ࡱ > a bjbjڥڥ 4 R\R\ t t t t t < t ; | $ $ $ $ $ =$ Q& w9 y9 y9 y9 y9 y9 y9 $ $= ? n 9 ]' " ]' ]' 9 $ $ g b; ]' ]' ]' ]' $ $ w9 ]' ]' w9 ]' ]' 7 C9 $ W ]' 8 " c9 x; 0 ; !9 " H@ ]' H@ D C9 H@ C9 ]' ]' ]' ]' ]' ]' ]' ]' 9 9 ]' ]' ]' ]' ; ]' ]' ]' ]' H@ ]' ]' ]' ]' ]' ]' ]' ]' ]' > F : Improving SOCARs Market Presence in the European Oil and Gas Industry
Azerbaijan, Baku, oil, world companies, 19th century businessmen from the second half to the beginning of the twentieth century and from many foreign companies where they successfully operated and produced oil. Haydar Aliyev
Course: Economics
Supervisor: Ganira Ibragimova
Student: Turan Alizada
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Outline
I. Introduction
a. Statement of the Problem
b. Purpose of the Study
c. Importance of the Study
II. Review of related literature
a. SOCARS activities and global Presence
b. Previous international marketing approaches adopted by SOCAR c. European Oil and Energy market d. Theoretical understanding
e. Summary
Methodology a. Research design
b. Data Collection Methods c. Validity of Data
d. Data Analysis IV. Discussion a. Product/Service b. Place
c. Price
d. Promotion
V. Oil in Azerbaijan
VI. Summary, Recommendations and Conclusion a. Summary
b. Recommendations c. Conclusion
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Acknowledgement
The last step to be awarded as a Bachelor of Economics...
Nothing can express my feelings I went through while studying in logo. Because every morning I hurried up to get to logo building, had launch in cafeteria and of course spending the day in the library till midnight. This was my daily routine.
Having a look at backwards I feel happy of being one of logo team members. In other words, Im sure that applying the experience I got from my lecturers, tutors and professors will help me to build and strengthen my future career.
In this sense, I would like to express my gratitude to all logo members headed by Prof. Adalat Muradov, Aida Gulieva as well as my supervisor Ganira Ibragimova for their kindness and support. Also Im thankful to logo organization for the reason that by means of it I could bring up a wide friendship network with hundreds of students.
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Abstract
Many players dominate the European oil and gas market. Although foreign companies participate in this market, most market players are local. Many oil companies intend to venture into this market as others plan to increase their market visibility. One such company is the State Oil Company of the Azerbaijan Republic (SOCAR). Based on the difficulty of increasing its market visibility in an industry that is dominated by many large players, this paper demonstrates that SOCAR can expand its operations in the European oil and gas market by adopting a four-tier marketing strategy which is based on Philip Kotlers 4Ps of marketing. Concisely, in five chapters, this paper proposes that SOCAR should pursue joint ventures with existing oil giants in Europe by marketing itself as an oil distribution company (as opposed to an oil producer or explorer), price its products relatively lower than the competition and adopt personal selling techniques to increase its market visibility in the European oil and gas market.
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Table of Contents
CHAPTER 1 INTRODUCTION
Statement of the
Problem...6
Purpose of the
Study....8
Importance of the
Study.....10
CHAPTER 2 REVIEW OF RELATED LITERATURE
SOCARS activities and global Presence..10
Previous international marketing approaches adopted by SOCAR. 11
European oil and Energy
market14
Theoretical
understanding16
Summary27
CHAPTER 3 METHODOLOGY
Research
design.......28
Data Collection
Methods...29
Validity of
Data.31
Data
Analysis...32
Ethics Statement 33
CHAPTER 4 DISCUSSION
Product/Service....33
Place.35
Price.36
Promotion36
CHAPTER 5
Oil in Azerbaijan.37
CHAPTER 6 SUMMARY, RECO M M E N D A T I O N S A N D C O N C L U S I O N S
S u m m a r y & & & & & & & & & & & & & & & & & & & & & & & & & & & & . . 5 6
R e c o m m e n d a t i o n s & & & & & & & & & & & & & & & & & & & & & & & & & 5 7
C o n c l u s i o n & & & & & & & & & & & & & & & & & & & & & & & & & & & . . . 5 8
S e l f - R e f l e c t i v e E s s a y 5 9
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C H A P T E R O N E
I N T R O D U C T I O N
S t a t e m e n t o f t h e P r o b l e m
F o s sil fuel drives the wheels of modern economies. However, there are ongoing efforts to reduce the reliance of oil and gas through green energy efforts, which are concentrated on renewable sources of energy. Developing nations are at the forefront in increasing the demand of the worlds oil and gas energy but developed nations have historically constituted the biggest market block for the same resources. Most of the worlds consumption of energy therefore occurs in advanced economies such as Britain, United States, China, and Japan (Amineh 2010). Europe and America are the biggest markets for oil and gas energy. Their high demand for energy stems from the robustness of their economies.
Like most competitive industries, many players compete for limited resources in the oil and energy market (Gammie 1997). Notably, many people know the countries that produce oil but not the constituent companies that exploit this natural resource. In Europe, some of the major oil companies include British Petroleum (B.P), Royal Dutch Shell Plc, Exxon Mobil Corporation, Wintershall Holding AG, Lundin Petroleum AB, A.P. Moller-Maersk A/S, Chevron Corporation (among others) (Wood 2011, p. 2). These companies are only some of the major players operating in the European oil and energy market because there are many other companies that are struggling to increase their market presence in the same market. With todays increasingly growing trend of globalisation, many foreign oil companies are willing to enter the European oil market .
T h e l i b e r a l i s a t i o n o f t h e E u r o p e a n m a r k e t a n d t h e s u b s e q u e n t f o r m a t i o n o f t h e E u r o p e a n U n i o n ( E . U ) h a v e f u r t h e r c a t a l y s e d t h e p e n e t r a t i o n o f s u c h c o m p a n i e s i n t h e E u r o p e a n m a r k e t ( H a r b o 2 0 0 8 ) . H o w e v e r , m o s t c o m p a n i e s , w h i c h h a v e d a r e d t o v e n t u r e i n t o t he European oil market, have found stiff competition from other existing companies (more so, local oil companies that have historically dominated
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the market) (Osborn 2005). Moreover, intense politicking (informed by ongoing policy formulations within the European Union and existing international conflicts with some of E.Us neighbours such as Russia) characterises the European oil and energy market (Heinberg 2005).
However, the ongoing political forces within the market is incomparable to the stiff competition realised by most foreign companies willing to venture into the European oil and energy market. Some companies, which have successfully managed to penetrate the market, have only done so substantially while others have failed to secure a continental presence in the competitive market. For example, numerous literatures document the unsuccessful penetration of foreign oil companies in Europe (Amineh 2010). Still, the rush to dominate the European oil and energy sector is strong and many companies are striving to outdo one another to increase their market shares.
It is crucial to highlight that the main challenge witnessed by foreign companies intending to venture into the European oil and energy market is the fact that Europe is also a producer of oil and energy. Therefore, unlike geographic regions, which do not produce oil or gas, Europe is a net producer of the natural resources. Taiyou Research (2011) explains that Europe is the world's fourth largest producer of oil and gas, with the North Sea basins containing the largest oil and gas reserves in Europe (p. 1).
Dominant market players in the European oil and gas sector hail from Norway, Germany, Italy, UK, Romania, France, Ukraine, Netherlands, Spain, Hungary, Finland, Greece, Lithuania, Sweden, Portugal, Slovakia (among others) (Taiyou Research 2011). Some of these countries are dominant producers and distributors of oil products while others only produce for their domestic consumption. In addition, some of the countries mentioned above have been dominant players in the worlds oil and energy market for a long time and similarly, they are home to some
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of the biggest oil companies in the world. For example, Europes British Petroleum (BP) and Royal Dutch/Shell have been dominant players in the world oil and energy market. The presence of such dominant multinationals makes it even more difficult for foreign oil companies to venture into the European market.
However, the European market is very big and even though there are some dominant oil producers in the continent, they are not able to meet (sufficiently) the rising demand for oil and gas energy in Europe (Taiyou Research 2011). This situation has led to the growing bill of oil imports and the emergence of new opportunities for foreign companies to venture into the same market. It is through this opportunity that this paper seeks to explore the alternatives for the State Oil Company of the Azerbaijan Republic (SOCAR) to increase its market presence in the European market.
Purpose of the Study
Venturing into new markets can be a brain-raking process for companies. Taiyou Research (2011) explains that Many companies that have succeeded locally find it difficult to venture into new business markets especially if it is somewhere across the globe. Few businesses owners have the nerve to research and risk their investments in new markets or send their workers to initiate a production unit in another part of the world, yet this is the pinnacle of business growth (p. 3).
The hesitation by some companies to venture into a new market is understandable because global market expansions pose great risks. However, it is also important to point out that successful market expansions have a high return.
Venturing into a new market is especially not for those weak at heart because it may defy a companys corporate philosophy, business practices and other aspects of core corporate governance as investments continue to flow into the new markets. Such investments may be worth millions of Euros. In fact, in more capital-intensive industries like the oil sector, such investments may run into billions of Euros. Unfortunately, no matter how much an organisation may be
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prepared for such intensive undertakings, the risk of failure exists. Indeed, companies may be bankrupt if they unsuccessfully expand into new markets (Osborn 2005).
Since such risks exist, scholars, professionals, economists, and academicians have developed numerous international business strategies. The outcome of their involvement is the availability of several strategic options. Some of these strategies are very specific and therefore not all companies can adopt them. It is therefore perplexing for managers to venture into new markets because they have several alternatives that may, or may not succeed. Notably, the nature of a companys operations and the characteristics of the host markets play an integral role in the determination of the right marketing strategy to adopt in new markets. Considering this paper focuses on the oil and energy market in Europe, the market dynamics of the same industry determines the right strategy for SOCAR to venture into this market. Competition is at the centre of this analysis because any new (or foreign) company intending to venture or expand its market operations in the European oil and energy sector needs to be aware of the existing presence of other dominant players in the industry. Moreover, prospective market participants need to understand that the energy industry is largely oligopolistic (Talus 2011). Purposefully, this paper seeks to establish the right marketing strategy for SOCAR as it tries to increase its market presence in the European market. The following research objectives define this aim:
To establish which marketing strategies are most beneficial for SOCAR as it expands its market presence in the European oil and energy market
To investigate which business sector SOCAR needs to concentrate on as it expands further into the European oil and energy market
To find out which resources SOCAR needs to use to achieve success in the European market and why these resources are crucial to SOCARS marketing strategy
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To establish the challenges of expanding SOCARs operations in the European oil and energy market
To demonstrate how SOCAR can use its marketing strategies to circumnavigate the pitfalls of the European oil and gas market
Importance of the Study
The importance of this study can be broken down into two components. First, the findings of this study will be important for energy companies that are willing to expand their operations in the market. With a keen consideration of the industry and company dynamics surrounding the marketing initiative, this paper provides a guideline for strategy formulation. Secondly, by highlighting the nature of the European oil and energy market (and how foreign companies can overcome existing barriers), the outcome of this paper also contributes to the existing body of knowledge regarding international market ventures. More importantly, this study provides an up-to-date understanding of successful business practices in the European oil sector and how foreign companies may use such practices to improve their visibility in the European market. This analysis provides a framework for future studies as well.
CHAPTER TWO
LITERATURE REVIEW
SOCARS Activities and Global Presence
Since its inception, the State Oil Company of Azerbaijan Republic (SOCAR) has undertaken major oil concessions in Azerbaijan (involving the production, sale, and distribution of oil products) (SOCAR 2012). The extensive outreach of the companys operations ranks it among the biggest oil companies in the world. Indeed, recent corporate rankings reported SOCAR as the 68th biggest company in the world (with a total asset base of $20 billion) (Ibrahimov 2007, p. 1). SOCARs activities are diverse as they range from exploration, preparation, distribution, and
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exploitation of oil fields in not only Azerbaijan but also other countries around the world. Some of its auxiliary activities include the transportation, processing, and distribution of oil and gas products. To sample the companys production capacity, Ibrahimov (2007) explains, In 2006, SOCAR produced from offshore and onshore fields about 7.84 million tons of oil and 4.34 billion cubic meters of gas (p. 3). About 61,000 specialised employees run the companys operations. SOCARs operations stretch far beyond its host market (Azerbaijan) into other markets around the world, such as, London, Vienna, Geneva, Frankfurt and other cities around the world (SOCAR 2012). Mostly, SOCAR has a representative office in these locations, with its activities ranging from international oil consortiums to franchises and partnerships around the globe. In Europe, SOCAR Trading SA is primarily involved in the market and distribution of the companys products, but its operations and activities have not been very visible.
