., Bin Arshad, Y., & Sihombing, H. (2019). Monte Carlo net present value for techno-economic analysis of oil and gas production sharing contract. International Journal of Technology, 10(4), 829-840. https://doi.org/10.14716/ijtech.v10i4.2051
Copyright information
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
About this article
Publication Date
09 March 2020
Article Doi
eBook ISBN
978-1-80296-078-5
Publisher
European Publisher
Volume
79
Print ISBN (optional)
-
Edition Number
1st Edition
Pages
1-1576
Subjects
Business, business ethics, social responsibility, innovation, ethical issues, scientific developments, technological developments
Cite this article as:
Musina*, D., Solodovnikov, A., & Makhneva, A. (2020). Justification Of The Organizational Model Of Partnership In Oil Production. In S. I. Ashmarina, & V. V. Mantulenko (Eds.), Global Challenges and Prospects of the Modern Economic Development, vol 79. European Proceedings of Social and Behavioural Sciences (pp. 633-639). European Publisher. https://doi.org/10.15405/epsbs.2020.03.91