1

Master thesis

MSc. International Business & Management

Industry effects in state-owned enterprise internationalization:

‘A study on state-owned Russian oil and gas firms’

By

D.J. Niekel

S3838986

d.j.niekel@student.rug.nl

University of Groningen

Faculty of Economics and Business

June, 2020

14,902

Supervisor: Dr. O. Lindahl

Co-assessor: Prof. Dr. H.J Drogendijk

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ABSTRACT

The purpose of this thesis is to explore which factors influence Russian oil and gas state-owned

enterprises (O&G SOEs) to internationalize. While SOE internationalization, in general, has

been studied frequently, the role of industry effects in this process has been largely ignored.

This thesis seeks to contribute to filling this gap by focusing on SOEs from one country and

industry, namely Russian O&G. The O&G industry are considered unique, in part because of

their strategic nature. This gives reason to believe that O&G SOEs have other, additional

factors influencing their internationalization. These unique influencing factors are more likely

to be identified thru studying Russian O&G SOEs, since they are considered extreme cases.

Thus, to fulfill its purpose, this thesis conducted a dual-case study on two large Russian O&G

SOEs. Eight managers, four from each SOE, were interviewed about their experiences with

O&G SOE internationalization. Additionally, nine annual reports (2010-2018) from both case

companies were analyzed to complement, and strengthen, the interview data. From this data

eight influencing factors were identified, of which three are already discussed in the extant

literature. Denoting that this thesis has identified five new influencing factors, which are:

importance to the governmental budget, long-term view of the controlling shareholder, inter-

government tie strength, discrimination in the host country, and home government foreign

policy goals. These five factors differ, between negative and positive, in how they influence

the internationalization of O&G SOEs. The findings of this thesis highlight that O&G SOEs

indeed have unique factors influencing their internationalization. Therefore, this thesis can

function as a springboard for future research on SOE internationalization. A topic which, due

to the rapidly growing number of SOEs, has never been more important.

Keywords: State-owned enterprises (SOEs), oil and gas (O&G), internationalization, Russia,

government, strategy, business, (geo)politics.

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TABLE OF CONTENTS

ABSTRACT .................................................................................................................................................. 2

LIST OF TABLES .......................................................................................................................................... 5

LIST OF FIGURES ......................................................................................................................................... 5

LIST OF APPENDICES ................................................................................................................................... 5

LIST OF ABBREVIATIONS ............................................................................................................................. 6

ACKNOWLEDGEMENTS............................................................................................................................... 7

1. INTRODUCTION ...................................................................................................................................... 8

2. THEORETICAL BACKGROUND ................................................................................................................ 11

2.1 BACKGROUND ON THE OIL AND NATURAL GAS INDUSTRY ......................................................................................... 11 2.1.1 Oil industry .......................................................................................................................................... 11 2.1.1 Natural gas industry ........................................................................................................................... 13

2.2 STATE-OWNED ENTERPRISES .............................................................................................................................. 14 2.3 INTERNATIONALIZATION .................................................................................................................................... 16

2.3.1 Internationalization of SOEs ............................................................................................................... 18 2.3.2 Internationalization of oil and gas SOEs. ............................................................................................ 19

3. METHODOLOGY ................................................................................................................................... 21

3.1 RESEARCH DESIGN ........................................................................................................................................... 21 3.2 RESEARCH STRATEGY ........................................................................................................................................ 21

3.2.1 Dual case study ................................................................................................................................... 22 3.3 RESEARCH SAMPLE ........................................................................................................................................... 22 3.4 DATA COLLECTION ........................................................................................................................................... 23 3.5 DATA ANALYSIS ............................................................................................................................................... 25 3.6 VALIDITY AND RELIABILITY.................................................................................................................................. 26

4. FINDINGS ............................................................................................................................................. 28

4.1 CLASSIFYING THE FACTORS ................................................................................................................................. 28 4.2 FREQUENCY ANALYSES ...................................................................................................................................... 28 4.3 CROSS-CASE ANALYSIS ...................................................................................................................................... 32 4.3.1 CONCLUDING REMARKS ON FINDINGS ............................................................................................................... 41

5. ANALYSIS ............................................................................................................................................. 43

5.1 THE INFLUENCING FACTORS ............................................................................................................................... 43 5.1.1 Importance to the governmental budget ........................................................................................... 43 5.1.2 Long-term view of the controlling shareholder .................................................................................. 44 5.1.3 Inter-government tie strength ............................................................................................................ 46 5.1.4 Discrimination in the host country ..................................................................................................... 46 5.1.5 Home government foreign policy goals.............................................................................................. 47

5.2 CONCEPTUAL MODEL ........................................................................................................................................ 49

6. CONCLUSION........................................................................................................................................ 50

6.1 CONCLUSION & DISCUSSION. ............................................................................................................................. 50 6.2 THEORETICAL IMPLICATIONS .............................................................................................................................. 52 6.3 MANAGERIAL AND POLICY IMPLICATIONS ............................................................................................................. 53 6.4 LIMITATIONS ................................................................................................................................................... 53 6.5 FUTURE RESEARCH ........................................................................................................................................... 54

REFERENCES ............................................................................................................................................ 55

APPENDICES ............................................................................................................................................ 62

APPENDIX I: INTERVIEW QUESTIONS......................................................................................................... 62

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INTERVIEW QUESTIONS ........................................................................................................................................... 63 1. INTERVIEW START – INTERVIEWEE INFORMATION ............................................................................................... 63 2. INTERNATIONALIZATION OF RUSSIAN OIL AND GAS SOES ..................................................................................... 63 3. FINISHING QUESTIONS .................................................................................................................................. 64

APPENDIX II: RESEARCH SUMMARY SEND TO INTERVIEWEES. .................................................................... 65

APPENDIX III: ILLUSTRATIVE QUOTATIONS INTERVIEWS. ........................................................................... 66

APPENDIX IV: ILLUSTRATIVE QUOTATIONS ANNUAL REPORTS. .................................................................. 75

APPENDIX V: DECREASE IN RUSSIAN OIL AND GAS EXPORTS TO EUROPE FOLLOWING SANCTIONS. ............. 91

APPENDIX VI: CASE DESCRIPTION ............................................................................................................. 92

[CASE 1] .............................................................................................................................................................. 92 [CASE 2] .............................................................................................................................................................. 93

APPENDIX VII: PROPOSITION FOUR – VISUALISATION. ............................................................................... 94

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LIST OF TABLES

Table 1: Share of world oil production (..) for both state-owned and publicly listed firms... 12

Table 2: Frequency analysis interviews…………………………………………………….. 29

Table 3: Frequency analysis annual reports [Case 1]………………………………………..30

Table 4: Frequency analysis annual reports [Case 2]……………………………………….. 31

Table 5: Cross-case analysis………………………………………………………………... 33

Table 6: Factor macro-economic – illustrative quotations……………………...................... 35

Table 7: Factor government support – illustrative quotations………………......................... 36

Table 8: Factor intra-country political conflict – illustrative quotations……………………. 37

Table 9: Factor importance to the governmental budget – illustrative quotations…………... 38

Table 10: Factor long-term view of the controlling shareholder – illustrative quotations..… 39

Table 11: Factor inter-government tie strength – illustrative quotations……........................ 40

Table 12: Factor discrimination in the host country – illustrative quotations…..................... 40

Table 13: Factor home government foreign policy goals – illustrative quotations............…. 41

LIST OF FIGURES

Figure 1: Natural gas production per country for the year 1900-2014……………………... 14

Figure 2: Conceptual model………………………………………………………………… 49

LIST OF APPENDICES

Appendix I: Interview questions…………………………………………………………… 62

Appendix II: Research summary send to interviewees…………………………………….. 65

Appendix III: Illustrative quotations interviews……………………………………………. 66

Appendix IV: Illustrative quotations annual reports………………………………………... 75

Appendix V: Decrease in Russian oil and gas exports to Europe following sanctions……... 91

Appendix VI: Case description……………………………………………………………... 92

Appendix VII: Proposition four – visualization……………………………………………..94

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LIST OF ABBREVIATIONS

O&G SOE Oil & Gas State-Owned Enterprise

O&G Oil & Gas

SOE State-owned Enterprise

MNE Multinational Enterprise

SOC Standard Oil Company

NOC National Oil Company

LNG Liquified natural gas

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ACKNOWLEDGEMENTS

It is with great pleasure that I present the final product of my educational career. I would like

to take this moment to thank everyone who has helped me with the difficult process that is

writing a thesis.

To start I would like to thank my supervisor and assessor, Dr. Lindahl from the Uppsala

University, and Prof. Dr. Drogendijk from the University of Groningen. Whom, during this

turbulent period, took the time to provide me with extensive and useful feedback. Particularly

I’d like to thank Dr. Lindahl for his constructive criticism via email and Skype, and his

willingness to brainstorm with me. This feedback helped me to see things in a different light,

which enabled me to better conceptualize the large amounts of data used in this research.

I’d also like to thank the interviewees for taking time out of their busy schedule to converse

with me and answer my questions. Furthermore, I want to thank the people which extended to

me their network, which was of great help during the search for potential interviewees.

Likewise, I greatly appreciate my friends and fellow pupils for their support during this

research process. Their distractions, and academic input were of great help to me as student,

but also as a person. I’d especially like to thank my former Russian teacher Tamara Zhirova,

for it were her enthusiastic lessons on the Russian language and culture that motivated me to

write my thesis on a topic related to Russia. Moreover, I’d like to thank Anja Dijkhuizen and

others at Shell for providing me with more insights on the energy industry at large.

Most importantly, I want to thank my parents and brother, for their unconditional support and

love. Their presence and motivating words made writing this thesis much more pleasant, and

doable.

Amsterdam, June 2020

Daniel Niekel

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1. INTRODUCTION

The concept of internationalization stands point and center within the IB literature. When

discussing internationalization, it is often understood as the steps taken by a company to

capture market share outside of the home country. Moreover, Welch and Luostarinen (1988, p.

36) describe it as “the process through which a firm increases involvement in international

operations”. Within the extant literature there is a strong focus on how this process of

internationalization differs per industry (Oh, Kim, & Shin, 2019). Yet, these so called ‘industry

effects’ are largely ignored by research on the internationalization of state-owned enterprises

(SOEs) (e.g. Cahen, 2015; Estrin, Meyer, Nielsen, & Nielsen, 2016). This is problematic

because the global market share of SOEs is growing rapidly (OECD, 2017), and by ignoring

industry effects these firms aren’t given the same academic scrutiny as private firms. It thus

stands to reason that the present literature can benefit from moving the discussion on SOE

internationalization to become more industry specific. The Russian oil and gas (O&G)

industries are a good starting point for such research, due to them being highly international,

sizeable, and controlled by the government (Lavrov & Aleksanyan, 2017).