Previous International Marketing Approaches Adopted by SOCAR
Like other multinational companies operating in the global market, SOCARs international marketing strategy has been very calculated. In other parts of the world (Non-European markets), SOCAR has been able to develop successful joint ventures with local companies. Such is the case in Turkey and Georgia (Ibrahimov 2007). In Europe, several marketing strategies complement the companys presence in the market. Recently, SOCAR purchased a subsidiary company of Exxon Mobil (Esso) to increase its market presence in Europe (Auty 2006). Through successful consortiums and the support of its subsidiary companies, SOCAR has also been able to entrench its presence in the European market (notably Switzerland). However, in some of the companys market, SOCAR has been independently carrying out its operations. Mostly, the companys operations in Azerbaijan have been independently undertaken but some of its offshore operations occur with the help of other companies. SOCARs experience in the oil and gas market stretches more than a decade ago when the company was engaged
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in the exploitation and exploration of oil in Russia. Its wider acceptance as the main oil exploration company in the South Caucus region also complemented its oil exploration activities in Russia (Ismailzade 2006, p. 26). Throughout the soviet times, SOCAR was able to develop a pool of specialised oil exploration experts who have been instrumental in undertaking oil exploration ventures across the globe. SOCARs proficiency and experience in venturing into international oil markets trace to Azerbaijans post-colonial period. T h e c o m p a n y s f i r s t v e n t u r e i n
t h e i n t e r n a t i o n a l m a r k e t w a s t h r o u g h i t s s u b s i d i a r y c o m p a n y A z r e t r o l t h a t v e n t u r e d i n t o M o l d o v a i n t h e S o v i e t p e r i o d . S i n c e t h e n , t h e c o m p a n y h a s b e e n a b l e t o e n t r e n c h i t s e l f i n o t h e r p a r t s o f t h e w o r l d . N o t a b l y , i t s a c t i vities around the Caspian Sea form a major part of the companys oil exploration history because it has been able to assist countries around the Caspian Sea (such as Georgia) to explore and exploit their oil. Its activities in Africa and Asia also form a significant part of the companys international operations. Slowly, foreign oil explorations in virgin oil fields of Asia and Africa are forming a huge percentage of the companys operations (Ismailzade 2006). Nonetheless, SOCARS
venture into Georgia was only natural because the country is geographically close to Azerbaijan. Over the years, the construction of more refineries made SOCAR a strategic partner in the sale and distribution of oil and gas products in Georgia. By building more refineries, SOCAR has been willing to increase its presence around the black sea. This strategy is part of a larger ploy to export more oil to black sea countries because the current transportation of oil through the existing terminal is only about ten million tones and the company intends to double this capacity to about 20 million tons of oil (Ibrahimov 2007). Besides the ambition to increase its presence in Georgia and the surrounding states, SOCAR plans to establish SOCAR-Georgia Company, to establish new petrol stations around Georgia (as part of the companys plan to increase its market visibility in the Caspian Sea). SOCAR also harbours other ambitious plans to expand its operations in some of its
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international markets such as Turkey. This plan complements SOCARs willingness to establish a monopoly in the country (International Business Publications 2008). In 2011, it was reported that In early December R. Abdullayev and chairman of the Turkish oil company Turcas Erdal Aksoy signed a protocol with SOCAR to establish a joint company (Ibrahimov 2007, p. 10). In a press statement from SOCARs president, SOCAR acknowledged that it intended to sell oil and gas products in Turkey because of its strategic geopolitical position with Turkey (International Business Publications 2008). Most of the oil products exported in this agreement originates from Azerbaijan and by developing a new oil distribution system through Turkey; SOCAR intends to penetrate other markets in the European peninsular. Through the Turkey deal, SOCAR aims to open more opportunities for trade with the rest of Europe by bringing some of its core partners such as Ukraine and the Republic of Moldova into the deal. Other countries expected to benefit from this expansion includes some black sea states such as Romania, Bulgaria, and other countries (Oxford Business Group 2009). Comprehensively, SOCAR has recognised the need to expand its operations from traditional markets to non-traditional markets. It is through this realization that the
company introduced SOCAR T r a d i n g ( b a s e d i n G e n e v a ) ( S O C A R T r a d i n g S A 2 0 1 2 ) . T h i s c o m p a n y i s a s u b s i d i a r y o f S O C A R a n d a c t s a s t h e i n t e r n a t i o n a l m a r k e t i n g a g e n c y f o r t h e c o m p a n y .
S o f a r , i t h a s d o n e a r e m a r k a b l e j o b m a r k e t i n g t h e b u l k o f S O C A R S c r u d e o i l e x p o r t s n o t o n l y i n E u rope but to other parts of the world as well. Some of the crude oil marketed through this subsidiary has not originated from Azerbaijan because the subsidiary also trades third-party crude oil. In fact, SOCAR Trading SA (2012) explains that third-party business constitutes about a third of all SOCAR
T r a d i n g o p e r a t i o n s . S O C A R t r a d i n g h a s a l s o b e e n a b l e t o a s s i s t i t s p a r e n t c o m p a n y t o m a k e i n v e s t m e n t d e c i s i o n s i n o v e r s e a s m a r k e t s t h r o u g h l o g i s t i c a l s u p p o r t . C o n c e r n i n g t h i s s u p p o r t , S O C A R T r a d i n g S A ( 2 0 1 2 ) e x p l a i n s t h a t S i n c e i t
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s h i p p e d i t s f i r s t c a r g o i n A p r i l 2 0 0 8 , S O C A R T r a d i n g h a s s u c c e s s f u l l y o p t i m i s e d a n d d i v e r s i f i e d t h e S O C A R b a r r e l a m o n g e n d - u s e r s a c r o s s E u r o p e , A s i a a n d A m e r i c a ( p . 3 ) . S O C A R T r a d i n g h a s a l s o b e e n s u c c e s s f u l i n l e v e r a g i n g i t s s y s t e m b a r r e l s f o r t h i r d p a r t y b u s i n e s s t h r o u g h l o g i s t i c a l s u p p o r t a n d t h e f o r m u l a t i o n o f t h e
r i g h t s t r a t e g i e s i n o i l l o g i s t i c s . R e c e n t l y , S O C A R T r a d i n g e x p a n d e d i t s o p e r a t i o n s i n t o o t h e r c o u n t r i e s a n d c i t i e s s u c h a s B a k u , S i n g a p o r e , V i e t n a m , D u b a i , a n d L a g o s , w i t h N e w Y o r k , C a i r o , a n d I s t anbul to follow (SOCAR Trading SA 2012, p. 4). Nonetheless, SOCARs European success largely depends on its ability to circumnavigate market challenges and opportunities. Through an exploration of the nature of the European oil and energy market, this paper highlights these challenges and opportunities below.
European Oil and Energy Market
Large concentrations of the European oil and energy markets are in the northern part of the continent because countries bordering the North have the highest concentration of oil and natural gas resources (Key Note Limited 2007). Among the countries known to produce the highest volumes of crude oil products are U.K, Denmark, Italy, Romania, and Germany. These countries produce the highest volumes of crude oil in that order (Osborn 2005). In addition, Netherlands produces high concentrations of natural gas. Germany, Italy, Romania, and Denmark (in that order) second its production (Osborn 2005). Interestingly, some of the above- mentioned countries have not been part of the E.U for a long time. For example, Romania (a top producer of crude oil and natural gas), mentioned countries have not been part of the E.U for a long time. For example, Romania (a top producer of crude oil and natural gas), only joined the E.U in 2007. Despite the participation of E.U countries in the production and distribution of oil, the domestic demand of oil in the E.U surpasses its local production. Consequently, there is a strong need to supplement domestic demand by oil inputs. Motivated by
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the fear of being heavily dependent on foreign oil, E.U is investing a lot of money to improve its oil infrastructure to make it easier to distribute the existing oil. Mostly, these investments work to improve the oil pipeline network and boost E.Us oil storage capacity. Conflict between E.U and its neighbouring states is a strong influencing factor in the sale and distribution of this oil (because E.U is trying to avoid any cases of oil and gas disruptions if there is any disagreement with some of its neighbours). Regarding the sourcing and distribution of natural gas, the European Union is turning to its Arab allies to source oil. However, the conflict between western powers and some Arab states has undermined this initiative (Ceric 2012). Therefore, Europe has only sought partnerships with friendly Arab nations. Already, North Africa and Qatar provide some of this oil. Europe is also building new liquefied natural gas (LNG) terminals to facilitate the distribution and storage of this commodity.
Since SOCAR engages in the exploitation and exploration of oil around the world, the ongoing decommissioning of oil ventures in the E.U (especially around the North Sea) is a worrying trend. The decommissioning of these oil fields show that there is little potential to expand Europes oil production capacity (Ceric 2012). Notably, there has been a significant decline in the production of oil within the E.U (as seen from the steady decline of oil production in the U.K). In fact, recent and new discoveries of oil are usually of a small proportion thereby making such projects economically unviable (Key Note Limited 2007). Experts say that until the price of oil significantly increases EU is an uneconomical region for oil exploration and exploitation. Currently, it would be very expensive to invest in oil production in Europe because the market does not provide adequate compensation for such investments, through high oil prices (Ceric 2012). Currently, many oil companies are looking for new geographic regions around the world to continue their oil and natural gas explorations. This trend is bound to work against SOCAR especially in the exploration and exploitation of oil in the E.U.
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Apart from the numerous efforts aimed at improving EUs capacity to import and store oil and natural gas, it is important to acknowledge the growing attention that climate change concerns plague the EU. Mainly, climate change concerns are forcing major E.U consumers to find new ways of reducing their carbon footprint on the economy. This trend is part of a global push to reduce global carbon emissions through the adoption of green energy sources (Oxford Business Group 2009). Already, airline companies in the E.U are warming up to these prospects and seeking new ways of reducing their fuel consumption. Car manufacturing companies are also developing new prototypes that have low fuel emissions. This trend manifests in almost every sector of the E.U economy as the region strives to embrace sustainable energy technologies.
Complementarily, the quest to reduce oil and gas consumption in the E.U works alongside the push to develop more alternative sources of energy within the continent. For example, many scientists are seriously considering the prospects of developing nuclear power to supplement the existing alternative sources of power (Key Note Limited 2007). Other alternative energy sources such as wind power, solar power, biogas fuels, and other similar energy sources are also gaining prominence across the European continent. Undoubtedly, the a d o p t i o n o f s u c h e n e r g y s o u r c e s w i l l h a v e a n e g a t i v e i m p a c t o n t h e e x i s t i n g o i l a n d g a s m a r k e t . T h i s t r e n d w o r k s a g a i n s t p r o s p e c t s t o l a u n c h n e w o i l c o m p a n i e s i n t h e E . U . M o r e o v e r , o i l c o m p a n i e s a r e i n c r e a s i n g l y g a i n i n g t h e r e p u t a t i o n o f b e i n g m o n e y - h u n gry goons who would do anything to safeguard their interests. Such a reputation is likely to stick to new companies like SOCAR, which aim to increase their geographic visibility around the E.U.
Theoretical Understanding
Absolute Advantage Theory
The absolute advantage theory explains why foreign companies should set up businesses in other countries (David 2010, p. 11). Adam Smith (the founder of the
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theory) explains that a company can realise business success in another country if
it establishes its absolute advantage over the other country. For example, countries
which have natural advantages like a better geographic location, cheap labour,
fertile land, and mineral resources (like oil) have a strong business advantage over
other companies that do not have these resources. For SOCAR, its endowment with
huge reserves of oil and natural gas from its host nation, Azerbaijan, offers it
immense business advantages over its European counterparts because the company
guarantees a steady supply of the natural resource over a long period. Similarly, the
company may equally use its immense experience in oil exploration, production,
exploitation, and distribution activities to gain a strong business advantage over its
main competitors (David 2010). These advantages define its absolute advantages to
use over its European competitors. An unrelated example of the adoption of the
absolute advantage theory centres on the selective production of silk products from
Indian factories. Here, India has an absolute advantage in the production of silk
saris because of its skilled labour force. In SOCARS case, its competencies in the
production, exploitation, exploration and distribution of oil and other energy
sources define its absolute advantages in the European market. Nonetheless, the
main weakness of the absolute advantage theory is that it gives no provision to
countries that have no absolute advantage (at all). In the same regard, this theory
does not give any provision to those countries that have all absolute advantages
(this has been its main basis of criticism)
(David 2010, p. 11).
