Harvard Case - Amoco Corporation
"Amoco Corporation" Harvard business case study is written by Susan Chaplinsky, Luann J. Lynch, Paul Doherty. It deals with the challenges in the field of Negotiation. The case study is 28 page(s) long and it was first published on : Mar 21, 2000
At Fern Fort University, we recommend Amoco Corporation pursue a strategic alliance with British Petroleum (BP) to achieve its goal of expanding its global presence and acquiring access to new oil reserves. This alliance should be structured as a joint venture, allowing both companies to leverage their respective strengths and share the risks and rewards of developing new oil fields.
2. Background
Amoco Corporation, a major American oil company, was facing challenges in the late 1990s. The company was struggling to compete with larger international players like BP and Royal Dutch Shell. Amoco was also facing declining domestic oil reserves and a need to expand its global footprint to secure future supplies.
The case study focuses on Amoco's efforts to acquire a stake in a large oil field in Kazakhstan, a venture that was fraught with challenges, including political instability, regulatory hurdles, and the need for significant capital investment.
The main protagonists are:
- Larry Fuller: Amoco's CEO, who is tasked with finding a solution to the company's declining oil reserves and expanding its global presence.
- John Browne: BP's CEO, who is also looking to expand BP's global reach and secure new oil reserves.
- The Government of Kazakhstan: The Kazakh government is eager to attract foreign investment and develop its oil resources but is also concerned about maintaining control over its natural resources.
3. Analysis of the Case Study
Strategic Analysis:
- Competitive Advantage: Amoco's competitive advantage lies in its strong domestic presence and its expertise in exploration and production. However, it lacks the global reach and financial resources to compete effectively with larger international players.
- Strategic Objectives: Amoco's strategic objectives are to secure access to new oil reserves, expand its global presence, and improve its financial performance.
- Industry Analysis: The oil industry is characterized by high capital intensity, volatile prices, and intense competition. The industry is also subject to government regulation and political instability.
- Porter's Five Forces:
- Threat of New Entrants: High due to the availability of technology and capital.
- Bargaining Power of Buyers: Moderate, as buyers have many options but oil is a necessity.
- Bargaining Power of Suppliers: High, as oil is a finite resource and suppliers have significant market power.
- Threat of Substitutes: Moderate, as alternative energy sources are becoming more viable.
- Competitive Rivalry: Intense, as many companies compete for market share and access to resources.
Financial Analysis:
- Capital Requirements: Developing oil fields requires significant capital investment, which Amoco may not have readily available.
- Risk Assessment: The Kazakh project is risky due to political instability, regulatory uncertainty, and the potential for environmental damage.
- Return on Investment: The project must generate a sufficient return on investment to justify the risk and capital outlay.
International Business Considerations:
- Political Risk: The Kazakh project is subject to political risk, as the government is unstable and there is a risk of nationalization.
- Cultural Differences: Amoco needs to be sensitive to cultural differences in Kazakhstan and build strong relationships with the government and local communities.
- Legal Framework: The legal framework in Kazakhstan is complex and subject to change, which can create challenges for foreign investors.
4. Recommendations
Amoco should pursue a strategic alliance with BP, structured as a joint venture, to develop the Kazakh oil field. This alliance will allow both companies to:
- Share the risk and reward: The joint venture will allow Amoco to share the significant capital investment and risk associated with the project.
- Leverage complementary strengths: BP has a strong global presence, financial resources, and experience in managing complex international projects. Amoco brings expertise in exploration and production.
- Reduce political risk: A joint venture with BP will likely be more acceptable to the Kazakh government, as it will reduce the risk of foreign control over the oil field.
- Improve access to financing: The joint venture will have access to a larger pool of capital, making it easier to finance the project.
Key Implementation Steps:
- Negotiate a Joint Venture Agreement: This agreement should clearly define the roles and responsibilities of each partner, the capital structure, the profit-sharing arrangement, and the exit strategy.
- Secure Government Approvals: Amoco and BP must obtain all necessary permits and approvals from the Kazakh government.
- Develop a Detailed Project Plan: This plan should outline the project's scope, timeline, budget, and risk management strategy.
- Implement the Project: The project should be implemented in a timely and cost-effective manner, with a focus on environmental sustainability and community engagement.
5. Basis of Recommendations
This recommendation aligns with Amoco's strategic objectives of expanding its global presence and securing access to new oil reserves. The joint venture with BP provides a number of advantages, including:
- Shared Risk and Reward: The joint venture structure allows Amoco to share the significant financial risk and reward associated with the project.
- Complementary Strengths: BP's global reach and financial resources complement Amoco's expertise in exploration and production.
- Reduced Political Risk: A joint venture with BP is likely to be more acceptable to the Kazakh government, reducing the risk of nationalization.
- Improved Access to Financing: The joint venture will have access to a larger pool of capital, making it easier to finance the project.
Assumptions:
- The Kazakh government will be willing to approve the joint venture.
- BP will be willing to partner with Amoco on the project.
- The project will be profitable and generate a sufficient return on investment.
6. Conclusion
A strategic alliance with BP, structured as a joint venture, is the best option for Amoco to achieve its strategic objectives and secure access to new oil reserves. This alliance will allow Amoco to leverage BP's strengths, share the risk and reward, and improve its access to financing.
7. Discussion
Alternative Options:
- Independent Development: Amoco could attempt to develop the Kazakh oil field independently. However, this would require significant capital investment and would expose the company to a high level of risk.
- Acquisition of BP's Stake: Amoco could attempt to acquire BP's stake in the project. However, this would be a costly and complex transaction, and BP may not be willing to sell.
Risks and Key Assumptions:
- Political Instability: The Kazakh government is unstable, and there is a risk of nationalization or other political interference.
- Regulatory Uncertainty: The regulatory framework in Kazakhstan is complex and subject to change.
- Environmental Concerns: The project could have significant environmental impacts, which could lead to protests and legal challenges.
- Project Delays and Cost Overruns: The project could experience delays and cost overruns, which could impact profitability.
8. Next Steps
- Negotiate a Joint Venture Agreement: Amoco and BP should begin negotiations immediately to finalize the terms of the joint venture agreement.
- Secure Government Approvals: Amoco and BP should work together to obtain all necessary permits and approvals from the Kazakh government.
- Develop a Detailed Project Plan: A detailed project plan should be developed outlining the scope, timeline, budget, and risk management strategy.
- Implement the Project: The project should be implemented in a timely and cost-effective manner, with a focus on environmental sustainability and community engagement.
Timeline:
- Months 1-3: Negotiate the joint venture agreement and secure government approvals.
- Months 4-6: Develop a detailed project plan and secure financing.
- Months 7-12: Implement the project and begin production.
This plan provides a roadmap for Amoco to successfully navigate the complex challenges of the Kazakh oil field project and achieve its strategic objectives.
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Case Description
This case is one of a pair of cases used in a merger negotiation. It is designed to be used with "British Petroleum, Ltd." (UV2469). One-half of the class prepares only the British Petroleum (BP) case, and one-half uses this case. BP and Amoco are considering a merger, and are in the process of negotiating a merger agreement. Macroeconomic assumptions, particularly forecasting future oil prices in an uncertain environment, and assumptions about Amoco's ability to reduce exploration and production costs make Amoco's future cash flows difficult to predict.
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