While some IB scholars, such as the Uppsala School, argue that firms tend to follow the same

evolutionary process of internationalization (Johanson & Vahlne, 2009), research shows that

the factors driving internationalization differ significantly per industry (Fernhaber, McDougall,

& Oviatt, 2007). This is mainly because entry barriers are country-industry specific (Oh et al.,

2019). In other words, a firm not only considers the host country’s regulations, laws, and

psychic distance, but also the competitiveness and knowledge intensity of the industry there

(Head, Mayer, & Ries, 2001; Oh et al., 2019). The industry in which a firm operates can thus

present several opportunities and challenges for internationalization. To aid the decision

making of firms, several industry specific factors affecting internationalization have already

been document (e.g. Curran & Zignago, 2012; Javalgi, Griffith, & White, 2003).

This thesis focuses on the distinctive factors that influence the internationalization of O&G

SOEs. Since the role of the state is inimitable it is rational to assume that this uniqueness has

an effect on internationalization. Some scholars bring up that state-ownership may explain

internationalization being driven by other than business strategic arguments, such as the

(geo)political objectives of the government (Li, Li, & Wang, 2019; Liang, Ren, & Sun, 2015).

Moreover, some studies discuss other, additional factors, that influence the internationalization

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of specifically O&G SOEs. Such as O&G needing to be exploited where it is, causing location

choice to be driven by geographic rather than strategic issues (Lai, O’Hara, & Wysoczanska,

2015). And that state-ownership in a strategic industry may clarify why a lack of resources is

less of an issue, explaining faster and riskier international expansion (Cuervo-Cazurra, et al.,

2014; Duanmu, 2014). Even so, it is still uncertain whether the internationalization of O&G

SOEs is mainly driven by business or political goals. Furthermore, it is also unknown whether

state-ownership gives rise to additional discriminatory behaviors in the host country, and how

this would affect the internationalization process of O&G SOEs. Therefore, it is currently

unknown which composition of factors drive O&G SOEs to expand abroad, owning to a lack

of earlier studies.

As a result, several authors have advocated for further research on the internationalization of

Russian O&G SOEs (Liuhto, 2002; Panibratov, 2016; Pierini, 2019). For the reason that the

controversies surrounding the Russian state make the internationalization of these SOEs

extreme cases (Collins & Botts, 2017; Gricius, 2018). Which according to Donaldson, Ching

and Tan (2013) makes relevant factors more visible than would otherwise be the case,

rendering them a good starting point for industry specific research. To understand the

internationalization process of these Russian SOEs, the experiences of managers are studied.

For the reason that managers are likely to have comprehensive knowledge on

internationalization decision making at their firm (Suder, Birnik, Nielsen, & Riviere, 2017).

Which factors, according to these managers, drive Russian O&G SOEs to internationalize? Do

unidentified obstacles or advantages for internationalization exist that are unique to (Russian)

O&G SOEs? In view of these unanswered questions, this thesis seeks to narrow the research

gap of the influence of industry on SOE internationalization, by examining the O&G industry.

More specifically, this thesis seeks to find the unique factors that drive the internationalization

of Russian O&G SOEs. The extreme nature of these SOEs provides a good starting point for

filling the identified research gap of how O&G industry effects influence SOE

internationalization. The goal is to shift the discussion on SOE internationalization to become

more industry specific by answering the following exploratory research question:

‘Which factors influence the internationalization of state-owned Russian oil and gas firms?’

This research question expands upon the extant literature which has largely focused on SOE

internationalization in general, without considering industry effects (Mariotti & Marzano,

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2019). As we known little on this subject an exploratory case study into SOEs from one specific

industry and country, in this case Russian O&G, is warranted (Eisenhardt & Graebner, 2007;

Babu, 2008). The exploratory case study is conducted by interviewing four managers at two

case companies, which all have experience with internationalization decision making. A dual

case study is appropriate as two cases represent a voluminous amount Russian O&G exports

(see appendix VI for case descriptions). Additionally, a content analysis of the annual reports

of both cases is done for the years 2010-2018. Such analyses can further strengthen the findings

of the interviews with financial and organizational data (Mayring, 2000). These cases can help

explain the strategic rationale for the internationalization of Russian O&G SOEs. This

information, in turn, can function as a jumping board for studying the approach to

internationalization of the rapidly growing number of non-Russian O&G SOEs (OECD, 2017).

Consequently, this thesis contributes to the IB literature in several ways. First, this thesis moves

the focus on SOE internationalization to be more industry specific. Second, this thesis identifies

factors influencing the international expansion of Russian O&G SOEs, creating a starting point

for future research on O&G SOEs in other countries. Third, this study can provide useful

insights for non-Russian energy companies that are seeking to benefit from Russia’s large

O&G reserves. Lastly, policy makers in countries depended on Russian O&G may benefit from

this thesis’s findings by better understanding the rational of their supplier.

This introduction is followed by a theoretical background on the fossil fuel industry, state-

ownership and internationalization. The third chapter clarifies and justifies the research

methodology. A description of the obtained qualitative data is found in chapter four. The

analysis of the data and the related findings are shown in chapter five. Chapter six presents

both the discussion and conclusion, as well as the limitations and some avenues for future

research.

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2. THEORETICAL BACKGROUND

In this chapter the relevant literature for this thesis is discussed. To start, a background on the

O&G industry is given. Second, the various aspects of state-ownership are discussed. Last is a

review of internationalization and how it relates to SOEs in general, as well as O&G SOEs.

2.1 Background on the oil and natural gas industry

The O&G industry is often the focus of discussion in business literature (e.g. Badiru &

Osisanya, 2016; Panibratov, 2016). According to Parra (2004) this scholarly interest comes

from the belief that O&G are strong indicators of global economic developments. Furthermore,

the proclamation by the United States government that “oil and gas are the lifeblood of modern

civilization” has added to the remarkable interest in this industry (Hirsch, Bezdek, & Wendling,

2006, p. 1). To provide relevant background information on this topic a brief historical and

literary review is done for both O&G.

2.1.1 Oil industry

Following centuries of inactivity, the use of oil finally increased in the 1860s with the launch

of new production and refining technologies (Craig, Gerali, Macaulay, & Sorkhabi, 2018).

These innovations caused such a large increase in demand that oil produced from traditional

fields in Eastern Europa, Russia and North America began to take over global markets (Gerali

& Gregory, 2017). Responding to this increase in demand, the first major oil company,

appropriately named Standard Oil Company (SOC), was founded in 1870 by John D.

Rockefeller (Tarbell, 2010). The SOC grew rapidly, and in 1880 became the world’s leading

producer of principal oil products, with a market share of 80% (Tarbell, 2010). The U.S.

government, however, did not appreciate this monopolistic positioning and passed several

antitrust laws to bring about competitive reform (Dalton & Esposito, 2007). As a result of these

laws U.S. federal courts instructed that The SOC be broken up into 34 standalone companies

(Tarbell, 2010). This historical event is still relevant today as some of the biggest energy firms

originate from The SOC split. For instance, Standard Oil of New Jersey became Exxon,

Standard Oil of New York became Mobil, and Standard Oil of California is now called Chevron

(The Library of Congress, 2006). Despite this government interference the U.S. oil industry

remained highly productive, accounting for more than halve of the worlds production up until

1950 (The Library of Congress, 2006).

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From 1950 onwards the world became increasingly globalized (Zinkina et al., 2019). This had

a significant impact on the oil industry, as countries such as The Soviet Union (today The

Russian Federation), Persia (today Iran) and Saudi Arabia became major players (Badiru &

Osisanya, 2016; Parra, 2004). New companies emerged to profit from these foreign oil reserves

(The Library of Congress, 2006), many of which still exists today (e.g. Royal Dutch Shell,

Aramco, British Petrol). At the same time, the globalization of oil supply chains caused several

political and economic issues. Such as the 1973 oil crisis, during which the Organization of

Arab Petroleum Exporting Countries embargoed all nations it considered to be supportive of

Israel during the Yom Kippur War (Issawi, 1978). This embargo led to the price of oil

increasing by 400% over a one year period (Issawi, 1978).

The unpredictable nature of non-domestic oil supply chains has motivated many countries with

internal oil reserves to move towards establishing national oil companies (Table 1), also

described as SOEs (Mitchell & Mitchell, 2014). This change has an enormous impact on the

modern oil industry as SOEs now control an ever-increasing part of known reserves and

production capacity, leaving less and less for private enterprise (Mitchell & Mitchell, 2014).

Recent publications (e.g. Cheon, 2019; Marcel, 2016) argue that this phenomenon will bring

about disorder in the oil market, as values held dear by private businesses are likely to be cast

aside and replaced by the values and objectives of the nation. This background reading shows

that the oil industry, once the poster boy for ruthless capitalism as practiced by John D

Rockefeller, is changing, as competition between companies is replaced by competition

between governments (Mitchell & Mitchell, 2014).

Table 1 - Share of world oil production in 2011 for both state-owned and publicly listed firms. Data originates from the

Petroleum Intelligence Weekly: Top 50, and Mitchell & Mitchell (2014).

This change, interestingly enough, occurred somewhat differently in what is now the Russian

Federation. As between the years 1917-1992 the Soviet Union only allowed SOEs (e.g.

Soiuznefteksport and Grozneft) to operate in its oil industry (Perović, 2017). Yet, once the

Soviet Union collapsed the O&G industries were largely privatized through presidential decree

Company’s organizational structure

Share of world oil

production (2011)

Share of world oil

production (2006)

Exclusive SOEs 19% 17%

SOEs with contracts to the private sector 26% 22%

Listed companies with state control 13% 11%

Publicly listed companies 20% 25%

Other 22% 25%

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No.1403 (Perović, 2017). However, things again changed under the leadership of president

Vladimir Putin, as he moved the Russian State to take back control over the industry by

renationalizing key players. In addition, access to most of Russia’s O&G reserves was

reassigned to these new SOEs (Locatelli, 2006). On top of this, the state increased its control

over export networks (pipelines), which severely limited the international strategic capabilities

of the remaining private Russian O&G firms (Locatelli, 2006). These measures have placed

the Russian State in a position where it can better compete with other oil producing nations.

2.1.1 Natural gas industry

Similar to oil, the large-scale economic potential of natural gas was only discovered in the late

19th century. This ground breaking innovation was done by the American Robert Bunsen, who

found that a constant flame can be created by mixing a certain combination of natural gas and

air (Considine, Watson, Entler, & Sparks, 2009). This gas-powered flame proved to be a safe

approach to both cooking and heating.

Due to its many uses, the demand and supply of natural gas has increased rapidly overtime, as

shown in figure 2 (p. 14). The United States led the growth in production up until the year

1980, at which point the Soviet Union (Russia) significantly increased natural gas extraction

(Etemad, Luciana, & US IEA Historical Statistics, 2015). The reason for this steep increase

was the Soviet Union’s need for foreign reserve currencies, and one of the few ways it could

obtain these was through exporting natural gas (Perović, 2017). Another interesting historical

phenomenon occurred in 1991 following the collapse of the Soviet Union, as political and

institutional disarray caused the Russian production capacity to plummet by one fourth

(Etemad et al., 2015; Perović, 2017).