Comparative Cost Theory
Another theory that has been beneficial in understanding SOCARs venture in the European oil and gas market is the comparative cost theory. The comparative cost theory developed as a follow-up to the absolute advantage theory. In some quarters, people know this theory as the Richardian model (after its founder David Richardo) (Wood 1993, p. 301).
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According to the comparative cost theory, two countries should do business with each other if one country is having an advantage in the ability of producing one good relative to another good as compared to some other countrys relative ability of producing same goods (Gemini Geek 2011, p. 6).
Using the above explanation, we see that if the US can produce 25 bottles of wine and 50 pounds of beef while France can produce 150 bottles of wine and 60 pounds of beef (using the same resources), France has a comparative cost advantage over the US. Normally, it would be okay to see no business transacted between the two countries since it will be uneconomical to do so but the comparative cost theory states otherwise. In essence, the comparative cost theory shows that France sacrifices two and a half bottles of wine to produce beef (this calculation is derived by dividing the number of bottles of wine and the weight of beef produced in France - 150/60) (Gemini Geek 2011). Similarly, to determine the number of wine bottles that the US sacrifices to produce beef, we divide the number of wine bottles that the U.S produces with the weight of beef it produces (25/50) (Gemini Geek 2011). Here, we see that the U.S sacrifices half of a bottle of wine to produce a pound of beef and therefore, in such a situation, we see that it is more expensive to produce a bottle of wine in France. The comparative cost theory would hereby suggest that France should import wine from the U.S and similarly, the U.S should import beef from France (Wood 1993, p. 301). This strategy makes more economic sense. Similarly, using the above model of ascertaining the comparative cost advantage, the comparative cost advantage theory also applies to SOCARs venture into the European oil and energy market. Its applicability stems from its position to provide a stable supply of oil and energy products in the European market. For example, compared to its competitors in the European market, it would be cheaper for European energy consumers to buy energy products from SOCAR because of the close proximity between major European markets and Azerbaijan. The comparative cost theory therefore dictates that it
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would be cheaper for Europe to buy oil from Azerbaijan as opposed to sourcing the commodity from far-flung areas like oil producing nations in the Far East, or in Africa (Wood 1993). Therefore, after considering the distribution costs, and the geographical concerns of marketing and distributing oil throughout Europe, SOCAR would be in a better position than most of its competitors to supply Europe with oil and other energy products. Through the above explanation, the comparative cost theory highlights one key concept of marketing - place. Within SOCARs marketing strategy, the company should therefore market itself as the most practical alternative for providing oil and energy products in Europe. Azerbaijans close proximity to Europe gives SOCAR this geographical advantage. Comprehensively, the comparative cost theory emphasises the importance of SOCAR to market itself as having a strategic position to supply and distribute oil in Europe.
One criticism of the comparative cost theory is the restrictive nature of the model. In other words, the comparative cost model only analyses international trade when only two countries are involved (or when there are two products involved). Since international trade normally involves more than two countries and two commodities, the comparative cost model fails to predict the outcome of such situations. This limitation directly applies to the understanding of SOCARs market venture in Europe because Europe is an expansive region, which is characterised by many countries and geopolitical zones. Moreover, SOCAR does not only engage in one product or service; its specialty stretches across several oil production and distribution services. Therefore, considering the dynamic nature of SOCARs operations and the multiple country demographics characterising Europe, it is somewhat difficult to predict SOCARs market strategy in Europe through the restrictive model of the comparative cost theory.
Opportunity Cost Theory
The opportunity cost theory of 1959 is also widely used to explain the intention of
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multinational companies to engage in international trade (Nicholson 2011). The opportunity cost theory bases its application on the determination of alternative cost values so that a company (or consumers) can determine which strategy is the most viable. Usually, the ascertainment of such a value concerns the ascertainment of forgone costs, while choosing a specific strategic plan. The opportunity cost theory focuses on forgone values, while pursuing a specific alternative.
This theory is important to the understanding of SOCARs strategy in Europe because it critically analyses the efficiency of exporting oil and energy products from Azerbaijan to Europe. This theory closely links with the comparative cost theory because they both highlight the efficiencies realised when Europe supplements its oil consumption through SOCARs import products. The comparative cost theory stipulates that it would be cheaper for Europe to buy oil and energy products from SOCAR, while the opportunity cost theory stipulates that the same strategy would be more efficient. Therefore, SOCAR is in a better position to export its oil products from Azerbaijan to European markets because it would be cheaper and more efficient to do so. Ordinarily, the opportunity cost theory would include the presence of another alternative option for Europe to meet its energy deficit (Nicholson 2011). However, for purposes of this study, this energy deficit includes the sourcing of energy products from other markets apart from Azerbaijan. By extension, this outsourcing should also include the supply of oil products from other companies besides SOCAR. Comprehensively, the opportunity cost theory dictates that Europe should pursue the cheapest and most efficient option for meeting its energy deficit. In the context of this study, SOCAR manifests as the cheaper and more efficient option for meeting Europes energy deficit. After ascertaining SOCARs position as the cheapest option for meeting Europes energy deficit, the companys marketing strategy should highlight this fact. Therefore, from SOCARs market strategy, European energy consumers should see SOCAR as the cheapest alternative for supplementing its energy needs.
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The opportunity cost theory would also show that other market participants would constitute expensive options for meeting Europes energy demand (Nicholson 2011). SOCARs relative cheapness (compared to other options of selling and distributing oil and energy products in Europe) highlights one p (price) from Kotlers four Ps of marketing.
Therefore, when formulating SOCARs market strategy, the company may market itself as the cheapest and most efficient option for supplementing Europes energy deficit. The forgone options form the opportunity cost. Even though the opportunity cost theory informs SOCARs price strategy, the theory has been criticised for its failure to compare different opportunities across varying market dynamics. Moreover, as opposed to the one-track perspective of deriving economic benefits by forgoing one benefit, it is equally possible to derive multiple economic benefits, by forgoing more than one alternative. For example, if an economy is in its production possibility frontier, it is very easy to obtain economic benefits by forgoing multiple opportunity costs. The opportunity cost theory therefore only applies to microeconomic situations where individual utility gains are profound. This one feature informs the Keynesian macroeconomic model. Therefore, since some investment opportunities may provide the same gains as other types of investments, it is difficult to apply the opportunity cost theory in macroeconomic situations. These limitations highlight the weaknesses of the opportunity cost theory.
Vent-for-Surplus Theory
Mehmet (1999) explains that the vent-for-surplus theory outlines how unemployed economic factors complement global trade because countries do not have similar production capacities. Naturally, countries that have many surplus goods and services deem it economical to export such outputs so that they do not run the risk of experiencing losses from the waste or misuse of such outputs in their domestic economies. I f t h i s o p t i o n r e m a i n s u n e x p l o r e d , a s p e c i f i c s e c t i o n o f t h e c o u n t r y s
2 1
e c o n o m i c f a c t o r s w o u l d s e i z e t o o p e r a t e . C o n v e r s e l y , s u c h a s i t u a t i o n w o u l d l e a d t o t h e o v e r a l l d e c l i n e o f t h e n a t i o n s o u t p u t . T h e m a i n a r g u m e n t o f t h e v e n t - f o r - s u r p l u s t h e o r y is the support of international trade to avoid economic wastages.
SOCARs export of oil from its primary market (Azerbaijan) highlights the tenets characterising the vent-for-surplus theory because Azerbaijan has an excess output of oil, which it should offload to the international market. In fact, according to Lerman (2010), Azerbaijan produces about 800,000 barrels of oil every day and most of this production is more than enough to meet the countrys local demand. Azerbaijans economy practically stems from oil boom trade of the seventies and even with the expansion of oil fields in other countries around the globe; Azerbaijan remains a leading producer of oil (Lerman 2010). Without such a channel for selling its surplus produce, Azerbaijan would experience wastages and economic inefficiencies stemming from lower prices because of imbalances in demand and supply. Therefore, the vent for surplus theory provides a model for companies that intend to float their surplus produce in the market through the most efficient and profitable manner. Therefore, international trade offers an opportunity for countries with surplus goods and services to vent their economic surpluses in the international market, thereby enjoying the benefits of international trade (Mehmet 1999). Through this strategy, factors of production in the exporting country will be fully utilised and the value of goods and services in the domestic economy would stay at sustainable levels. Similarly, it is crucial to point out that in such a situation, it is easy to exploit unemployed labour so that the economy operates more efficiently. The vent-for-surplus theory therefore justifies SOCARs push to penetrate into the European market because it is through this strategy that SOCAR can fully exploit its oil potential from Azerbaijan. In addition, through a market expansion into the European economy, there will be no
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wastages of oil or gas products from the Azerbaijan economy. Similarly, there will be no underutilisation of specialised skills from SOCARs worker pool.
Comparative Advantage Theory
Since SOCAR expects to face stiff competition from other European oil companies, the importance of the comparative advantage theory surfaces. The comparative advantage theory complements the need to have a robust marketing plan for SOCAR as it tries to improve its visibility in the European oil and energy market. More importantly, the theory explains why SOCAR needs to re-invent itself in the European oil and gas market. The comparative advantage theory refers to a countrys ability to produce goods and services at relatively lower costs than its competitors do (Goel 2009). Usually, marginal and opportunity costs establish the level of comparative advantage that an organisation (or country) has over another. This theory largely explains the differences in international trade by demonstrating how different countries benefit from trade (even if one country produces a bulk of the goods or services). Usually, the gains derived from such international transactions become the gains of trade (Maneschi 1998).
The law of comparative advantage, which stipulates the importance of countries to sustain their comparative advantage by reinventing themselves throughout different levels of operation, demonstrates the importance of the comparative advantage theory (Goel 2009). Particularly, this understanding closely refers to SOCARs activities on the international market because the company sustains its comparative advantage by reinventing itself in the international market. This relationship explains the association between the comparative advantage theory and globalisation because globalisation also encourages companies to penetrate new markets through corporate rebranding. Analysts draw close similarities between globalisation and the comparative advantage theory because companies sustain their comparative advantages by re-inventing themselves on the global map (Goel
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2009). Furthermore, experts draw a strong link between globalisation and the ability of globalisation to increase a companys efficiency of operation.
After carefully scrutinising the structure and concepts of the comparative advantage theory, we see that the theory encourages companies to operate as if there were no international barriers to trade (Maneschi 1998). Conversely, if this theory applied to SOCARs intention to expand into the European oil and gas market, the comparative advantage theory would stipulate that SOCAR should expand without succumbing tothe barriers of trade. Practically, it is difficult to defend this philosophy because there are substantial barriers to trade on the international market. For example, some countries still have protectionist policies that act as impediments for international trade. These impediments highlight the difficulties SOCAR faces as it ventures into the European energy market (the dominance of European oil companies pose a barrier to the entry of foreign companies). Furthermore, different countries have different economic environments that pose varied dynamics to international trade. Some of these dynamics are unfavourable to international trade (Goel 2009). Besides the challenges of having a complementary economic environment, critics of the comparative advantage theory say that even if the theory is applied effortlessly so companies that have a stronger comparative advantage produce goods and services (instead of companies that do not share this advantage), the flow of capital is not going to be equitable (Maneschi 1998).