These historical occurrences highlight an interesting difference between the two largest

producers of natural gas (U.S and Russia). Namely that The Unites States uses most of its

production for internal consumption, whereas Russia focuses much more on exporting (Central

Intelligence Agency, 2015). The likely reason for this phenomenon is that the closest export

partners of the U.S. (Mexico and Canada) have large gas reserves themselves (Central

Intelligence Agency, 2017). While most countries in close proximity to Russia often lack a

domestic supply of energy resources such as natural gas (Central Intelligence Agency, 2017).

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2.2 State-owned enterprises

The concept of SOEs has been the focus of discussion multiple times in international business

literature (e.g. Bass & Chakrabarty, 2014; Liang et al., 2015). According to Chang and The

United Nations Department of Economic and Social Affairs (2007), a SOE is by definition a

firm where managers and employees don’t have ownership. The reasoning for this is the

principal-agent problem. According to this problem, a manager with shares is motivated to act

opportunistically. Hence, SOEs cannot have employees with ownership, as this could cause

personal enrichment to be put above the national interest (Chang & UNDESA, 2007). One of

the reasons for scholarly and business interest in SOEs is the increasingly large number of these

firms partaking in the world economy (Kwiatkowski & Augustynowicz, 2015), a trend which

is unlikely to stop soon (OECD, 2017). In addition, it is assumed that SOEs affect globalization,

innovativeness, and (geo)political decision making, and thereby the overall effectiveness of the

global market (Kowalski et al., 2013).

To study SOEs it is important to first examine how this concept is understood. Many scholars

and organizations have conceptualized state-ownership in different ways. Kowalski et al.,

(2013) straightforwardly define it as ‘a majority state-owned enterprise’. SOEs can also be

Figure 1 - Natural gas production, measured in terawatt-hour (TWh) equivalents per year for the years 1900-

2014. The countries for which data is shown are The United States, Russia, China and The Netherlands.

Source: Etemad, Luciana, & US IEA Historical Statistics, 2015; Ritchie & Roser, (2020)

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explained through the economic and political perspectives. Following the economic

perspective SOEs are conceptualized as government owned tools to resolve market

imperfections (Cuervo-Cazurra et al., 2014), such as information asymmetry, natural

monopolies and positive externalities (Levy, 1987; Lindsay, 1976). From the political

perspective it is argued by Liang et al., (2015) and Li, Li, & Wang, (2019) that SOEs are

political in nature and that their main objective is not necessarily to create economic rents, but

instead to achieve the ideological and political objectives of the home government.

Within the political perspective the conceptualization of SOEs is further specified based on the

ideology followed by controlling government (Cuervo-Cazurra et al., 2014). Communist

governments define SOEs as a way to bring the means of production to the working class

(Marx, 1909). While nationalistic governments define SOEs as a technique to ensure control

of the commanding heights of the country, which are firms with critical backward and forward

linkages (Rodkrik, 2007). Lastly, the social ideology focuses on controlling only organizations

of societal importance such as hospitals and universities (Cuervo-Cazurra et al., 2014). The

most used definition of SOEs, however, comes from The World Bank (1995, p. 26) which

defines it as ‘any goods selling or service providing economic entity that is controlled or owned

by a government’.

A more recent conceptualization of SOEs is the angle of state-favoritism. State-favoritism

occurs when a privately held firm benefits from home country governmental support, which

gives it an advantage over competitors at home and abroad (Kowalski et al., 2013). Extending

the concept of SOEs to privately held firms might appear counterintuitive, but it has scholarly

merit. The reason being that countries such as the U.S. and Germany are increasingly wary of

foreign companies with direct state-ownership (Chari & Gupta, 2008). To ensure that trade

with these profitable markets can continue, countries such as China move support from SOEs

to private domestic firms (e.g. Xiaomi), without taking direct control (Gao, 2015; Li &

Brødsgaard, 2013). Nevertheless, Kowalski et al., (2013) argue that such state-favoritism

comes with heaps of non-commercial obligations. In turn, these government-imposed

obligations give politicians a similar level of control over the selected private firms as would

direct ownership, making it rational to extent the concept of SOEs to them (Kowalski et al.,

2013; X. Li & Brødsgaard, 2013; Meissner, 2016).

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Despite all the aforementioned definitions, no general conceptualization of SOEs is put forward

in the literature. Yet, because this thesis conducts a case study of two firms with indistinct

ownership structures, a somewhat broad definition is appropriate. Therefore, this thesis uses

the following definition of SOEs:

Any goods selling or service providing economic entity that is controlled, owned, or

competitively dependent upon financial or legislative support by a government.

2.3 Internationalization

Internationalization occurs when an economic exchange crosses national borders (Morgan &

Katsikeas, 1997). Internationalization can be achieved through a large number of methods that

range from low (e.g. licensing, direct exporting, franchising) to high (e.g. acquisition,

greenfield venture) foreign market commitment (Zahra, Ireland, & Hitt, 2000). When

deliberating internationalization this thesis makes use of the definition put forward by Welch

and Luostarinen (1988, p. 36), that is:

‘The process of increasing involvement in international operations.’

One of the most cited studies in the IB literature is the Uppsala School’s international process

theory (Johanson & Vahlne, 1977). This theory postulates that the process of

internationalization follows an evolutionary and progressive path, where the extend of cross-

border operations (e.g. level of ownership) is slowly increased overtime (Johanson & Vahlne,

1977; Morgan & Katsikeas, 1997). This hypothesis is supported by research showing that

private firms, in the early stages on internationalization, prefer to expand to markets that have

low psychic distance by being geographically, culturally and economically similar (Dow, 2000;

Gomez-Mejia, Makri, & Kintana, 2010; Oh et al., 2019). The theory was reexamined by

Johanson and Vahlne in 2009, which caused the concept of liability of foreignness to be

replaced by the liability of outsidership so as to consider the significance of network

relationships. A more recent modification to the theory was made by Kim and Aguilera (2015),

who extend it to today’s semi-globalized world by considering both country and regional level

factors in firm internationalization. Despite being heavily cited, critiques based on

generalizability (Carneiro, Rocha, & Silva, 2008; Sullivan & Bauerschmidt, 1990) and

theoretical soundness (Andersen, 1993; Steen & Liesch, 2007) have been advanced towards

the theory. Examples of such critiques are that the model can only be considered applicable to

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small and inexperienced firms (Steen & Liesch, 2007), a lack of consideration for non-business

strategic arguments which makes it difficult to apply to non-private firms (Liang et al., 2015),

and that the notion of industry effects is not contemplated (Oh et al., 2019)

Taking a different approach, Rugman and Verbeke (2004) extended the transaction cost

economics theory to regard the internationalization pathway of MNEs as mostly regional. They

argue that for the most part firm specific advantages and resources can only be leveraged

within, or in close proximity to, the home region (Oh et al., 2019; Rugman & Verbeke, 2004).

Other scholars have justified this line of thought by stating that having both national

responsiveness and economies of scale is difficult when a company is operating in a sea of

socio-cultural differences (Meyer, Mudambi, & Narula, 2011; Upadhyayula, 2010). Thus,

dissimilar from the Uppsala theory, the regional multinational theory of Rugman and Verbeke

(2004) implies that the internationalization path of a firm is not and endless evolutionary

process but instead ends at a regional border.

Where the aforementioned theories focus on the path of internationalization, scholars such as

Dunning (1988) concentrate on the incentives that drive individual firms to internationalize.

This approach was conceptualized through the OLI framework (Dunning, 1988). OLI suggests

that ownership (e.g. reputation for reliability), location (e.g. cheap labor) and institutional

factors (e.g. R&D incentives) may produce advantages and disadvantages that motivate firms

in their internationalization decision making (Niosi & Tschang, 2009). The focus of OLI is

therefore to determine the ‘why, where and how’ of firm internationalization (Eden, 2003).

While the core focus of the framework remained the same, MNEs and internationalization itself

have changed drastically overtime (Pedersen, 2015). To cope with these changes the

framework was revised in 1995 to consider cooperative ventures of all sorts and sizes (strategic

alliances, etc.), in 2001 to consider strategy development, and again in 2003 to include

institutional economics (Dunning, 2001, 2003; Narula, 2010). Overtime the OLI framework

developed into a key tool to chart industry effects for internationalization, by bringing attention

to aspects such as competitiveness, knowledge intensity, and legal incentives (Chiu, Lo, &

Susy, 2015; Kling, Ghobadian, Hitt, Weitzel, & O’Regan, 2014).

Nevertheless, the OLI framework has not been spared from critique. Most notably from Narula

(2010), a former co-author of Dunning, who argues that the desire to extent the OLI model to

all MNE related development makes it tautologous and therefore unusable in academia.

18

Another gap within the theory, as articulated by Pedersen (2015) is that it is unclear whether

the three OLI factors are independent and necessary. As a result, scholars such as Eden (2003)

and Narula (2010) propose to return to the classic OLI framework, and to combine it when

necessary with alternative theories to explain new developments.

2.3.1 Internationalization of SOEs

As discussed, scholars argue that internationalization decision making is influenced by psychic

distance, transaction costs, and ownership, location, institutional, and industry factors. These

factors however, effect SOEs differently than they would a private firm. One argument for this

phenomenon is that SOEs are more opaque, giving reason for the host country to be distrustful

of political ties and agency problems (Li et al., 2019). This distrust can amplify the psychic

distance between the SOE and the host country, as well as create obstacle’s in the institutional

domain (Li et al., 2019). Thus, where a private firm can overtime reduce psychic distance by

learning from and adapting to the local environment (Johanson & Vahlne, 2009), it is possible

that a SOE is burdened with being inherently distrusted. The possibility of ‘ever-present’

discrimination is currently not considered by internationalization theory, even though it would

significantly impact a firm’s ability to establish itself in a foreign market.

Another way in which SOEs differ is that many of them internationalize without having an

ownership advantage (Ramasamy, Yeung, & Laforet, 2012), that is owning a resource that

provides a competitive advantage (Dunning, 1988). The literary explanation for this

phenomenon are non-business reasons, such as the national interest, causing firms to

internationalize so that they can transfer foreign best practices and natural resources back to

the home country (Cuervo-Cazurra et al., 2014; Duanmu, 2014; Ramasamy et al., 2012). To

further motivate SOEs to obtain and transfer these resources, home governments can provide

financial and diplomatic support so as to significantly change the risk profile of the SOE, as

well as compensate for the lack of ownership advantages (Duanmu, 2014). Ramasamy et al.,

(2012) found that the sustenance of state-ownership is so great that it causes SOEs to be most

interested in quick expansion to countries with risky political environments. This discovery

conflicts with the extant views on firm internationalization (e.g. Uppsala model, regional

multinational theory), which propose a steady expansion to countries with low psychic distance

and therefore low risk. A gap thus exists within internationalization theory by not considering

the different risk profile of SOEs.

19

An additional point of notice is that even though some internationalization frameworks (e.g.

OLI) can be extended to account for SOE industry effects, it is seldom done. The academic

reasoning being that for SOEs governmental objectives, instead of industry considerations, are

the main factor influencing internationalization decision making (Cuervo-Cazurra et al., 2014;

Duanmu, 2014; Ramasamy et al., 2012). However, recent research on the topic has established

that industry effects actually play a considerable role in SOE internationalization, and should

therefore be considered (Ren, Manning, & Vavilov, 2019; Rodrigues & Dieleman, 2018). For

instance, SOEs in the mining industry internationalize to seek alternative resource pools (Ren

et al., 2019), whereas semiconductor SOEs do so to obtain knowledge and develop the supply

chain (Minin, Zhang, & Gammeltoft, 2012). In spite of these findings, SOE internationalization

research is mostly centred on SOEs in general (e.g. Chang & UNDESA, 2007; Chari & Gupta,

2008; Alvaro Cuervo-Cazurra et al., 2014; Meyer & Thein, 2014), thereby ignoring the

aforementioned ‘industry effects’ that are often considered when researching private firm

internationalization (Fernhaber et al., 2007; Kling & Weitzel, 2011). By not considering these

effects the generalizability and thus the managerial applicability of findings is severely

hampered (McGahan & Porter, 1997). Subsequently, steps must be taken to move the focus of

SOE internationalization to become more industry specific.

2.3.2 Internationalization of oil and gas SOEs.

Despite being in short supply, a few studies have already attempted to identify the factors that

influence the internationalization of O&G SOEs (Bass & Chakrabarty, 2014; Collins & Botts,

2017; Liuhto, 2002). One of these factors is a low government mandated price in the domestic

market, forcing SOEs to expand abroad for economic rents (Liuhto, 2002). Moreover, Stevens

(2008) argues that similar to private energy firms, macro-economic factors such as demand and

price developments also influence the internationalization of O&G SOEs. On a different note,

scholars make a case that political conflict between countries especially influences the

internationalization of O&G gas SOEs (Cahen, 2015; Collins & Botts, 2017). With the

argument being that the strategic nature of O&G SOEs makes them efficient tools to place

pressure on rivaling countries, as was done during 1973 oil crisis (Collins & Botts, 2017;

Issawi, 1978; Parra, 2004). Another influencing factor found in the extant literature is the

additional government support given to O&G SOEs, such as diplomatic assistance, supplies of

financial resources, and access to state-supported technical research (Lai et al., 2015). This

governmental support motivates O&G SOEs to expand abroad as they are exposed to less

financial and political risks (Lai et al., 2015). Despite the aforementioned findings, there are

20

still many questions about O&G SOE internationalization. Such as, do unidentified obstacles

or advantages for internationalization exist that are unique to (Russian) O&G SOEs? And

which other additional factors drive O&G SOEs to expand to a certain country?

The global economy is changing, where it was once dominated by private enterprise it is now

increasingly steered by SOEs (OECD, 2017). Although the subject of SOE internationalization

is well researched in general, there has been little consideration for industry effects, making it

difficult to derive unambiguous conclusions from academic publications. The aim of this study

is to partly fill this gap by focusing on the factors influencing the internationalization of SOEs

in one industry and country, namely Russian O&G. Some of these factors have already been

identified, yet the extend of these influences and whether other additional influences exist is

unknown. To find answers to these questions, an exploratory dual case study is done by

conducting eight in-depth interviews with managers from two Russian O&G SOEs, all of

which have partaken in internationalization decision making for their respective firm. In

addition, a content analysis of the annual reports for the years 2010-2018 is done for both cases.

21

3. METHODOLOGY

In this chapter, the methodology of this research is described by shedding light on the used

research design and methods. This is done through the research onion model (Saunders, Lewis,

& Thornhill, 2008). Sequentially, this chapter will make clear the research design, the research

strategy, the research sample, the manner of data collection, the analysis of data, and finally

the validity and reliability of the data. The intent of this chapter is to justify why a dual-case

study, conducted through in-depth-interviews and a content analysis, is most suitable.

3.1 Research design

This thesis seeks to develop new theory on SOE internationalization through inductive research

(Saunders et al., 2008). The inductive approach is fitting for exploratory studies that seek to

build theory from cases in areas that lack research (Eisenhardt & Graebner, 2007), which is the

case for this thesis. For that reason, four managers from both cases are interviewed, and a

content analysis of annual reports was conducted. The obtained information is analyzed to

identify which factors influence the internationalization of Russian O&G SOEs.

3.2 Research strategy

The research strategy describes the steps through which the research will be carried out

(Prenger, 2018). The research onion model differentiates between three research strategies,

namely: descriptive, explanatory and exploratory (Saunders et al., 2008). For this thesis the

exploratory strategy is chosen, because, it enables the obtention of new insights into the subject

(Saunders et al., 2008). To conduct this exploratory qualitative study, in-depth interviews and

a content analysis of annual reports was carried out (Mayring, 2000). Combined these methods

facilitate the obtention of information pertaining to personal experiences on the topic, as well

as broader case-specific information. Thus, interviews and annual report content analyses are

appropriate since it provides the researcher with a well-rounded collection of information for

analyses (Moeckli, 2011). Moreover, an explorative qualitative study is fitting since little

research exists that explicitly looks at the internationalization of O&G SOEs. An explorative

qualitative research into Russian O&G SOEs can help close this research gap, because, their

large market share and extensive government involvement makes them extreme cases. This

extreme nature makes relevant factors more identifiable (Donaldson et al., 2013). Furthermore,

an explorative approach makes it possible to gain a better understanding of complicated issues,

such as the role of (geo)politics in SOE internationalization.

22

3.2.1 Dual case study

This thesis makes use of a dual case study to answer the research question. Scholars regularly

use case studies to investigate areas that lack existing theory, and to conduct theory building

(Eisenhardt & Graebner, 2007). Case studies are also used to examine contemporary events

when the behaviour cannot be manipulated (Rowley, 2002). Scholars maintain that a multiple-

case study makes available more data, and therefore offers a stronger foundation for theory

building (Rowley, 2002; Yin, 2009). However, a smaller number of cases is appropriate when

the cases are considered special (Rowley, 2002). Thus, when it concerns internationalized

Russian O&G SOE, two cases are sufficient to study (Sprenger & OECD, 2008). For the reason

that both [case 1] and [case 2] are special due to the extreme levels of government pressure and

support they receive (Collins & Botts, 2017). Accordingly, a dual case study is used to develop

new theory, since there is a lack of pragmatic knowledge on the internationalization of

(Russian) O&G SOEs. By using a qualitative rather than quantitative approach, the complex

processes driving SOE internationalization are more likely to be identified (Eisenhardt &

Graebner, 2007). Therefore, this approach enables the consideration of largely forgotten

aspects of SOE internationalization, such as industry effects and discrimination (Duanmu,

2014; Liang et al., 2015; Oh et al., 2019).

3.3 Research sample

This thesis adds to the internationalization literature by concentrating on Russian O&G SOEs.

To collect primary data on these firms, interviews are held and a content analysis of annual

reports is conducted. To identify the factors influencing the internationalization of Russian

O&G SOEs, four managers from both [case 1] and [case 2] were interviewed. All eight

managers have had internationalization decision making experiences at their respective firm.

For this dual case study, a sample size between six and twelve interviews was planned, after

considering for time constraints, limited financial resources, and the difficulty of obtaining

access to interviewees due to the secrecy surrounding Russian SOEs (Guest, Bunce, & Johnson,

2006; Liuhto, 2002). This relatively small sample size ought not to be a problem as all

participants have sufficient expertise on the topic, enabling these few interviewees to still

provide complete and accurate information (Guest et al., 2006).

Nevertheless, to complement the conducted interviews with financial and organizational data,

a content analysis on the annual reports of [case 1] and [case 2] was conducted for the years

23

2010-2018. Such analyses are especially useful to answer this thesis’s research question. As a

content analysis of annual reports can give clear insights into a firms strategy by identifying

the development of programs, plans, organizational arrangements, and budgets overtime

(Bowman, 1984). The period 2010-2018 was chosen, as during this period both cases

significantly increased their involvement in international operations (Panibratov & Michailova,

2019). In line with the research strategy, inductive category development is used to carry out

the content analysis (Mayring, 2000).

This thesis defines SOEs as “any goods selling or service providing economic entity that is

controlled, owned, or competitively dependent upon financial or legislative support by a

government”. Both of the selected cases meet this definition as [case 1] and [case 2] are for

the majority owned (>50% of shares) and controlled by the Russian government. The case

study consists of two SOEs that operate in the same industry and originate from the same home

country, denoting that the cases can be compared to each other. Additionally, all interviewed

managers were of sufficient rank and had a role in internationalization decision making. This

renders the interviewees reliable information sources regarding the factors influencing the

internationalization of Russian O&G SOEs.

3.4 Data collection

The manner in which data is collected depends on the methodology used (Guest, Namey, &

Mitchell, 2017). For case studies several data collection methods are available. To answer the

research question of this thesis, primary data was collected through interviews and a content

analysis of annual reports. Since the phenomena of interest is dynamic and infrequent,

interviews become a key data source (Yin, 2009). Accordingly, a semi-structured interview

guide is used, as it this allows the exploration of issues and remarks brought forward by the

interviewees (McGrath, Palmgren, & Liljedahl, 2019). This is useful as all interviewees are

experts on the factors influencing the internationalization of Russian O&G SOEs. All

interviews are conducted via telephone. By doing so cultural differences, such as body

language, are less likely to distort the obtained interview data (Klitmøller & Lauring, 2013).

This is important as Russia and other former Soviet States have large cultural differences with

The Netherlands, the researcher his nationality (Hofstede Insights, 2020). Thus, telephone

interviews, in this case, are more likely to facilitate the interpretation of how managers

understand their experiences, and the free discussion of relevant topics. Since the objective is

24

to understand internationalization from the interviewee (Russian) perspective, the interview

guide is organized in a semi-structured manner, involving open questions and potential follow-

up questions. The interview guide is found in appendix I. Through this unstructured approach,

the interviewees are motivated to open up and express themselves in their own way. The

questions are formulated in such a way that the interviewee comes up with factors that are

influencing the internationalization of Russian O&G SOEs.