This observation contradicts suggestions advanced by proponents of globalisation who show that international trade is a zero-sum game where everybody benefits equally. Equitable capital distribution only occurs in perfect markets but perfect markets do not exist. This criticism forms part of the challenges informing SOCARs quest to succeed in the international market. Figure One: S u s t a i n e d C o m p e t i t i v e A d v a n t a g e ( S h a w 2 0 0 5 )
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A s s u m i n g t h a t S O C A R w a s r e p r e s e n t e d b y t h e l e t t e r B a n d S O C A R s m a i n c o m p e t i t o r w a s r e p r e s e n t e d b y t h e l e t t e r A , t h e a b o v e d i a g r a m s h o w s t h a t S O C A R h a s a b e t t e r d i s t r i b u t i o n a n d q u ality advantage over its main competitor. However, SOCARs distribution advantage is greater than its quality advantage. Therefore, while formulating a marketing strategy to expand its operations in Europe, SOCAR should market its distribution advantage as the main selling point (as opposed to its quality advantage). This way, SOCAR would stand a better chance of achieving significant success in its European expansion. However, if it markets its quality advantage as its main selling point, SOCAR would receive more opposition from its main competitor (A) because A also has a relatively strong quality advantage. Conversely, if A wanted to market itself in the European oil and energy market, it should market its quality advantage instead of its distribution advantage because SOCAR has a stronger distribution advantage than it does.
Nonetheless, there is no clear relationship between international trade and sustained competitive advantage, but because the international market provides the groundwork for market expansion, the comparative advantage theory provides the right model for the formulation and implementation of market innovation strategies. Therefore, the comparative advantage theory informs SOCARs market strategy in the European market. More importantly, this theory demonstrates how SOCAR can overcome the hurdles of operating in the European oil and energy
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market (through market strategy formulation). Indeed, the comparative advantage theory says companies, which take the initiative to re-invent their brands (say, by exposing their main selling points), stand a chance of stealing business from companies, which do not bother to take such initiatives. By stealing business from their customers, the main assumption of the comparative advantage theory is that a perfect economic equilibrium occurs (Shaw 2005, p. 206). Coincidentally, re-inventing a companys activities polish different facets of its operations, such as,marketing and product/service innovations (thereby, boosting its chances of moving up the hierarchy of organisational competence). For example, by venturing into the European market, SOCAR will have to abide by international/global standards of operation, thereby improving the quality of its operations. Interestingly, capital always moves to companies that have the initiative of re-inventing themselves and the commitment to sustain their comparative advantages. Usually, this observation is true, irrespective of the existing socio-economic differences in a country (Goel 2009). The comparative advantage theory acknowledges the barriers to capital inflows, but the theory also acknowledges that such barriers cannot reverse the trend towards economic superiority/dominance of strong companies. A companys resource heterogeneity and the ability to transfer resources should ordinarily amount to sustained economic advantage. However, because there are barriers to trade (like causal ambiguity, historical dependencies, and social complexities) this outcome is normally untenable. Investments in market strategies (for strong companies) create a pathway for the flow of organisational capital; however, more importantly, it provides an opportunity for organisations to sustain their comparative advantages (Goel 2009). This way, SOCAR stands to gain from exposing and sustaining its comparative advantages. Ideally, after applying the principles of the comparative advantage theory (to the context of this study), SOCAR can easily succeed in the European oil and energy market if it carefully adopts a prudent and well-calculated
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marketing strategy (because this will be the only guarantee that the company can perform better than the existing competition) (Zoephel 2011). A liberal market environment would guarantee such an eventuality, and since the European oil and gas market is liberal, such an outcome is highly probable.
Summary
The decision to venture into a new market is becoming an ordinary phenomenon for most companies that have enough resources to do so. It is highly unlikely that this trend will change in future. SOCAR has realised this opportunity and it has already started setting up new offices in the European market. However, based on the nature and number of players in the European oil and gas sector, SOCAR is not going to have an easy time trying to improve its visibility in the European market. First, competition is going to be a big hurdle for the Azerbaijan multinational, considering some of the worlds renowned oil companies control the European energy market. It would therefore require a well-formulated marketing plan to guarantee the efficacy of SOCARs market strategy in the European market. Another hurdle SOCAR is going to face emanates from the dwindling prospects of exploiting European oil because the European global output of oil and natural gas has been on a steady decline. This situation is disadvantageous to SOCAR because it limits the possibility of offering specialised services in oil exploration and exploitation. The only opportunities viable for the company therefore constrain within the framework of oil distribution and the sale or promotion of its oil products. Even the execution of these possibilities may be a daunting task because there is a green trend within the European oil and gas sector where consumers are encouraged to adopt green and alternative energy sources.
However, the comparative advantage theory (among other theories discussed in this literature review) shows that there are enough opportunities for SOCAR to expand successfully in the European oil and energy market. Subsequent sections of
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this paper demonstrate how SOCAR may bridge the gap between this theoretical and practical knowledge.
CHAPTER THREE
METHODOLOGY
This research methodology seeks to gather and compile different databases to have a deeper conceptual understanding of the research problem and to have a realistic and factual understanding of the marketing strategies that SOCAR may adopt in Europe. In addition, this research methodology aims to explain which marketing strategies are most beneficial for SOCAR, which business sectors SOCAR needs to concentrate on as it ventures into the European oil and gas market, and which resources SOCAR needs to use to achieve success in the European market. These questions also outline why company resources are crucial to SOCARS marketing strategy and how SOCAR can use its marketing strategies to circumnavigate the pitfalls of the European oil and gas market. These insights provide a deeper understanding of the research topic. They will also go a long way towards answering the research questions.
Research Design
Based on the nature of the research problem, this paper uses the qualitative research methodology. The selection of this methodology stems from the little knowledge about the scope and nature of the research topic (at the start of the research). Furthermore, the qualitative research design was preferred as the initial research methodology that pre-empted any future research. The importance of adopting the qualitative research design is therefore to have a holistic and conceptual understanding of the research questions. Furthermore, among the main motivations for adopting the qualitative research design is its ability to integrate information for case studies and its ability to accommodate research dynamics that unfolded during the research. Finally, the subjective nature of qualitative research was also a huge attraction for this study (Kelle 1995). The use of qualitative
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research design is however also subject to criticism because of its ambiguity in application and the underdevelopment of its potential. One major disadvantage of the qualitative research design is its tendency to rely on small population samples. Having a small population sample usually reduces the probability of generalising the research findings. However, it is equally important to note that qualitative research designs are time-consuming, and it is difficult to undertake an effective research process using a large population sample. Therefore, the use of a small population sample in a qualitative research design is often unavoidable. This is a big limitation of this research design. Lastly, it is often difficult for qualitative research to ascertain the truthfulness of the information obtained or even to justify their responses by including responses from other groups. Comprehensively, these issues highlight the weaknesses of the qualitative research design.
Data Collection
Many researchers have studied the concept of international marketing but few have focused on the intrigues of the oil market. More so, even fewer studies investigate the practicalities of implementing such marketing strategies in the European oil and gas industry. Based on this understanding, this study focused on introducing a new analysis on the successful marketing strategies that could by SOCAR (and similar foreign companies) to venture into the European oil and gas market. The data collection process sourced information from secondary and primary research data. The secondary research data mainly contained information from published sources like books, journals, and reliable websites. Since the reliability of secondary research information was questionable, this study also included primary research data by interviewing professionals and experts who were knowledgeable about the European oil and gas market, or the possible strategies that a foreign company could adopt while venturing into this market. Primary research provided
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a self-check mechanism for the study, where the primary research data counter-checked the secondary research information. Therefore, any disparities and inconsistencies from the two sources of data were easily detected (Valtonen 2006).
Validity of Data
The validity of the data collected mainly depended on the credibility of the secondary and primary data collected. As mentioned in earlier sections of this paper, books, journals, and online data constituted the main secondary research sources. The credibility of these information sources guaranteed their validity. For example, since books and journals contained published and peer-reviewed data, it was easy to uphold the credibility of the information obtained here. Scholars perceive published and reviewed information to be reliable because the authors subject them to a rigorous credibility-review test, which assures the readers that the information published, is factual, and error-free. Furthermore, peer-reviewed sources allow for the diversity of information, thereby eliminating the possibility of including personal-bias or preconceived ideas into the research process (Rachels 1986, p. 56). Finally, the professionalism of the respondents guaranteed the credibility of the information obtained because all the respondents sampled were working professionals. Indeed, registered and reputable oil consultancy firms provided the respondents to complete the research questionnaires. Therefore, based on the experience and knowledge of these firms, the opinions of the experts were well informed.
Sample Population
The sample population comprised of ten experts and professionals who had sufficient knowledge about the European oil and energy market. Efforts to obtain credible research participants centred on interviewing employees at the managerial level because they were more versant with the strategic decision-making processes of oil companies and the market intrigues of the European oil and gas sector. To have an accurate assessment of the research questions, consulted members came
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from the managerial team, or their close confidants. There was no limitation to the position held at the managerial level because at the beginning of the research process, there was a strong anticipation of difficulties in accessing the chief group chairperson.
Therefore, any available member of the management team was an acceptable candidate for interviewing. At the end of the study, interviews for eight managing directors occurred.
The remaining two interviewees were a marketing manager and a senior strategic management officer. This interview body provided a diverse pool of knowledge about the research topic. The top-level managing directors provided a more comprehensive and broad analysis of the research questions because they had a broader understanding of the European oil market and the existing strategies adopted by energy companies in this market as well. The lower-management team provided an intermediary analysis of the research questions because they knew the practicalities of the energy market better than top management. These experts and professionals came from two oil consultancy firms (five respondents came from each firm).
Data Analysis
For purposes of data analysis, this paper used the interpretive, coding, and member check techniques. These data analysis tools have a high reliability when evaluating secondary and primary research data. The interpretive data analysis technique emphasizes the need to have a strong idiographic focus on the insights of a person or author. In other words, this technique tries to investigate how a respondent or author makes sense of a given issue. These experiences may concern a personal experience held by the respondent or the development of an important relationship by an author, respondent, or any information provider. In detail, the interpretive data technique structured the findings of the secondary research data. Since the secondary research sources contained numerous volumes of data, the interpretive
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technique eliminated irrelevant information from the final findings to provide a structured impression of the overall outcome.
One criticism of the interpretive data analysis technique is its tendency to have a very close involvement of the information sources and the actual outcome of the study. Some pundits say this close involvement is often time consuming (Kelle 1995). A less involved study would provide more opportunity for the researchers to undertake a more comprehensive study. Moreover, the close involvement of respondents in this analysis technique makes them less honest about their responses, especially when they have huge stakes in the research. Overall, this weakness lowers the integrity of the findings. The coding technique complemented the work of the interpretive technique but its use was clearer in the organization of the research data. In detail, the coding technique worked by assigning codes to related data sources. Like the interpretive data technique, the coding technique also provided an interpretive eye to the research findings by segmenting the huge volumes of data into related segments and assigning relevant codes for easy analysis (Kelle 1995).
One criticism of the coding technique stems from its generalization of research data into different groups. This technique therefore fails to appreciate the small differences that exist between different data groups. Therefore, it is easy to overlook small details differentiating the information obtained from different data sources. Another criticism of the coding technique stems from its data storage/grouping mechanism. One code holds a very huge volume of information. The loss of this code could therefore mean the loss of a lot of information.
Finally, the member check technique analysed the primary information obtained by evaluating the accuracy, credibility, and transferability of the information obtained (from the professionals in the oil and energy market). Ordinarily, the member-check technique establishes the variables between the source of the information and the eventual reporting of the same information. A high similarity
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rate shows that the findings of the study have a high credibility and a low similarity rate shows that there are many discrepancies in the findings of the study (Valtonen 2006). Relating to the views sourced from the professionals, an expression of the feelings, attitudes, and experiences of the authors define credible research outcomes.
Ethics Statement
The research process adhered to relevant ethical principles. For example, the study upheld the anonymity of the respondents throughout the research process. However, for future reference, the names of the respondents were safely stored. In addition, the respondents felt reassured that any information gathered from the entire research was for academic purposes only. Therefore, they did not have any reason to doubt the purpose of the study or believe they were going to be penalized or deceived to participate in the research. Furthermore, none of the respondents felt coerced to participate in the research study. All the respondents participated in the research on their personal volition. Through the assurance that the research process would be undertaken ethically, the respondents felt safe to participate in the study.
CHAPTER FOUR
DISCUSSION
After evaluating previously highlighted dynamics of the European oil and energy market and factoring the dynamics of the industry explored by the experts sampled, this chapter reviews some of the most notable dynamics of SOCARs marketing strategy in the European market. Complementarily, to have a more comprehensive understanding of how to position SOCAR in the European oil and gas market, this chapter uses Kotlers marketing framework (4Ps). The design of this framework explains product (service), place, price, and distribution as the four main components of a comprehensive marketing plan (Mehmet 1999). This framework organizes the outcomes of the entire research process.