The interviews lasted between 30 and 45 minutes, and are if allowed by the participant audibly

recorded. By doing so, the interviewer can allocate all attention to what the interviewee is

saying, and therefore ask more appropriate follow-up questions. Yet, these follow-up questions

were formulated and asked in such a manner that steered the interview as little as possible,

thereby reducing bias (Yin, 2009). The main challenge for these interviews, due to the secretive

nature of Russian SOEs, was to get the participants to open up as much as possible. To achieve

this, full anonymity was given to the interviewees by redacting from the transcripts all

information that could lead to the interviewee being identified. Also, the interviews were

started with a few “easy” questions, to make the interviewees comfortable and familiarized

with the process (McGrath et al., 2019). Moreover, rapport was built with the interviewees by

providing a draft summary (appendix II) of the thesis prior to the interview, as a way to inform

them on what they can expect to talk about (McGrath et al., 2019).

Additionally, when the topic of interest involves corporate strategy and budgets to serve it, a

content analysis of annual reports becomes a source of valuable data (Bowman, 1984).

Accordingly, a content analysis of the annual reports of [case 1] and [case 2] is done for the

years 2010-2018. To accurately code this data an inductive form of category developed is used,

because this facilitates the development of an interpretation that is close to both the source

material and this thesis’s research question (Mayring, 2000). A content analysis sheds light on

the broader trends within the two cases (Bowman, 1984), something which is not as easily

extracted from interviews with individual managers. Therefore, it can be deduced that the

aforementioned data collection methods complement each other well.

25

3.5 Data analysis

To analyze the interview data, the interviews were recorded, transcribed, coded, and

categorized based on the similarity of responses. To extract relevant information from the data

a multiple stage method is used (Powel & Renner, 2003). This method makes analysis

manageable by tapering the size of the large amount of data. Following this method, the

transcripts are first read through multiple times to establish familiarity with the data. Once

familiarized, a preliminary coding framework is developed to identify themes or patterns

within the data. To remain consistent the coding is done on a per case basis (Miles &

Huberman, 1994). Then, patterns and connections within and between the cases are identified

through the following summarizing techniques; reducing redundancy, and fact rejection

(Powel & Renner, 2003; Wolff, 1982). Where reducing redundancy consists of finding

repetitions within the interview data and reducing it to one instance of the pattern coded for

repetition, with a record of the number of instances (Wolff, 1982). Whereas fact rejection

excludes irrelevant and inconsequential parts of the interview (Wolff, 1982). The development

of the coding framework was guided by the factors that appeared to influence the

internationalization of O&G SOEs.

The aforementioned summarizing techniques were used to bring together the factors in the final

coding framework. Additionally, a frequency analysis was done to identify which factors were

most often acknowledged (Powel & Renner, 2003). For small samples, according to Krauth

(2004), a factor can be said to occur frequently when it is identified in more than halve of the

sample. As the sample size is eight and nine for the interviews and annual reports respectively,

it follows that the factors with a frequency score of five or higher across all data-sets are

analyzed further. Lastly, a cross-case analysis was done to identify the comparability between

the two cases (Dillon, O’Brien, Moje, & Stewart, 1994). The objective of the data analysis is

to extend theory by identifying common factors that influence SOE internationalization

through coding. The coding framework and the interview transcripts are found in the additional

appendix document.

Inductive category development is used, in addition to the codes generated from the interview

data, to analyze the data obtained from annual reports. This means that first a criterion of

definition is created from this thesis’s theoretical chapters, this determines which written

materials are taken into consideration (Mayring, 2000). Second, the annual reports are analyzed

26

following this criterion, and the interview coding scheme, to deduce categories in a provisional

manner (Mayring, 2000). Third, the aforementioned summarizing techniques are again used to

taper the size of the data. Fourth, categories are revised after 40-60% of the material is covered

to ensure enduring reliability (Mayring, 2000). Lastly, the results are interpreted, through a

frequency analysis, and linked to the data obtained from the interviews.

3.6 Validity and reliability

Case studies are a useful tool for generating new theories. Nevertheless, the case study method

has been criticized for lacking methodological rigor in terms of validity and reliability (March,

Sproull, & Tamuz, 2003). This criticism stems from the difficulty of replication, researcher

bias effecting observations, and case studies being tools in the early phases of research causing

methodological errors to create ripple-effects throughout later stages (Eisenhardt & Graebner,

2007; Gibbert, Ruigrok, & Wicki, 2008). To ensure validity and reliability in a qualitative case

study the following four components need to be considered; transferability, reliability,

construct validity and objectivity (Morrow, 2005).

Transferability refers to the degree that findings can be generalized to other contexts. SOEs in

the O&G industry are rather homogenous (Mahdavi, 2014). This is characterised by most O&G

SOEs being OPEC+ members to improve the likelihood of achieving their common goals.

Russian O&G SOEs, due to their market share, are a pivotal part OPEC+. Because the two

cases used in this thesis represent internationalized Russian O&G SOEs, it follows that the

findings represent the point of view of Russian SOEs and by extension OPEC+. Therefore, it

is likely that findings can be generalized to other contexts, most notably to O&G SOEs from

other OPEC+ countries.

The second component is reliability. The reliability of Interview data can be influenced by

cultural differences, bias, interview structure and language barriers (McGrath et al., 2019).

Thus, to ensure reliability, interviews are conducted via telephone to mitigate the cultural

impact of body language (Gilson, Maynard, Jones, Vartiainen, & Hakonen, 2015). Moreover,

the interviewer will steer the conversation as little as possible to reduce bias and ensure

objectivity. Additionally, rapport is created with the interviewee by providing information on

the research topic beforehand, making it more likely that the interviewee will be at ease and

answer accurately (McGrath et al., 2019).

27

Third is construct validity, which refers to the degree that a study investigates what it claims

to investigate, and the extent to which inferences made from the data are appropriate (Gibbert

et al., 2008). Thus, to achieve construct validity, a broad theoretical background is written. This

makes it that inferences from the data can be more wide-ranging, instead of being limited to

only a few theoretical arguments. This makes appropriate inferences more likely (MacKenzie,

2003). Moreover, two data sources, interviews and annual reports, are used to ensure that the

identified findings are related to the studied phenomena. If the same finding occurs in a similar

context in two different data sources, the possibility of confounding variables is greatly reduced

(Plümper, Troeger, & Neumayer, 2011). These two approaches make construct validity much

more likely (Gibbert et al., 2008).

Last is objectivity, which denotes professional and impartial interactions with all data sources.

This thesis ensures objectivity by asking unbiased and non-leading questions to the

interviewees, and by developing a comprehensive criterion of definition so as to not reject

relevant information from the annual reports (Ratner, 2002). Moreover, the obtained data is

analysed through thoughtful and systematic procedures, such as frequency analysis, that leave

no room for preconceptions (Ratner, 2002). Through the aforementioned the concepts

developed in this thesis can be considered objective.

28

4. FINDINGS

This chapter depicts the main findings that appeared from the interviews, and the examination

of annual reports. The collected data is to extensive to straightaway recognize the relevant

factors influencing internationalization. For that reason, a multiple stage method (Taylor-

Powel & Renner, 2003) is used to make the size of the obtained data more manageable. For the

first stage, the factors influencing the internationalization of O&G SOEs are identified by

thoroughly examining the interview transcripts, and the selected annual reports. In the next

stages the various influencing factors are analyzed, and summarized via a cross-case analysis.

4.1 Classifying the factors

To ensure an accurate analysis of the obtained primary qualitative data all interviews are

transcribed. From these transcripts a preliminary coding framework is develop by codifying

the unprocessed written data line-by-line. Every potential factor mentioned by the interviewees

which could influence the SOE internationalization process is coded. The interview transcripts,

the preliminary coding framework and the coding procedure are shown in the additional

appendix document. To complement the interview data, organizational data in the form of

annual reports is also analysed. This analysis is done by creating a criterion of definition

following existing theory and the obtained interview data. The annual report data that fits the

criterion of definition is categorized, and, to ensure consistency, coded following the same

coding framework used for the interviews. The criterion of definition and the coding procedure

are shown in the additional appendix document.

4.2 Frequency analyses

During the interview and annual report analysis many factors (twenty-two) are coded that seem

to influence the internationalization of O&G SOEs. Some of these factors appear frequently in

the data, while other factors are rarely mentioned. The frequency of each factor is compared

between sources thru a frequency analysis on both the interview and annual report data (table;

2, 3, 4, page; 29, 30, 31). The most frequently mentioned factors are expected to be more

reliable, and to more commonly influence the internationalization of O&G SOEs. Therefore,

this thesis only moves ahead with the most frequently mentioned factors, meaning factors with

a frequency score of five or higher across all three frequency tables. The most common factors

are revealed below. However, due to space constraints these factors won’t be explained in 4.2,

instead they are further explained in the next step, chapter 4.3.

29

The frequency analysis shows that the factor ‘macroeconomic’ has a full frequency score in

both the interviews and annual reports. Moreover, ‘financial’ and ‘non-financial government

support’, and ‘importance to the governmental budget’ have a high score of at least seven

across all the data sources. Next, with a score of at least six, are ‘long-term view of the

controlling shareholders’ and ‘inter-government tie strength’. Last, scoring at least five, are

‘political conflict between the home/host country’, ‘discrimination in the host country’, and

‘home government foreign policy goals’. However, a few influencing factors appear to have

components that overlap. For that reason, the factors ‘financial’ and ‘non-financial’

government support and merged into ‘government support’, ‘inter-government tie strength’

and ‘perceived reliability as supplier’ are merged into ‘inter-government tie strength’, and

‘political conflict between home/host country and ‘sanctions’ are merged into ‘intra country

political conflict’. The next section analyses the remaining factors via a cross-case analysis.

Table 2 - Frequency analysis of possible factors influencing the internationalization of O&G SOEs (Source: Interviews

conducted by the author). Point of notice: Manager 1-4 work for [Case 1]and managers 5-8 for [Case 2].

30

Table 3 - Frequency analysis of possible factors influencing the internationalization of O&G SOEs (Sources: [Case 1] annual reports 2010-2018; author). To conserve space financial’ and ‘non-

financial government support’ are merged into ‘government support’ and, ‘(..)government tie strength’ and ‘perceived reliability as supplier’ are merged into ‘inter-government tie strength.

31

Table 4 - Frequency analysis of possible factors influencing the of O&G SOEs (Sources: [case 2] annual reports 2010-2018; author). To conserve space financial’ and ‘non-financial government

support’ are merged into ‘government support’ and, ‘(..)government tie strength’ and ‘perceived reliability as supplier’ are merged into ‘inter-government tie strength.

32

4.3 Cross-case analysis

The cross-case analysis is a research method that makes the comparison of commonalities of

cases from different settings easier (Khan & VanWynsberghe, 2008). The abovementioned

eight frequently mentioned factors are used in this cross-case analysis. The results of this

analysis are shown in table 5 (p. 33/34). This table displays the most important findings from

each interview for each of the eight most frequently scored factors: Macro-economic,

government support, intra country political conflict, importance to the governmental budget,

long-term view of the controlling shareholders, inter-government tie strength, discrimination

in the host country, and home government foreign policy goals. Appendix III shows the

illustrative quotations of the identified factors per interviewed manager, and appendix IV

shows the illustrative quotations for the annual reports.

It is important to note that only the primary interview data is used in the cross-case analysis.

The reason being that the eighteen analyzed annual reports follow a very similar structure,

namely the international financial reporting standards (IFRS), with terminology and

information that is mostly repeated over the years. It is therefore logical to assume that

communalities exist between the cases based on annual report data. On the other hand, the

interviews are a more diverse and unpredictable body of information. Therefore, it is

considered appropriate to focus the cross-case analysis solely on the interview data, so as to

establish whether communalities between the cases also exist in non-regulated data.

33

Factor M#1 M#2 M#3 M#4 M#5 M#6 M#7 M#8

Macro-

economic (+/-)

Demand;

Price;

Demand; small

margins; price;

expensive to

transport;

Price; market

stability;

Vulnerable

market

share;

Demand;

Supply;

Growth;

demand;

price;

Growth; demand;

price;

Small margins;

price; geographic

distance; demand;

supply;

Growth;

demand;

price;

Government

support (+)

Help;

supportive;

Tax exemptions;

legislative

support; easier

border

crossings;

Loan; Grants; tax

incentives;

diplomatic

weight;

guarantee;

Loan; loss

compensation

Venezuela;

network;

legislative;

permitting;

Loan; loss

compensation;

legislative support;

permitting;

Loan; network;

help with initial

steps;

Loan; tax

exemptions;

diplomatic

weight;

Intra country

political

conflict (-)

Fear;

unreliable

supplier;

tension;

negative

pressure; less

export

potential;

Geopolitical

ambitions;

sanctions;

threat; Conflict

with West not

East;

Fear;

dangerous;

geopolitical

ambitions;

obstacle;

costs;

Sanctions;

Conflict with

West not

East.

Sanctions;

take over

marketing

Venezuela;

No access trading

platforms;

sanctions; costs;

diversify;

Sanctions; negative

impact; fear;

Tension;

sanctions;

unpredictable

Importance to

the

governmental

budget (+)

Large

taxpayer;

remove

middleman;

Large taxpayer;

development of

economy;

Large

taxpayer;

jobs; future

tax income;

most profits

from exports

Large

taxpayer;

national

budget; keep

customer

base;

Large taxpayer;

national budget;

business is politics;

Achilles heel; Most

profits from exports

Large taxpayer;

Mandated

oligopoly; most

profits from

exports;

Large

taxpayer;

national

budget;

diversify;

Long-term

view of the

controlling

shareholders

(+)

Health of the

industry; long-

term

profitability;

Large

projects;

long time-

horizon;

expected

market

development;

Developing

countries;

time-horizon;

expected

market

development;

Health of the

industry; optimize

processes; large

projects;

Long-term strategy;

health of the

industry; large

projects;

Rights to

reserves;

security;

long-term

strategy;

large

projects;

34

Inter-

government

tie strength (+)

Trust; security

of supply;

state

guarantee;

political

involvement;

Good

relationships;

trust; need

partners;

Reliability;

security of

supply;

political

sensitivity;

trust; good

relationships;

Business

first;

openness;

good

relationships;

trust;

Trust; president

present; reliability;

security of supply;

Reliable;

deteriorating

Western

relationships; trust;

Russian

reputation;

reliability;

duty; good

relationships;

Discrimination

in the host

country (-)

Resistance;

environmental;

threat to

democracy;

Nord Stream

II;

Image;

football

sponsorship;

resistance;

Image;

resistance;

perspective;

Western countries;

image state-

ownership; political

tool; unfair

perception;

Distrustful;

motives; image;

state-ownership;

Protest;

social

investments;

image;

Home

government

foreign policy

goals (+/-)

Financial

independence;

Pressure

Ukraine;

Sphere of

influence.

Diplomatic

maneuverability;

dependence

European

customers;

flexibility.

Different

objectives

among

partners;

clashing

interests;

Former

Soviet

Countries;

Sphere of

Influence;

Russian

dependence;

unprofitable;

Russian

dependence;

financials;

Forced

internationalization;

unprofitable

Sphere of

influence; Russian

dependence; forced

internationalization;

unprofitable;

Risk; non-

monetary

value;

unprofitable;

Table 5 - Cross case analysis (source: author). The left side of this table showcases the eight most frequently mentioned factors. The other boxes indicate, per manager, the coded interview

information that related to the respective factor. For example, in the interview with manager 1 the importance of both demand and price developments is coded, these codes are categorized under

the factor macro-economic. Most other interviewees had similar responses for this factor, denoting cross-case similarity. This table thus helps to understand whether (dis)similarity exists among

the interviewee responses in relation to each factor and thus the reliability of each factor, as well as whether the factors have a positive or negative influence.

35

Macro-economic

The cross-case analysis shows that all eight managers mention that macro-economic elements

have a significant influence on SOE internationalization. As mentioned by the managers, this

influencing factor can affect the internationalization process both positively and negatively.

The demand for the product in the host country has a large effect on the internationalization

process according to numerous managers. When the demand is relatively low, this often has a

negative influence on the process. The managers explained that transportation of O&G

products is expensive and that margins in the industry are low. Subsequently large volumes

must be sold to compensate for these industry characteristics. Furthermore, price stability in

the host country was also mentioned as an important macro-economic element. The

explanation being that significant investments in infrastructure must be made in order to export

O&G to a foreign country. These investments, manager three clarifies, are only worthwhile if

the market is expected to have a stable price level over a certain time-period. The manager

states that Germany had such a stable price level, whereas the U.K did not. As a result [Case

1] did not extend the Nord Stream to the U.K market. On the contrary, countries with a large

population base and a rapidly industrializing economy, such as China, make a good

internationalization target according to the interviews. One of the arguments being that it is

easier to obtain market share while an economy is growing, then once it is saturated. As a

result, numerous managers stated that it is important to look at developing countries in the

internationalization process. Thus, the macro-economic conditions in the host country are

important for successful O&G SOE internationalization. The demand and price level, and

future growth expectations determine the extent of resource allocation in a host country. Table

6 (p. 35) shows some illustrative quotes from managers at Russian O&G SOEs.

Table 6 - Influencing factor macro-economic - illustrative quotations (source: author).

36

Government support

All eight managers mention that government support, both financial and non-financial, is

crucial to their firms’ internationalization process. The interviewees explain that financial

support, such as tax exemptions, facilitates expansion into countries that in the short term are

less profitable but are expected to overtime develop into lucrative markets. Moreover, manager

six argues that financial state-support is a must because Russian O&G SOEs face more

international pressures than private firms, and this must be compensated for to stay

internationally competitive. Because of these pressures as well as other elements, multiple

managers also mention that non-financial government support, such as diplomatic protection,

is important. Having diplomatic support, the interviewees explain, significantly reduces the

risk of opportunistic behavior by foreign partners, as well as political risks such as

appropriation of the SOE’s assets by the host country. Even though financial and non-financial

support have been mentioned and coded as separate factors, they can be merged into one factor

because both illustrate a form of support given by the home government. The quotes shown in

table 7 (p. 36) highlight the importance of the factor government support in SOE

internationalization.

Table 7 - Influencing factor government support – illustrative quotations (source: author).

Intra-country political conflict

Another factor mentioned by all eight managers, and several annual reports, is intra-country

political conflict. A political conflict between the home and host country negatively contributes

to the internationalization process of an O&G SOE. One explanation given by the interviewees

is that fixed infrastructural assets, such as pipelines, are necessary to economically export

O&G. These assets can cross multiple countries, and cannot easily be relocated. Therefore, a

political conflict could motivate a transit (host) country to pressure the home country by

37

denying home country SOEs access to the infrastructure. Such an action by a transit (host)

country would severely limit the SOE’s export potential to not only the host country, but all

other markets connected to that infrastructure. Moreover, the interviews and annual reports

highlight that a political conflict between Russia and the U.S. and EU resulted in the latter

countries placing sanctions on Russian SOEs, including those in the O&G industry. This had

a large negative effect on the internationalization of these SOEs, as illustrated by the significant

decrease in Russian oil and gas exports to Europe following sanctions (appendix V). While

political conflict and sanctions are coded as distinct factors, it is appropriate to merge them into

one factor because they have very similar characteristics. The strong negative relationship

between intra-country political conflict and the international process of an O&G SOE is

illustrated by the quotations in table 8 (p. 37).

Importance to the governmental budget

One more relevant factor is the importance of the SOE to the governmental budget, as stated

by seven managers and most annual reports. When a SOE is an indispensable taxpayer, which

O&G SOEs often are, it is in the government’s interest to ensure that these SOEs can generate

sufficient taxable future revenues. Consequently, the managers argue, that such governments

turn their O&G industries into monopolies or oligopolies, to ensure higher prices and maximum

returns. Moreover, a lack of domestic competition enables the SOEs to allocate more attention

and resources to internationalization. The importance of O&G gas SOEs to a country’s national

Table 8 – influencing factor intra-country political conflict – illustrative quotations (source: author) Table 8 – influencing factor intra-country political conflict – illustrative quotations (source: author).

38

budget also cause the controlling government to push for geographic diversification so as to

safeguard tax income. By influencing their O&G SOEs to internationalize more aggressively,

governments seek to achieve steadier and more predictable cashflows. The managers thus

indicate that a driving factor of O&G SOE internationalization is not only to generate more

taxable revenues, but also to increase the stability of cashflows going into the national budget.

Table 9 (p. 38) shows several quotations from managers and annual reports that highlight the

positive relationship between the importance of a SOE to the governmental budget and SOE

internationalization.

Table 9: influencing factor importance to the governmental budget – illustrative quotations (source: author)

Long-term view of the controlling shareholders

The long-term view of the firm denotes the objectives that a firm seeks to achieve over a

lengthier period of time. According to six managers, being able to strategize for the long instead

of short-term is in many cases an important factor for O&G SOE internationalization. Having

more time to conceptualize strategies, optimize processes, and develop partnerships creates a

stronger foundation on which to build international activities. Moreover, some managers

mention that O&G SOEs in resource rich countries are ensured of long-term access to resource

reserves. This removes the risk of having to renegotiate access rights to key O&G reserves, a

risk which often pushes private firms to focus on short term profit maximization. The stable

long-term access to resources lowers the risk profile of O&G SOEs, enabling them to invest in

long-term projects, such as pipelines or LNG ports which facilitate economies of scale and

therefore make exporting more profitable. See table 10 (p. 39), for several quotations from

managers and annual reports regarding the importance of having a controlling shareholder with

a long-term view for SOE internationalization.

39

Table 10: influencing factor long-term view of the controlling shareholder – illustrative quotations (source: author).

Inter-government tie strength

The inter-government tie strength is another crucial influencing factor according to six

managers and all analyzed annual reports. This factor describes the strength of the relationship

between the SOE’s home country and the host country. According to the interviewees, buyers

of O&G prefer to buy from organizations which they trust to reliably supply their energy needs.