Product/Service
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Considering the responses given by the sampled industry professionals and a review of the activities undertaken by SOCAR (pertaining to the dynamics of the European oil and gas market), the best bet for SOCAR to improve its visibility in the European oil and gas market is by marketing itself as an experienced oil distribution company. This marketing framework positions the company effectively with the current and future needs of European oil and gas market (oil distribution). There is enough evidence gathered from the oil experts sampled to show that the primary concern for most European countries hinge on the availability of a safe and reliable oil transportation network (Osborn 2005). Previous research confirms that there is a lot of concern expressed by many European countries regarding the disruption of oil distribution systems by hostile countries. Therefore, many European countries are looking to invest in new oil pipelines that are safe and reliable. This concern heralds a new opportunity for oil distribution companies to take advantage of this opportunity and fill the market void. SOCAR strategically can do so. SOCAR can therefore market itself as a viable and reliable partner in oil distribution because its other areas of specialization like oil exploration and production are constrained by competition from other oil companies in Europe. Furthermore, the declining production of European oil constraints its contribution to the European oil and gas industry. For example, regarding oil exploration, this paper establishes that there are insufficient opportunities in Europe to undertake viable economic oil prospects.
Many European countries are therefore not looking for partners in oil exploration or exploitation. Instead, many countries are sourcing for reliable foreign oil distribution companies that provide a steady supply of oil to their countries. Concerning oil production, SOCAR is constrained by geographic limitations of oil distribution. For example, it can only economically supply oil to European countries that are in close geographic proximity to Azerbaijan. It would be
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uneconomical to transport Azerbaijan oil to western European countries (like U.K for example) because of the geographic distance and the sheer cost of constructing oil pipelines or shipping oil products across the continent. The best alternative for SOCAR is therefore to market itself as an oil distribution company, which can offer tremendous expertise in the construction of oil distribution infrastructure to link European markets with their nearer oil sources.
Place
SOCARs main problem is having insufficient market visibility throughout the European market. A large cross-section of the literatures studied in this paper also shows that many players dominate the European oil and gas market. This fact shows that competition is also another major hurdle that SOCAR has to overcome as it tries to improve its market visibility in Europe. However, for SOCAR to increase its geographic visibility across the continent, this paper proposes the adoption of a joint venture strategy with a European oil company. SOCAR can enjoy many advantages from the adoption of the joint venture strategy. However, practically, the joint venture strategy is beneficial to SOCAR because it helps it to collaborate with two or more oil companies in the European market to increase its geographic presence (Pongsiri 2004). Such joint venture strategies are not new to SOCAR because the company has already adopted this strategy with Foster W h e e l e r i n A z e r b a i j a n t o e s t a b l i s h a n e w c o m p l e x f o r o i l a n d g a s p r o c e s s i n g ( P o n g s i r i 2 0 0 4 ) . T h i s s t r a t e g y h a s b e e n l a r g e l y s u c c e s s f u l a n d i t h a s c r e a t e d a n e x c e l l e n t e n g i n e e r i n g c o n g l o m e r a t e t h a t d o m i n a t e s o i l a n d g a s p r o j e c t s i n A z e r b a i j a n . S O C A R m a y adopt the same strategy in Europe if it collaborates with other European oil companies to create a similar oil distribution conglomerate that will dominate most oil concessions in the continent and most importantly, increase the companys visibility in the European oil and gas market. Going it alone is not a viable strategy for SOCAR because many players already dominate the market.
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Collaborating with the best market player is therefore a more prudent decision to increase the companys market visibility in Europe.
Price
Based on existing literatures explaining the progressive trend of the European oil and gas market, many authors have established that the pricing formula used in the European oil and gas market is largely dependent on global oil prices (Amineh 2010). Based on this understanding, SOCARs pricing strategy is subject to global intrigues in the oil and gas market. However, since this paper focuses on oil distribution as SOCARs main service offing, the companys pricing strategy will largely depend on operational costs such as material costs, labour costs, profit margins, and the likes to determine its pricing strategy in the European market. It is crucial for SOCAR to adopt a two-fold pricing policy aimed at increasing the companys market presence in the first years of operations. Later (after the company has gained enough market visibility), it may adjust its price accordingly to reflect its new dominant status in the market. In detail, SOCAR needs to adopt a low-end pricing strategy in the first years of operations and later, it can increase its price quote. Since competition is equally an important factor affecting SOCARs pricing strategy, the company needs to bid for tenders at a relatively lower price than its competitors do. This pricing strategy will give it an edge above its competitors and more importantly increase its market visibility in the region.
Promotion
SOCARS quest to increase its market visibility largely depends on its promotional campaign. Conversely, the effectiveness of the promotional campaign depends on its ability to reach and convince its target market that it is the best option to consult with when undertaking energy projects in Europe. Since the oil and gas industry has a few dominant players, SOCARs promotional strategy needs to base on person-to-person marketing. In detail, SOCAR needs to recruit effective sales and marketing personnel to negotiate and engage oil stakeholders (mostly
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governments) to secure business in the energy industry. The partnership strategy proposed in this study also complements this strategy because SOCAR will be able to participate in promotional campaigns undertaken by its partner as well. Finally, SOCAR may increase its corporate social responsibility campaigns (CSR) in Europe so that it receives more press as a responsible company in energy production and distribution (Amineh 2010). Currently, the main CSR project that may be beneficial to the company involves environmental conservation. Such projects complement the European quest to conserve the environment (alongside the green energy campaign).
CHAPTER 5
Oil in Azerbaijan
History of oil development in Azerbaijan
Historical roots of Azerbaijani oil go back to very ancient times. Ahmed Al-Balaruri (9th century), an Arab historian, geographer and traveler, pointed out that the economic life in Absheron was anciently related to oil, Abu-Isaq Deserved (XI-X centuries), Abu Dhasani Ali Masudi (X century), oil field of Baku, Absheron "white" and "black" oil. The Italian traveler Marko Polo (XIII-XIV centuries) took Baku oil to the nearest Eastern countries, German diplomat and traveler Adam Oleari (XVII century), oil wells in Baku, Turkish traveler Evliya Chalabi (XVII century) oil fields, oil to Iran, Central Asia, Turkey and Reported on annual revenue from oil and oil transportation to India. The stone found on one of the oil wells in Balakhani shows that the well (35 m deep) was drilled and put into operation by the master Allahyar Mammadnur oghlu in 1594. According to Amin Ahmed Razi (Iran, 1601), at the beginning of the sixteenth century there were about 500 oil wells and wells in Baku, both black and white oil. German traveler, physician and naturalist Engelbert Kempfer as Secretary of the Swedish Embassy in 1683, visited Balakhani, Binagadi, Surakhani, on the Absheron Peninsula, and transported oil from Absheron Peninsula to Iran, Central Asia and the North
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Caucasus. In 1803 (1798), resident of Baku Gasimbay Mansurbekov drilled two oil wells near Bibiheybat, 18m and 30m offshore.
There are several stages in the history of the development of the oil industry of Azerbaijan, each of which has had its own unique achievements.
The first stage starts in 1847 with the extraction of oil from well drilled wells and continues until 1920. For the first time in 1847-1848, oil was extracted from the wells drilled from Bibiheybat and then Balakhany, and then the development of the oil industry of Azerbaijan began.
At the beginning of the 19th century, Bibiheybat was the first oil in the world to extract 30 m offshore drilling wells.
In 1859 the first oil refinery was built in Baku. In 1863 Javad Melikov built a kerosene plant in Baku and used refrigerators for the first time in the world. In 1867 15 oil refineries functioned.
As the technique and technology of drilling wells develops mechanically, a number of new oil deposits are discovered (Binagadi, Pirallahi, Surakhani, etc.), oil production is increasing, oil industry infrastructure and oil refining begins to develop, oil production, hundreds of firms are created. The national bourgeoisie is formed in Azerbaijan, and Baku is becoming one of the world's industrial centers. For the first time, the Balakhani-Sabunchu-Ramaniy field was started in 1871 in the Absheron peninsula by industrial methods. In 1872, two laws were adopted to regulate relations in the oil industry: the "Excise Tax on Oilfields and Petroleum Products" and "Sale of Oil Fields by Individuals to Individuals at Auction." On December 31, 1872, the first sale of oilfields was held in Balakhani with 15 fields, and 2 sites in Bibiheybat.
At that time, the untapped land belonging to the state was leased for 24 years for oil exploration and exploitation of oil fields discovered. The lender had the right to export its crude oil and set its sales price. The net sales of the tenant's sold oil accounted for 14-15%. In the 70s of the 19th century, pure national capital
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investment in the oil industry was only 4%. With the participation of national capital, the volume of mixed capital was about 10%. At the end of the XIX century 49 (24.8%) of the 167 entrepreneurs operating in the oil industry were Azerbaijanis. At that time there were great contributions to the development of the oil industry by national "oil millionaires" (Haji Zeynalabdin Tagiyev, Isa bey Hacinski, Murtuz Mukhtarov, Shamsi Asadullayev, Seyid Mirbabayev and others). In 1874, Baku became the first oil company - "Baku oil society". In 1873, the Swedish nationalist, Robert Nobel, comes to Baku, witnessing an oil-related economic boom. In 1876, the Nobel brothers created an oil company for oil production and processing in Baku. At that time there were a number of oilfields, refineries in Azerbaijan, oil tankers, barges, railways, hotels, etc., for the first time in the Caspian Sea. Belonged to the Nobel brothers. After the abolition of excise tax on oil products in 1876, new refineries were built and put into operation.
In 1878, the first oil pipeline was built in Russia, which connects the Baku oil refinery with the Balakhany field and the 12 km long oil pipeline. In 1898, the total length of oil pipelines connecting Baku oil refineries and oilfields was 230 km. These pipelines are 1 mln tons per year oil was transported.
In 1883 the Baku-Batumi railway was constructed and put into operation, which was crucial for the export of oil and oil products to European countries. Since 1883, Rothschild begins financial and credit operations in Baku and begins to sell oil. In 1886 Rothschild's Caspian-Black Oil Company was created. In 1890 Rothschild's bank controlled 42% of the Baku oil exports. In Azerbaijan in 1901, 11 mln. t oil was extracted, which accounted for more than 50% of world oil production. In 1880, famous chemist-scientist D.I.Mendeleyev suggested building Baku-Batumi oil pipeline to ensure the delivery of Baku oil to world markets. The length of this pipeline is 833 km, d.-200 mm, which began in 1897 and is completed in 1907.
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There were 109 joint-stock companies operating in Azerbaijan until the oil industry was nationalized. 72 of them belonged to Russian capital (240 million rubles) and 37 of them belonged to the British capital (100 million pounds sterling). The Nobel brothers' share in the oil industry is $ 30 million. rubles. The investment of the Haji-eleken oil company in the oil industry, which is one of the richest oil-industry businessmen of the time, was $ 1.25 million. pound sterling. On the eve of the nationalization of the oil industry, there are 270 oil producing enterprises in Azerbaijan, 49 small and medium-sized firms engaged in drilling oil wells, 25 oil refining companies, more than 100 mechanical workshops, repair shops and so on. they acted. In the last years of this phase, the oil industry was in a difficult situation (as a result of war, revolutionary movements, etc.) and oil production drastically reduced.
The II stage began after the nationalization of the oil industry in Azerbaijan in 1920 and covered the discovery of the Neft Dashlari field in the open sea in 1949. In 1921 oil production decreased to 2.4 million tons. tonne In connection with the expansion of exploration works in the II stage, a number of new oil fields (especially Gala, Buzovna-Mashtagha etc.) were discovered and put into operation in Azerbaijan and oil extraction was increased to 23.6 mln. tons, which is about 76% of the USSR's oil production at that time. In this connection S.A.Vezirov was the first oil workers of the Azneftkombinat, R.H.Ismayilov (head of Azneftzavodlar), B.G.Baba-Zadeh (chief geologist of Azizbeyovneft), R.Rahimov (drill master). Oil production in Azerbaijan in the 1941-1945 oil and oil industry specialists in the eastern regions of the USSR (Tatarstan, Turkmenistan, Bashkortostan, etc.) amounted to 11.1 mln. tons fall.