For the reason that O&G are of strategic importance to their economies. Therefore, exporting

O&G to a country which has a good relationship with the SOE’s home country is easier, as this

existing inter-governmental relationship is extended to the SOE. Moreover, some interviewees

argue that it is important for O&G SOEs to also develop their own foreign relations in addition

to the government’s existing interactions. This is supported by the annual reports, which show

that both [Case 1] and [Case 2] invest in foreign representative offices and self-styled

diplomatic activities. The value of inter-government tie strength to O&G SOEs is illustrated in

table 11 (p. 40).

40

Table 11: influencing factor inter-government tie strength – illustrative quotations (source: author).

Discrimination in the host country

Another notable influencing factor is discrimination in the host country, mentioned by six

managers. While negative attitudes are already strong towards O&G firms in general, as the

public sees these firms as producing large amounts of negative externalities. The interviewees

mention that being a state-owned O&G firm worsens the existing perceptions and causes

additional ones to arise, such as being seen as a political tool. O&G SOEs thus need to

undertake extra actions to better their image and mitigate discriminatory attitudes in the host

environment. Examples of such activities, as stated by the interviewees, are sponsoring local

soccer teams as well as including foreign nationals in the board of directors. Thus,

discriminatory behavior in the host country has a negative effect on the internationalization of

O&G SOEs, but social activities and executive diversification can partly mitigate this. Table

12 (p. 40) shows quotations from managers on this topic.

Table 12: influencing factor discrimination in the host country – illustrative quotations (source author).

41

Home government foreign policy goals

All eight managers, and most annual reports, consider home government foreign policy goals

to be a vital influencing factor. Similar to private firms, SOEs focus on creating value for their

shareholders. Yet, according to several managers, the government as a shareholder does not

always define value creation in monetary terms. Instead the government can consider the

accomplishment of foreign policy goals through its SOE as value creation. This is especially

the case for O&G SOEs as they operate in a strategic industry. Accordingly, the managers

mention that their firms have internationalized for non-monetary value creation. In this sense

home government foreign policy goals have a positive influence on SOE internationalization

as they push the firm to expand abroad. However, the managers also brought up that pursuing

such foreign policy goals, for instance in Venezuela, clashed with the interests of other

countries and therefore had a negative effect on their overall internationalization potential. The

views of the managers on the relationship between home government foreign policy goals and

O&G SOE internationalization are shown in table 13 (p. 41).

Table 13: influencing factor home government foreign policy goals – illustrative quotations (source: author).

4.3.1 Concluding remarks on findings

Through the cross-case analysis several influencing factors have been identified. As stated

before, SOEs that operate in the O&G industry are unique. Therefore, these SOEs are expected

to have additional factors influencing their internationalization compared to those SOEs in

other industries (Marcel, 2016). The recognized influencing factors, macro-economic, intra-

country political conflict, and government support have already been explored in the extant

O&G SOE internationalization literature. The existing literature shows that these three factors

42

are important and influence the internationalization of O&G SOEs. The interviewees and

annual reports also acknowledge the importance of these factors to the internationalization of

O&G SOEs. With this in mind, the focus of the analysis is on the newly identified influencing

factors. Which are, importance to the governmental budget, long-term view of the controlling

shareholder, inter-government tie strength, discrimination in the host country, and home

government foreign policy goals. Seeing as these influencing factors have not yet been

discussed in the literature on the internationalization of O&G SOEs.

43

5. ANALYSIS

Throughout this chapter the analysis of the collected data is clarified. Multiple factors are

recognized and examined. First, the recognized factors on the internationalization of O&G

SOEs are analyzed through proposition development. Second, a conceptual model is developed

from these propositions to more clearly showcase the relationship between the independent

variables and the dependent variable.

5.1 The influencing factors

The factors that were identified to influence the internationalization of O&G SOEs are

discussed below. These factors are importance to the governmental budget, long-term view of

the controlling shareholder, inter-government tie strength, discrimination in the host country,

and home government foreign policy goals. These factors have a special influence on O&G

SOEs due to the unique nature of these firms. As a result, five propositions are posed.

5.1.1 Importance to the governmental budget

Most managers experienced an influence to internationalize because their O&G SOE is an

important contributor to the governmental budget. From the point of view of the home

government, the managers see that internationalization is an opportunity to mitigate budgetary

vulnerabilities. These days many firms embrace geographic diversification, to, among other

things, reduce their financial dependence on a few key clients. When a firm is financially

dependent on a few clients it follows that these clients have a relatively large amount of

bargaining power. Since the Russian O&G industry gets most profits from exports to Germany

and Turkey, it can be reasoned that these countries have a strong bargaining position vis-à-vis

Russian O&G SOEs. Even so, a mutual dependence initially ensured a balance of power

between Russian O&G SOEs and their key markets. Yet, the rise of renewable energy, and

liquefied natural gas exports (LNG) from America and Qatar have shifted the balance of power

to favor customer countries. Since the Russian government needs tax revenues from O&G sales

to ensure national stability, the bargaining power of key customer countries can be expected to

also extend to the Russian government. This could have a negative effect on Russia’s national

stability, as key customer countries can use their bargaining power to pressure the Russian

budget. Thereby endangering Russian national stability by making less tax funds available for

key sectors such as healthcare. Therefore, O&G SOEs find themselves between two conflicting

objectives. They must internationalize to profitable countries to maximize their contribution to

44

the national budget; however, they do not want to be financially dependent on these countries.

Therefore, the importance of O&G SOEs to the national budget makes geographic risk

diversification a necessity, according to several managers. The diversification of risk is also a

concern for SOEs in other industries, albeit for different reasons (Schneider, 2009). For

example, the Chinese State Grid Corporation conducted product diversification (fossil and

renewable energy) to improve the reliability of the national energy supply (Baker Tilly China,

2019).

While the role of the governmental budget in (O&G) SOE internationalization is not

extensively discussed in the extant literature. Contemporary research has found that

governments, in general, are gradually seeking to diversify their income streams (Jensen, 2018;

Prichard, Salardi, & Segal, 2018). As stated by Narayan (2005), diversified income streams

make it easier for governments to invest in the long-term development of key areas, such as

schooling and healthcare, as budgetary risk is lower. Furthermore, governments with low-risk

income streams have higher credit ratings, which reduces the cost of capital, thereby

stimulating innovation and entrepreneurship in the national economy (Elkhoury, 2009). It thus

stands to reason that when O&G SOEs contribute significantly to the governmental budget,

geographical diversification of these firms increases the welfare of the home country. Thus, a

positive relationship is identified between the importance of an (oil and gas) SOE to the

governmental budget and its internationalization. These findings are similar to those of this

thesis, that is to say that with an increasing tax burden comes a positive influence for O&G

SOEs to internationalize. This gives reason to propose the following:

Proposition 1: The greater the importance to the governmental budget, the higher the stimulus

for an oil and gas SOE to internationalize.

5.1.2 Long-term view of the controlling shareholder

The factor long-term view of the controlling shareholder alludes to the time-period within

which shareholders expect the SOE to achieve its strategic objectives. Such as, the time-span

within which an international project must become profitable. O&G SOEs are unique in this

regard because they require static infrastructure, such as pipelines and LNG ports, for

internationalization. As a result, the time before an international project starts generating profit

increases with the geographic distance between the home and host country. For example,

Russian gas exports to Northern China require 3000 kilometres of pipeline to be built, which

45

is expected to take six years. This denotes that long-distance O&G internationalization projects

cannot be profitable in the short-term. Giving reason to believe that O&G SOEs whose

controlling shareholder has a short-term view are encouraged to only internationalize to

countries geographically close by. Correspondingly, it can be argued that having a controlling

shareholder with a long-term view positively influences O&G SOE internationalization,

because it provides the firm with a larger array of possible host countries. Moreover, the

interviewees mention that the Russian O&G industry is oligopolistic by design to achieve the

government’s desired price stability over the long-term. As a result of this long-term view,

domestic competitive pressures are artificially kept low. This gives reason to believe that,

having a government owner with a long-term view enables a SOE to have more resources

available for internationalization, because, these resources are not needed to fend of domestic

competition. The interviewees thus indicate that O&G SOE internationalization benefits from

having a controlling shareholder with a more long-term view, as it enables farther expansion,

as well as make available more resources for internationalization.

A few scholars have already studied the relationship between the time horizon of the

controlling shareholder and firm internationalization, albeit not for O&G SOEs (Liu, Li, &

Xue, 2011; Tsao & Chen, 2012). García-García, García-Canal, & Guillén (2017) deliberate

how the desire for short-term returns influences internationalization. Their study emphasizes

that focusing international expansion solely on achieving short-term goals makes the project

unlikely to succeed. For the reasons that, over a short time period, strategies cannot easily be

adapted, unexpected setbacks cannot be mitigated, and local relationships are either non-

existent or poorly development (Liu et al., 2011). This thesis adds to the aforesaid that O&G

SOEs whose controlling shareholder has a long-term view are not limited to the near abroad in

their internationalization, and are likely to have more resources available for international

expansion. In view of the aforementioned and the relation that has been found in this thesis, it

gives reason to believe that the time-horizon of the controlling shareholder has an especially

strong influence on the internationalization of O&G SOEs. Thus, it can be concluded that a

controlling shareholder with a long-term view has a positive influence on the

internationalization of O&G SOEs. This brings about the following proposition.

Proposition 2: The more long-term the view of the controlling shareholder, the higher the

stimulus for an oil and gas SOE to internationalize.

46

5.1.3 Inter-government tie strength

Inter-government tie strength is a frequently mentioned influencing factor in both the

interviews and annual reports. Inter-government tie strength indicates the level of trust, and the

strength of the relationship, between the SOE’s home country and the country to which it wants

to internationalize. At present the international business literature conceptualizes the strength

of a relationship as being only between companies (Mitrega & Pfajfar, 2015; Turnbull, Ford,

& Cunningham, 1996). This thesis, however, found that this is different for O&G SOEs. The

likely source of this difference is the strategic nature of O&G products. The managers mention

that, to minimize the strategic exposure of the nation, importers of O&G prefer to work with

countries with which they have good relationships and trust to be reliable suppliers. This

suggests that O&G SOEs built relationships not only through their own interactions with

businesses in the host environment overtime, but also through interactions between home and

host country actors. This gives reason to believe that an O&G SOE can more easily

internationalize to a country which has a strong relationship with the home country, as this

relationship is extended to the SOE. This is further supported by the interviewees emphasizing

that it is beneficial for O&G SOEs to complement the existing foreign relations of the home

government. By, for example, investing in foreign representative offices. In view of the

aforementioned and the relation that has been found in this thesis, it gives reason to believe

that inter-government tie strength has an influence on the internationalization of O&G SOEs.

Thus, it can be concluded that a stronger inter-government tie strength positively influences

the internationalization of O&G SOEs. Thus, it is proposed that:

Proposition 3: The stronger the inter-governmental tie strength between the home and host

country, the higher the stimulus for an oil and gas SOE to internationalize.