On November 7, 1949, a well with a depth of 942 m in the Oil Rocks (Gala Lite) was put into operation with 100 tons per day and laid the basis for the offshore oil production. The first geologist on the bed was Agha Gurban Aliyev.
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The III stage starts with the development of the offshore oil industry in Azerbaijan in 1950 with the commissioning of the Neft Dashlari field and it continues until 1969. At this stage, marine geological exploration works are expanding, a number of oil and gas fields are discovered and put into operation (Kum-deniz, Sangachal-Divanni-deniz-Hara-Zira, Bahar, Bulla-Deniz, Darwin Cube, Mud pilaf and etc.), development of offshore drilling (including exploration drilling), hydrotechnical oil refining technology and technology, and infrastructure for offshore oil production.
At this stage a number of new oil and gas condensate fields were discovered and put into operation in dry areas (Kuurdag, Mishovdaq, Kurtsang, Garabaghli, Kalmaz, Garadagh and others). During this period, intensive development and operation of the Oil Rocks and other fields was carried out. For the first time in the world practice, sea-lined onshore pillars were built in the open sea. As a result of the complex engineering and scientific and technical measures, a large amount of capital investment, meta-saving and high labor productivity have been achieved, and the cost per ton of oil has been reduced.
The IV stage, starting with 1969, is characterized by the fact that the oil and gas industry, as all the spheres of the Azerbaijani economy, embarked on a high dynamic development stage, which coincides with the first period of our national leader Heydar Aliyev's leadership in Azerbaijan. During this period, a new stage in the development of the oil and gas industry of Azerbaijan, especially the offshore oil production, begins. In 1970, Khazareftizeft Production Association (PU) was established and the USSR Oil Industry Ministry, based on the experience of Caspian Sea Oil Workers in the Caspian Sea, was engaged in geological exploration, drilling, development, exploitation and other works in all sectors of the Caspian Sea (division into the Caspian Sector) to Azerbaijan oilmen.
By this time, the technical equipment used in the Caspian Sea would only be able to operate in areas with depths up to 40 m. At that time in the Azerbaijani sector of
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the Caspian, almost all the oil and gas deposits were discovered in promising areas at a depth of 40 meters. The increase in oil and gas production on the sea was due to the oil and gas deposits in the deeper depths. As a result of the initiative and efforts of the national leader of the Azerbaijani people Heydar Aliyev, cranes, boats, seismic, passengers, etc., raised more than 400 heavy loads to 75 in Azerbaijan in the 70-80s. Ship types were brought. The 2500-strong "Azerbaijan" crane was launched in the Caspian Sea. Moreover, as a result of the acquisition of shelf-type semi-submersible drilling rigs, which allowed to operate in areas of the Caspian Sea for geological prospecting at 70m depths and later in the 200m depths of the sea, rich oil and gas in deeper seas and discovered their fields. As a result, eight new oil and gas fields were discovered compared to the end of the 1960s, oil reserves increased two and gas reserves three times. Total oil and gas production in 1975 was $ 27.1 million. t-a (conventional fuel). In the 1980s, the number of floating drilling rigs reached 11 and, as a result of their use, there were discovered deposits with a rich oil reserves at 80-350 m above sea level (Guneshli, Chirag, Azeri and others).
At that time, the Soviet Union's $ 450 million was used for the construction of the Deep Sea Equipments plant in Azerbaijan, It was the result of the strong will and courage of Mr. Heydar Aliyev, whose allocation of US dollars was achieved by obtaining such a permit (building of this plant in Astrakhan).
V stage is characterized by the collapse of the USSR, the emergence of the "New Oil Strategy", covering the independence and the new history of Azerbaijan.
Important oil conventions of Azerbaijan
Baku, September 20
This day, the signing of the contract between the State Oil Company of the Azerbaijan Republic (SOCAR) and world-renowned oil companies on the joint development of the Azeri-Chirag-Guneshli fields in the Azerbaijani sector of the Caspian Sea and the deepest part of the Gunashli field and the distribution of oil
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production two years pass. It is celebrated as Oil Worker Day in Azerbaijan on September 20, 2001 by the decree of national leader Heydar Aliyev.
The contract, about 400 pages and 4 languages, has been named the "Contract of the Century" for its historical, political and international significance. The agreement covers 13 most popular oil companies in 8 countries (Azerbaijan, US, UK, Russia, Turkey, Norway, Japan and Saudi Arabia) (Amoko, BP, MakDermott, Yunokal, SOCAR, LUKOIL, Statoil, Exxon, Turkey Petroleum, Penzoyl, Itochi, Remko, Delta). Thus, the basis of the oil strategy and doctrine of our independent state was laid. This global project demonstrated to all over the world that Azerbaijan, as a sovereign state, has the right to possess its natural resources, defend its national interests, economic and strategic interests, and become an important guarantee of state independence.
The "Contract of the Century", prepared under the leadership of national leader Heydar Aliyev, is a glorious page of the new oil strategy. This contract is included in the list of the largest deals in the world, both in terms of both hydrocarbon reserves and investment volume.
In early November 1997, the first oil from the Chirag platform was purchased under the "Contract of the Century". On November 12, the ceremony was held on the platform with participation of great leader Heydar Aliyev, representatives of the project operator BP and its partners, guests from foreign countries. This was the beginning of success of Azerbaijan's new oil strategy. This event laid the foundations for the construction of production facilities related to the oil industry of Azerbaijan in line with international standards.
An intergovernmental agreement was signed between the Russian Federation and the Republic of Azerbaijan on the transportation of Azerbaijani oil via the Baku-Novorossiysk route in January 1996. In October 1997, this line was put into operation.
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Compared with large oil volumes produced within the framework of the "Contract of the Century", this pipeline has limited transmission capacity and the necessity of diversification of export pipelines has emerged and serious work on alternative options has begun. An agreement was signed between Azerbaijan and Georgia on the transportation of oil to the Black Sea by the Baku-Supsa route in 1997. In April 1999, the Baku-Supsa oil pipeline and the Supsa export terminal on the Black Sea coast of Georgia were commissioned.
But it was not enough. Baku-Supsa and Baku-Novorossiysk pipelines were unable to export large volumes of oil in Azerbaijan to the world market. That's why the need to build a major export oil pipeline was short-lived. In this case, the great leader Heydar Aliyev brought up the idea of Baku - T b i l i s i - C e y h a n ( B T C ) m a i n e x p o r t o i l p i p e l i n e . B y b r i n g i n g v a r i o u s p r e t e x t s b o t h i n s i d e a n d o u t s i d e o u r r e p u b l i c , t h e i n t e r n a t i o n a l p u b l i c o p i n i o n s t r i v e s t o c r e a t e a n i d e a t h a t A z e r b a i j a n w i l l n o t h a v e e n o u g h o i l t o e x p o r t i t t o t h e p i p e l i n e i n t h e f u t u re, considering it as utopian. However, this concept of the great leader Heydar Aliyev showed that it was absolutely real and economically efficient. In May 2006, Azerbaijani oil was delivered to the port of Ceyhan via the BTC pipeline. At present, the importance of this pipeline is recognized worldwide.
Today, the Baku-Tbilisi-Ceyhan main export oil pipeline is also of great importance for the entire international energy security system, as well as for countries that are successfully partnering with our country in oil export, especially in the Central Asian states.
The capacity of the pipeline is 50 million tons per year, which can be reached in the future with up to 60 million tons. BTC transported 19 million 157 thousand 662 tons of oil in January-August this year. Generally, 312 million 660 thousand 920 tons of oil has been pumped from the BTC as of September 1 of the current year. 728,768 tons of oil from Novorossiysk port, 1 million 578 thousand 922 tons of oil from Supsa port, 11 million 379 thousand 588 tons from Ceyhan port and 14
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thousand 946 tons of Azerbaijani oil were exported from Kulevi terminal in January-August.
With the implementation of the new oil strategy, large foreign investments were attracted to exploitation of oil reserves of our republic. It is enough to say that the State Oil Company of Azerbaijan (SOCAR) successfully represents the Azerbaijani state in the Production Sharing Agreement (PSA) signed with 25 companies from 15 countries. Within the framework of the HPBS, USD 51.6 billion was invested in the oil and gas sector of Azerbaijan in 1995-2013. SOCAR is a transnational company that meets the world standards and carries out big projects beyond Azerbaijan, with the necessary economic and technical capacities. At present, oil and oil products from Azerbaijan are transported to 30 countries and gas to Georgia, Turkey, Russia, Iran and Greece.
One of the major dividends brought by Azerbaijan in recent years is the transformation of Azerbaijan into a natural gas exporter with great international expectations. In June 1999, the discovery of a giant Shah Deniz field with reserves of 1.2 trillion cubic meters of gas and 240 million tons of condensate and the successful implementation of the Shah Deniz gas project have introduced Azerbaijan as a country exporting large quantities of gas to the world.
Since 2006, field production has been started. The South Caucasus Pipeline (Baku-Tbilisi-Erzurum) was built and put into operation in order to export Shah Deniz-1 gas to Georgia and Turkey. The gas extracted from this field since 2006 is initialed at Sangachal Terminal and exported to Georgia and Turkey via the Baku-Tbilisi-Erzurum pipeline, with a total length of 997 km, transmission capacity of 20 billion cubic meters a year. In January-June of this year, 5.4 billion standard cubic meters of natural gas and 1.3 million tons (about 10 million barrels) of condensate were extracted from the Shah Deniz field. Shah Deniz is one of the largest gas fields in the world and gas reserves of the field are more than 1 trillion cubic meters.
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In 2012, an agreement was reached on the construction of the Trans-Anatolian gas pipeline (TANAP) as a result of the political leadership of Turkey and Azerbaijan on the Shah Deniz-2 project. Significant steps were taken to export gas to Europe within the framework of long-term contracts, agreements on construction of TANAP and Trans Adriatic (TAP) gas pipelines were signed. TANAP's initial capacity of 16 billion cubic meters per year is expected to increase the capacity of the pipeline to 23 billion cubic meters in 2023 and to 31 billion cubic meters in 2026.
On June 28, 2013, the Shah Deniz Consortium announced the selection of the Trans-Adriatic gas pipeline to deliver gas to the consumers in Greece, Italy and Southeast Europe, under the Shah Deniz-2 project. The TAP project, estimated to be 871 kilometers long and originally estimated at $ 5.2 billion, is a continuation of the South Caucasus gas pipeline (Baku-Tbilisi-Erzurum) and the TANAP gas pipeline. This pipeline involves the transportation of gas from the Shahdeniz-2 field through Greece and Albania, the Adriatic Sea to southern Italy and then to Western Europe. The TAP pipeline project is included in the list of priority energy security projects of the European Commission, which serves common interests. Solemn ceremony dedicated to the 20th anniversary of the "Contract of the Century" and the foundation of the "Southern Gas Corridor" was held on September 20, 2014 in Baku. After the ceremony, President Ilham Aliyev, Prime Minister of Georgia Irakli Garibashvili, Turkish Minister of Energy and Natural Resources Taner Yildiz, Prime Minister of Greece Antonis Samaras, President of Bulgaria Rosen Plevneliev, Albanian Minister of Energy Damian Giknuri, Italian Economic Development Minister Claudio de Vincente, Montenegrin Head Minister of Trade and Investment of the United Kingdom of Great Britain and Northern Ireland Lord Livingston, US Department of State's Special Representative for International Energy Amos Hocksten, bp Chief Executive Officer Robert Dudley, Energy Minister Natig Aliyev and SOCAR President
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Rovnag Abdullayev They signed the first pipeline to be laid for the Southern Gas Corridor. Thus, the foundation of the Southern Gas Corridor, which is considered to be the most complex natural gas pipeline chain in the world, has been laid.
The 3,000-kilometer-long South Gas Corridor (SGC), transporting gas from the Shah Deniz-2 field to Turkey and this country to Europe, is regarded as the most complex natural gas pipeline chain developed around the world. The chains of this chain are the Shah Deniz-2, South Caucasus Pipeline Expansion (SCPX), TANAP and TAP gas pipeline projects. At this stage, it is planned to transport 6 billion cubic meters of gas to Turkey and 10 billion cubic meters of Azerbaijani gas to Europe.
The State Commission and Southern Gas Corridor Closed Joint-Stock Company (CJSC) were set up to implement the project. The projects will be implemented by SOCAR's SOCAR Upstream Management International and SOCAR Midstream Operations. These companies participate in all the committees created within the project and collaborate with operators on the project implementation. SOCAR is also a participant in making major decisions in addition to ensuring the state's interests in projects. The state has 51% share in the Southern Gas Corridor and 49% by SOCAR. The project is funded through capitalization of Shah Deniz-1 revenues, including through equity capital of Southern Gas Corridor CJSC, and borrowed funds from local and foreign financial markets.
Shah Deniz-2, one of the world's largest gas field development projects, includes two new platforms, 26 drilling wells, underwater equipment, expansion of the Shenzhen terminal and 500 km subsea pipelines. At present, 162 equipment suppliers from 23 countries have been involved in the project. Under the project, a total of $ 11 billion contracts were signed on engineering, construction and procurement. In Azerbaijan, over 12,500 people are employed on all key contracts, and more than 85 percent of them are local labor force.
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At present, the Shah Deniz-2 project is successfully being continued and ahead of the schedule. Up to now, 10 out of 26 wells have been drilled. The level of work to be made on the initial gas production at the beginning of April is ahead of schedule. Up to 80 percent of the total project work has been completed. The total capital expenditure of the Shah-Deniz-2 for 2014-2020 is about $ 24 billion, taking into account inflation, more than $ 12 billion of this amount.
The first natural gas export to Turkey is planned for 2018 and to Europe in 2020. The project participants are BP-operator (28.83 percent), TPAO (19 percent), NICO (10 percent), LUKOIL (10 percent), AzSD (10 percent), SGC Upstream , 67 percent) and Petronas (15.5 percent).Another component of the Southern Gas Corridor, the South Caucasus Pipeline Expansion Project, covers the construction of a new 48-inch pipeline, including two compressor stations in Georgia, to pass through the territory of Azerbaijan and Georgia. The SCPX project has been launched since 2013 and is scheduled for completion in mid-2018. The pipeline will be connected to TANAP on the Georgian-Turkish border, which will serve the delivery of Azerbaijani gas to Turkey and from here to Europe. The total cost of the project is $ 4.9 billion. Under the SCPX, the costs of Azerbaijani companies are expected to be $ 820 million by 2020.
As a result of the expansion, the capacity of the South Caucasus Pipeline (Baku-Tbilisi-Erzurum) will increase by 16 billion cubic meters and reach 23.4 billion cubic meters. Thus, the volume of gas transportation will increase up to 3 times. The length of the pipeline is 424 kilometers in the territory of Azerbaijan, 61 kilometers in Georgia and 2 kilometers from TANAP. More than half of the project work has been implemented.
The foundation of TANAP was laid on March 17, 2015 in the Selim district of Turkey's Kars province with participation of Azerbaijani President Ilham Aliyev, Turkish President Recep Tayyip Erdogan and Georgian President Giorgi Margvelashvili. TANAP is another project that is part of the Southern Gas
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Corridor. TANAP will join the South Caucasus Pipeline on Turkey-Georgia border and the TAP pipeline on the Turkish-Greek border. TANAP, which is 1810 kilometers long, is expected to be commissioned in the middle of 2018. The capital expenditure required for the pipeline is $ 9.2 billion. The length of the Georgian-Turkish border - 56 inch Eskish e h e r - 1 3 3 4 k m , t h e l e n g t h o f t h e 4 8 - i n c h d i a m e t e r a l o n g t h e E s k i _e h i r - T u r k e y - G r e e c e b o r d e r i s 4 5 0 k m . I n a d d i t i o n , T A N A P a l s o c o n s i s t s o f a 1 8 - k i l o m e t e r s u b m a r i n e o f 2 x 3 6 i n c h e s d i a m e t e r . T h e i n i t i a l c a p a c i t y o f t h e p i p e l i n e i s 1 6 b i l l i o n c u b i c m e t e r s , w hich can then be increased to 31 billion cubic meters. The overall development of the project in May this year is 26.3 percent. At this time, 1166 km of pipes were produced and 929 km of pipes were delivered to the construction site and the source of the 533 km pipeline was completed.
To date, $ 2 billion 91.2 million have been invested in the projects. Expenditures of Azerbaijani companies on the project are expected to total $ 6.2 billion by 2020. The share of TANAP shareholders in this project is as follows: Southern Gas Corridor CJSC - 58%, Botas - 30% and BP - 12%.
The second meeting of the ministers within the Southern Gas Corridor Advisory Council was held in Baku on 29 February with the participation of President Ilham Aliyev. The Joint Declaration of the second meeting of ministers was signed at the meeting in the "Southern Gas Corridor" Advisory Council.
On May 17, the foundation of the Trans Adriatic Pipeline (TAP) was laid in Thessaloniki, Greece. The event was led by Energy Minister Natig Aliyev and SOCAR President Rovnag Abdullayev led by Deputy Prime Minister Yagub Eyyubov. The last link of the Southern Gas Corridor and the European part is the TAP gas pipeline. The TAP project is a continuation of the South Caucasus Pipeline and TANAP and envisages the transportation of gas from the Shah Deniz-2 field to Greece, south-east Italy and western Europe via Greece and Albania through the Adriatic Sea. This project creates great opportunities for
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delivering Azerbaijani gas to major European markets such as Italy, Germany, France, Great Britain, Switzerland and Austria. The initial capacity of the TAP will be 10 billion cubic meters per year and this volume will be increased to 20 billion cubic meters in the future. Shareholders of TAP are: BP (20 percent), SOCAR (20 percent), Snam SpA (20 percent), Fluxys (19 percent), Enags (16 percent) and Axpo (5 percent).
The length of the TAP pipeline is 871 km (Greece - 547 km, Albania - 211 km, Adriatic Sea - 105 km, Italy - 8 km) and diameter is 48 inches (submarine - 36 knots). Until the end of May, 19.5 percent of the project work was implemented and total investments of 877 million euros were invested. By 2020, the cost of Azerbaijani companies is projected to be $ 1.2 billion. The TAP capital expenditure is $ 5 billion. The pipeline will be commissioned in 2020.
On September 1, President Ilham Aliyev attended the launch ceremony of the shaft of the Shahdeniz-2 production and drilling platform at the Heydar Aliyev Baku Underground Refinery. To date, the project has been successfully completed at all production and installation sites onshore and offshore. At present, 77% of works, including engineering, procurement, and construction have been completed. More than 10 operating wells were drilled with the use of "Heydar Aliyev" and "Istiglal" drilling rigs in preparation for the first gas transportation and subsequent preparations for the project. Under the Shah Deniz Stage 2, the focus is on remaining reserves at the disposal of the currently used floor to reach an additional 16 billion cubic meters of gas and 120,000 barrels of condensate per day. Shah Deniz Stage 2 includes two new production platforms combined with bridges, 26 underwater drilling from two submersible drilling rigs, 500 kilometers of underwater water pipelines at a depth of 550 meters and expansion of Sangachal Terminal.
Azerbaijan. It should be noted that for the first time, 100 percent of Shah Deniz 2 platforms are being built across the country.
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To date, Azerbaijan has invested $ 5 billion 212 million in financing the projects included in the Southern Gas Corridor project. The share of Azerbaijan in the Shah Deniz-2 and Southern Gas Corridor projects is estimated at $ 11 billion 454 million. This means that Azerbaijan fulfilled 45.5 percent of its financial obligations under the project. $ 2.5 billion of this amount was invested by the State Oil Fund of the Republic of Azerbaijan (SOFAZ), $ 1.7 billion through the Ministry of Finance and SOCAR, and $ 1 billion in Eurobonds in March. This year, Azerbaijan plans to allocate $ 2 billion 809 million to the Southern Gas Corridor. 55.7 percent or $ 1.566 billion of this volume will be spent on TANAP, 30.2 percent or $ 847 million for the Shah Deniz Stage 2 project. This year $ 278 million will be allocated to the TAP project and $ 118 million to the South Caucasus Pipeline Expansion Project.
Totally up to 30,000 new jobs will be created during the implementation of the Southern Gas Corridor. Ten thousand of these jobs will be opened in Azerbaijan. Implementation of the project will allow Azerbaijan to generate about $ 30-50 billion in hydrocarbon sales and transportation.
In short, one of the great dividends that oil strategy has brought to our country in recent years is the transformation of Azerbaijan into a natural gas exporter with great international hopes. This rich potential, which derives its source from the "Contract of the Century," has now transformed Azerbaijan into the region's oil and gas state. In addition, the Southern Gas Corridor will play an important role in ensuring Europe's energy security and diversifying the gas transportation infrastructure of the continent.
These successes are also driven by the selfless labor, rich experience and professionalism of Azerbaijani oil workers. It is no coincidence that on the day of signing the "Contract of the Century" on September 20, the Day of Oil Workers is celebrated in our country according to the Decree of national leader Heydar Aliyev who takes into account this.
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SOCAR ' s n e w a d m i n i s t r a t i v e b u i l d i n g
T o d a y S O C A R c a r r i e s o u t l a r g e - s c a l e p r o j e c t s t h a t c a n c o m p e t e w i t h i n t e r n a t i o n a l c o m p a n i e s n o t o n l y i n t h e R e p u b l i c o f A z e r b a i j a n , b u t a l s o i n t h e w o r l d o i l m a r k e t . M e a n w h i l e , t a r g e t e d m e a s u r e s a r e b e i n g t a k e n t o i m p r o v e t he working conditions of the company's employees.
One of the work done in this direction is the construction of a modern administrative building complex of modern style that meets the modern standards in order to consolidate the central management units of enterprises and organizations that are part of the company and are not directly involved in the production.
The groundbreaking ceremony for the new administrative building of the State Oil Company of Azerbaijan Republic was held in Heydar Aliyev Avenue in Baku in October 2010 with participation of the President of the Republic of Azerbaijan Mr. Ilham Aliyev. It should be noted that the work on the design of the modern office building of SOCAR commenced in 2007 and the proposals of some influential companies of the world and Azerbaijan were considered. The concept of "wind-flames" presented by the South Korean "Heerim Architects & Planners Co. Ltd" in terms of conformity to the modernity, functional characteristics, conformity to the architecture of the capital as well as to the technical conditions laid out by SOCAR, was considered more attractive and based on this concept of design work it was advisable to carry it out.
In September 2007, a contract was signed between Heerim Architects & Planners Co. Ltd, the winner of the design competition with SOCAR. After that, an open competition for construction services was announced in March 2010 and the Turkish company TEKFEN Construction and Supply won 8 of the prestigious construction company in the world and a contract was signed between the company and SOCAR.
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"Heerim" will implement the author's control and construction management of the building. The project is initially estimated at $ 235.4 million.
It can be said that the new administrative building, which will be distinguished by its modern style of construction in the capital, will fully meet the requirements of the company and meet modern international standards. The office building, which will have a height of 200 meters, will cover a total area o f 5 h e c t a r e s , w i t h 4 0 f l o o r s o v e r h e a d a n d 2 f l o o r s w i t h u n d e r g r o u n d . T h e r e a r e 5 c o n f e r e n c e h a l l s , a f i t n e s s c e n t e r a n d s e v e r a l c a f e t e r i a s w h e r e 1 2 4 3 p e o p l e w i l l b e a b l e t o u s e a t t h e s a m e t i m e . T h e r e w i l l b e 1 0 4 5 p a r k i n g s p a c e s i n t h e g r o u n d f l o o r a n d 2 4 0 c a r s o n t h e g r o u n d f l o o r . 2 n d f l o o r f i t n e s s c e n t e r , 3 - 6 t h a n d 1 8 t h - 3 7 t h f l o o r s a r e d e s i g n e d f o r o f f i c e s o f t h e C o m p a n y ' s s t r u c t u r a l d i v i s i o n s . T h e t o t a l a r e a o f t h e f a c a d e o f t h e b u i l d i n g i s 2 7 , 0 0 0 s q u a r e m e t e r s , t h e b a s e m e n t a r e a i s a b o u t 5 2 , 0 0 0 s q u a re meters, and the office area is 40,500 square meters. In total, the project area is over 100,000 square meters. The construction of SOCAR's new administrative building will be based on a reinforced concrete dome and a steel structure composite system. The building will be 9-point earthquake resistant to the Richter scale. The building project was tested at a specially-designed international laboratory in Canada at a wind speed of 190 km / h.
According to the wind-tunnel test, it was decided to equip the building with a special damping system for the purpose of limiting the flare amplitude. Construction works in the new administrative building of SOCAR will be conducted in accordance with IBC (International Building Standards), American standards, SNIP, Azerbaijan Construction Norms. For the first time in Azerbaijan, cleaning and maintenance of facades will be carried out through IUU automatic cleaning system. The 2200-seat building will also be equipped with twin cabin lifts, ventilation, electric boards and automated centralized navigation systems, based on the principle of "two lifts in one ferry". A staff of 220 people will be provided with technical support. Jobs are continuing according to schedule.
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Production Sharing Agreements - Offshore
Absheron Participating parties and equity interest,%
% 1 . A R D N ^ % 4 0 % % 2 . T o t a l % 4 0 % % 3 . G D F S u e z S . A . % 2 0 %
A z e r i , C h i r a g d e p o s i t s a n d d e e p w a t e r p a r t o f t h e G u n e s h l i f i e l d P a r t i c i p a t i n g p a r t i e s a n d e q u i t y i n t e r e s t , %
B i P i E x p l o r a t i o n ( C a s p i a n S i ) L i m i t e d [ b p ] 3 5 %
A z e r b a i j a n ( E y S i C i ) L i m i t e d 1 1 %
C h e v r o n T e k s a c o 1 1 %
I N P E K S S a u s v e s t C a s p i a n S i , L t d 1 0 %
S t a t o y l A b s h e r o n a . s . 8 %
T u r k e y P e t r o l l e u A . O . 6 %
0T O U O y l E k s p l o r e y _n ( A z e r b a i j a n ) L i m i t e d 4 %
H e s s i n A m e r i c a 2 %
B a h a r " a n d " K u m - D e n i z " f i e l d s
5 4
P a r t i c i p a t i n g p a rties and equity interest,%
Spring Energy Limited 80%
SOCAR 20%
Shafag-Asiman "perspective structure Participating parties and equity interest,%
Azerbaijan (Ey Si Ci) Limited 50%
BiPi Exploration (Caspian Si) Limited 50%
The Shah Deniz field
Participating parties and equity interest,%
B i P i E k s p l o r e y _n ( A z e r b a i j a n ) L t d 2 5 % 2 . S t a t o i l A z e r b a i j a n a . s . 2 5 %
T O O T H 1 0 %
L U K O I L 1 0 %
N I C O 1 0 %
A z e r b a i j a n ( S h a h D e n i z ) L i m i t e d 1 0 %
T u r k i s h P e t r o l e u m O v e r s e a s C o m p a n y L t d . 9 %
P r o d u c t i o n S h a r i n g A g r e e m e n t s - D r y
B a l a k h a n i - S a b u n c h u - R a m a n a a n d K u r d a k h a n i o i l f i e l d s P a r t i c i p a t i n g p a r t i e s a n d e q u i t y i n t e r e s t , %
U Q E L a n s e r P T I . L T D 7 5 %
S O C A R 2 5 %
B l o c k i n c l u d e d i n t h e o i l f i e l d " K r o v d a " P a r t i c i p a t i n g p a r t i e s a n d e q u i t y i n t e r e s t , %
5 5
G l o b a l E n e r g y A z e r b a i j a n 8 0 %
S O C A R 2 0 %
P a d a r " i s a b l o c k of neutral space Participating parties and equity interest,%
Global Energy 80%
SOCAR 20%
Pyrrhakht "block, which contains a hinge base Participating parties and equity interest,%
Petro Hong Kong Limited 50%
Middle East 30%
SOCAR 20%
Surakhani "block, which includes the hill Participating parties and equity interest,%
Rafi Oyl 75%
SOCAR 25%
Blocks included in Zykh and Hovsan oil fields Participating parties and equity interest,%
Absheron Investments 75%
SOCAR 25%
3 blocks of South-West Gobustan Participating parties and equity interest,%
Commonvels 40%
Yunion Texas 40%
56
3. SOCAR 20%
CHAPTER SIX
SUMMARY, RECOMMENDATIONS AND CONCLUSIONS
Summary
This paper demonstrates that many oil players (who have increased the industrys barrier to entry) flood the European oil and gas market. This situation is similar to most oil markets around the world where a few oil companies dominate the market. In addition, this paper also demonstrates that there are limited prospects for SOCAR to position itself as a formidable force in the European oil and gas market because of the limited opportunities for growth in the sector. However, this paper shows that the best bet SOCAR can make to expand its market visibility in Europe is to position itself as an oil distribution company - in line with the intention to improve the European oil and gas distribution network. This conclusion stems from a preliminary analysis of a two-faced understanding of the European oil and gas market and the internal operational dynamics of SOCAR, which shows that the market needs better oil distribution infrastructure and a reliable partner to fulfil this need. This paper has therefore merged the best alternatives existing in the internal and external market spheres to establish an appropriate marketing plan for SOCAR. These alternatives also complement SOCARs key competencies in oil distribution.
Recommendation
This paper proposes a deeper understanding of the effect that alternative energy will have on SOCARs marketing strategy (based on the growth of the oil industry through the discovery of new oil prospects in other parts of the world, such as, Africa). The emergence of the green initiative damps the prospects of seeking the services of traditional oil companies to support energy initiatives in Europe. In fact, Europe is a signatory to environmental conservation agreements (like the Kyoto
57
protocol) to reduce the worlds carbon emissions. Therefore, since SOCAR is a traditional oil company that specializes in the production and distribution of fossil fuel, European customer may shun it as they seek more environmentally friendly ways of meeting their energy demand. SOCAR is not the only oil company facing reduced market acceptance (because of the adoption of green energy), many oil companies are similarly facing this hurdle. Since the trend to adopt green energy can only strengthen, SOCAR should rebrand itself as an environmentally conscious company that works to reduce its carbon footprint as well. Therefore, even as SOCAR markets itself as the best oil distribution company in Europe, it should do so by proposing environmentally friendly alternatives to improve Europes oil infrastructure. Creating the perception, that SOCAR is environmentally conscious is an important component of the companys branding strategy because European partners would not want to be associated with a company that has a bad environmental record. Comprehensively, it would be interesting to know how major oil players like SOCAR position themselves (viz-a-viz the green energy movement) because they have already marketed themselves as supporters of the green revolution (yet, they profit from oil activities). Essentially, such companies should rebrand themselves as environmentally conscious entities to eliminate the perception that they are key contributors to environmental degradation.
Conclusion
Improving SOCARS market visibility in the European oil and gas market is an achievable goal. However, based on the market intrigues highlighted in this paper, this prospect largely depends on SOCARs ability to execute a perfectly calculated marketing strategy. This paper fragments SOCARs marketing strategy into four main components (product/service, place, price, and promotion). This paper proposes that SOCAR should market itself as an oil distribution company so that it can reap the benefits of an expanding oil distribution network in Europe. This
58
marketing strategy should be SOCARs main marketing pillar. Concerning SOCARs pricing strategy, this paper proposes that the company needs to price its services slightly lower than its competitors do, so that it can improve its market share during its first few years of operation. After this objective materializes, SOCAR may increase its prices accordingly to reflect its new market dominance in Europe. This paper also proposes that personal selling should be SOCARs main promotion strategy so that it can effectively communicate with its services to potential customers. Finally, this paper suggests that SOCAR should pursue a joint-venture strategy so that it can increase its market presence and avoid a protracted competition with the dominant oil players in the European oil and gas sector. Comprehensively, these strategies will increase SOCARS market visibility in the European oil and gas market.
Self-Reflective Essay
In this paper, I sought to identify SOCARs marketing strategy in Europe after merging European market opportunities and SOCARs key competencies. This analysis created a compressive marketing plan based on Kotlers four Ps of marketing (price, promotion, place, and product). This marketing strategy developed through the incorporation of international marketing theories that emphasized the need for SOCAR to manifest its key competence oil distribution. Throughout the research process, I was satisfied with the comprehensive approach adopted to formulate SOCARs marketing plan and the overwhelming willingness of some of the respondents to answer the research problem.
My biggest disappointment with the entire project stemmed from the little emphasis I accorded to the influence of the green energy revolution on SOCARs marketing plan and the failure to investigate the differences in business practices between foreign and local European companies. These differences surfaced during the research. Overall, the research experience was fulfilling and informative. Investigating the different types of marketing strategy SOCAR could adopt in the
59
European oil and gas market required an extensive understanding of the company performance, successes, and previous marketing strategies of the company. Investigating the structure and performance of the European oil and gas market also provided some useful insights to the research problem. By investigating the market structure and characteristics of the European oil and energy market, it was easy to establish the market opportunities that existed for foreign companies to exploit. In addition, understanding the key market characteristics of the European oil market and the history of SOCAR helped to identify the companys key competencies to apply in the European energy market. Furthermore, through the understanding of the European market and SOCARs company structure, this paper employed a two-faced marketing approach for formulating SOCARs marketing strategy in Europe.
From the onset of the project, I had a lot of pessimism regarding the willingness of oil consultancy firms to participate in the research (without any form of persuasion).
Moreover, I was more pessimistic about the probability of senior level managers to share their insights regarding the research topic or the characteristics of the European oil and gas market. However, contrary to my expectations, many managers were available for interviewing. Only two managers were unavailable to participate in the study, but they recommended that I should seek assistance from supporting managers. This redirection proved useful to expanding the overall scope of the interview because I was able to get the insights of a marketing manager who was able to provide a marketing perspective on the research topic (which was crucially important because this paper was market-centered). The sheer willingness of the participants to participate in the study surprised me.
Throughout the research process, I also learned a few insights regarding the European oil and gas market (that I did not know). For example, I was not aware of the decline in the European oil industry, which stemmed from the decline of oil
60
reserves in most European oil producing nations. Furthermore, it only came to my realization that Europe stakes a claim to most global energy production and distribution processes because of the presence of dominant oil firms in the continent. Indeed, big oil firms like BP and Shell base their operations in Europe and most of them have huge stakes in other global oil companies. Therefore, the influence of Europe on the global oil market is profound and it is difficult for foreign oil companies to venture into their home markets.
This realization highlighted the difficulty that SOCAR would experience in the European oil market because it would play a secondary role to dominant oil companies in the region. This realization informed the decision to propose a joint-venture strategy between SOCAR and another dominant oil company in Europe. From the experiences, I learned by undertaking this research paper, I understood the importance of accommodating unforeseeable issues regarding the research topic.
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u u /x 0x 1x d d ] ^ d| ] ^ d| ]^ d d| ] ^ $d ^$ d d ^ d d| ^ d Indeed, while formulating a research plan, it is difficult to have a comprehensive conceptualization of everything that happens in the research. In fact, there seems to be a big divide between the theoretical expectation of the paper and the practical expectations of the same process. Since, it is difficult to know what to expect in the research process, it is crucial to account for unforeseen issues in the research process.
Somewhat, the adoption of the qualitative research design helped to accommodate unforeseen research questions, but in my future studies, I will provide more opportunities to accommodate unforeseen dynamics of the research project. After experiencing all the intrigues of this research project, I could have done several things differently. First, I wish I could have had a larger population sample to provide a more dynamic set of views regarding the research topic. Having a small representative sample reduces the ability to generalize the studys finding. Furthermore, having a small representation of respondents reduces the credibility
61
and validity of the findings because a larger population sample is more representative and practical about the prevailing market dynamics. Having a more balanced approach for investigating SOCARs key competencies would also improve the credibility of the findings because all the respondents sampled were European. There was therefore little consideration about the views of SOCARs employees or even the views of Azerbaijan oil consulting companies. With more research resources, it would be easier to get more contributions from easily accessible experts like Azerbaijani employees. The limited literatures regarding Azerbaijani business practices also limited the scope of market intrigues that could be included in the research. Most of the literature available focused on European business characteristics and successful marketing strategies in the western world. Nonetheless, there is a difference in the business practices adopted in Azerbaijan and Europe. Experts also emphasize the need to understand cultural differences in international business. This consideration should have been an important part of this study.
62
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65
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