5.1.4 Discrimination in the host country

Discrimination indicates the extent to which a firm is treated differently, in the negative sense,

compared to other firms that operate in the same environment. Most of the interviewees, and

annual reports, mention that discrimination in the host country has as large influence on the

internationalization of oil and gas SOEs. Within the extant literature it is argued that as a firm

gets more integrated into the host environment, discriminatory pressures towards that foreign

firm diminish (Johanson & Vahlne, 2009). This is also called the think global, act local

phenomenon (Anderson, Graham, & Lawrence, 1998). To minimize discrimination a firm must

thus adjust its behavior to local standards. According to the interviewees, O&G SOEs attempt

47

this by sponsoring local football teams, natural parks, and social events. While for other

industries such activities are often enough to overtime be considered a local (Attig, Boubakri,

El Ghoul, & Guedhami, 2016), the polluting nature of the O&G can be assumed to lessen the

impact of these efforts. This gives reason to believe that O&G firms see discriminatory

pressures diminish more slowly overtime, making internationalization tougher. Furthermore,

the interviewees explain that being a (Russian) SOE adds to the existing discriminatory

pressures. Because, locals extend any animosity towards the SOE’s home country to the SOE

as well. Additionally, the opaque nature of SOEs makes it more difficult for locals to trust

foreign SOEs (Li et al., 2019). This may suggest that there always exists a base level of

discriminatory pressures towards SOEs, which cannot be mitigated. Therefore, this thesis adds

to the extant literature that O&G firms, compared to other industries, are more slowly accepted

as local, and that this is worsened for SOEs because they are unlikely to ever completely off-

load discriminatory pressures (visualized in appendix VII). Thus, in view of the

aforementioned and the relation that has been found in this thesis, it gives reason to believe

that discrimination in the host country has an especially strong influence on the

internationalization of O&G SOEs. Thus, it can be concluded that stronger discriminatory

pressures in the host country negatively influence the internationalization of O&G SOEs.

Therefore:

Proposition 4: The stronger the discriminatory pressures in the host country towards the home

country, the lower the stimulus for an oil and gas SOE to internationalize.

5.1.5 Home government foreign policy goals

Interviewees from both cases mention that their internationalization decision making seeks to

achieve, most of all, value generation for shareholders. Value generation signifies the extent to

which a firm produces benefits for its shareholders. In the business literature, international

value generation is generally considered in monetary terms (e.g. Christophe & Lee, 2005;

Green, 2012). However, recent publications argue that SOEs also internationalize for non-

monetary value generation (Duanmu, 2014; Ramasamy et al., 2012). This non-monetary value,

the scholars argue, is generated by obtaining, and subsequently transferring foreign best

practices to the home country. However, according to the interviewees, O&G SOEs are capable

of generating non-monetary value in a unique way, because they operate in both a lucrative

and strategic industry. This gives reason to believe that O&G SOEs are capable of generating

non-monetary value in different ways than SOEs in other industries. For instance, [Case 1]

48

generated (geo)political value for the home government by providing financial support to

Venezuela, a strategic partner of the home country. While [Case 2] made the host

environment’s energy needs dependent on the SOE’s technologies and capabilities. Thereby

keeping the host country in home country’s sphere of influence. Therefore, home government

foreign policy goals can be said to have a positive influence on the internationalization of O&G

SOEs, because it provides other, non-monetary reasons for O&G SOEs to internationalize.

Despite this, the managers also mention that home country foreign policy goals can have a

negative influence on the ability of an O&G SOE to internationalize. Particularly, they mention

that O&G SOEs make for easy pressure points for non-home countries, due to them being of

both strategic and economical importance to the home country. In the words of one manager,

‘oil and gas SOEs can be considered the achilleas heel of many a country’. An example of the

international community targeting this achilleas heel are the sanctions on Russian O&G SOEs

following the Russian annexation of Crimea. This gives reason to believe that conflicting

foreign policy goals between the home country and the larger international community have

an especially strong negative influence on O&G SOE internationalization. Thus, this thesis

adds to the extant literature that O&G SOEs are unique in their ability to generate international

non-monetary value in the (geo)political domain. And that O&G SOEs are more susceptible to

international political pressures than SOEs in other industries. In view of both the

aforementioned relations, it gives reason to believe that home government foreign policy goals

have both a strong positive and negative influence on the internationalization of O&G SOEs.

This argumentation leads to the following propositions:

Proposition 5a: The higher the possibility of achieving home government foreign policy goals

in the host country, the higher the stimulus for an oil and gas SOE to internationalize.

Proposition 5b: The more dissimilar the home government foreign policy goals to those of the

host country, the lower the stimulus for an oil and gas SOE to internationalize.

49

5.2 Conceptual model

The relation of the identified influencing factors to the internationalization of O&G SOEs is

portrayed in the conceptual model (figure 2, p. 49). In this conceptual model O&G SOE

internationalization is the dependent variable, whereas the identified influencing factors are

independent variables. As previously discussed, an increase in the factor in question will have

either a positive or negative effect on internationalization of O&G SOEs.

Figure 2: Conceptual model (source: author).

50

6. CONCLUSION

6.1 Conclusion & discussion.

In this chapter the findings of this thesis are discussed, and the conclusion of the research is

given. This research focuses on the internationalization of Russian O&G SOEs. Since most of

the extant literature solely studied factors influencing SOE internationalization in general, this

thesis focuses on one industry, O&G, to create a better understanding of industry effects on

SOE internationalization. More specifically, Russian O&G SOEs were chosen, because, they

are considered extreme cases which make relevant factors more visible. The research was

carried out through an explorative qualitative dual-case study. The two cases, and the related

interviews and annual reports, offer novel insights to the SOE internationalization literature.

Trough the findings of this thesis, the following research question is answered:

‘Which factors influence the internationalization of state-owned Russian oil and gas firms?’

This thesis identified eight important influencing factors. Three of these factors, namely,

macro-economic, government support, and intra-country political conflict, were already

discussed in the literature review. Denoting that five new factors influencing the

internationalization of Russian O&G SOEs have been identified. This thesis shows that

‘importance to the governmental budget’, ‘long-term view of the controlling shareholder’, and

‘inter-governmental tie strength’ have a positive influence. Whereas ‘discrimination in the host

country’ has a negative influence. The factor ‘home government foreign policy goals’, was

found to have both a positive and negative influence on the internationalization of Russian

O&G SOEs. These newly identified influencing factors are particularly exciting for the study

of O&G SOE internationalization in general. Because, the homogenous purpose of national

O&G companies (Jaffe, Wilson, & Baker, 2007) makes it likely that the findings of this thesis

apply to other more common cases as well. It is, however, expected that these influencing

factors are more visible in the selected cases due to their extreme nature.

This thesis postulates that, akin to private firms, industry effects have an important influence

on SOE internationalization. This is especially true for the O&G SOEs, because they operate

in a strategic industry (Duanmu, 2014). Thus, as identified in this thesis, O&G SOEs have

additional advantages and disadvantages to internationalization. One advantage being the

often-long-term view of a government owner. This enables O&G SOEs to invest in capital

intensive assets (e.g. pipelines), with longer pay-back periods, that are necessary to export

51

O&G farther away. Moreover, the strategic nature of O&G products makes it that customer

countries prefer to buy from countries which they trust to be reliable suppliers. Therefore, when

the inter-government tie strength between the home and host country is strong, it is likely that

this relationship is extended to the SOE, making internationalization easier. This is interesting,

as studies on the internationalization of SOEs in different industries do not mention inter-

governmental relationships as being of importance (e.g. Bass & Chakrabarty, 2014; Ren et al.,

2019).

Another effect of operating in a strategic industry, is that, whether they’d like it or not, O&G

SOEs are useful tools in the game of foreign policy (Collins & Botts, 2017). This stimulates

internationalization because O&G SOEs, more so than SOEs in other industries, are able to

generate non-monetary value in the (geo)political domain. The studied cases, for instance,

internationalized to Venezuela and Central Asia, not merely for monetary gains, but also to

generate (geo)political value for the home country. On the other hand, when a SOE is

considered a foreign policy tool, it more easily becomes a target for countries that want to

pressure its home-country. This pressure, for the studied cases, took the shape of sanctions,

which severely limited the SOEs their ability to conduct business internationally. Another

disadvantage O&G SOEs face when internationalizing is that they are perceived as producing

many negative externalities in the host environment, making the process of obtaining local

acceptance slower compared to SOEs in other industries. Moreover, it was found that SOEs in

general are seen as opaque, and that locals are likely to extend any animosity towards the SOE’s

home country to the SOE as well. As a result, it is expected that SOEs can never completely

get rid of discriminatory pressures in the host country. Thus, this thesis found that the stronger

the discriminatory pressures in a host country, the lower the stimulus for an O&G SOE to

internationalize to said country. Because, the SOE will be unable to mitigate these pressures.

To conclude, the stimulus for an O&G SOE to internationalize to a certain country depends on

multiple factors identified in both the interviews and annual reports. Yet, the role of the home

country appears to be critical in this process. More specifically, the (geo)political ambitions of

the home country seem to indicate the outcome of the internationalization decision making

process of an O&G SOE.

52

6.2 Theoretical implications

To start, this thesis found that the greater the importance of an O&G SOE to the governmental

budget, the higher is the SOE’s stimulus to internationalize. The novelty of this finding is that

O&G SOEs seemingly internationalize more to improve the stability of the national budget

than to maximize contributions to this budget. Thereby indicating that governments as owners

seek stability over profitability from O&G SOE internationalization. This finding challenges

the existing literature, in which it is predominantly argued that SOEs internationalize to

improve profitability or to obtain and transfer foreign best practices and resources back to the

home country (e.g. Cuervo-Cazurra et al., 2014; Duanmu, 2014; Ramasamy et al., 2012).

Another finding is that the more long-term the view of the controlling shareholder, the higher

is the stimulus for an O&G SOE to internationalize. Simply put, the static infrastructure

necessary to export O&G is expensive, and thus seems to limit O&G SOEs to the near abroad,

unless the shareholder accepts projects with a longer payback period. This finding is novel in

that it identifies a relationship between the expected payback period of an investment and the

distance that an O&G SOE can internationalize. Contradicting, several studies argue that

government support lowers risk, and that therefore SOEs have a more global pathway to

internationalization (e.g. Ramasamy et al., 2012). This thesis partly challenges this view, by

arguing that (Russian) O&G SOEs are unique in their predominantly regional pathway to

internationalization.

This thesis also found that inter-governmental tie strength influences O&G SOE

internationalization. The novelty of this finding is that it seems that O&G SOEs not only built

the relationships necessary for internationalization through their own interactions with the host

environment overtime, but also through interactions between home and host country actors.

This is interesting because the extant IB literature does not consider the possibility of

relationships trickling down from the governmental to the SOE level. This thesis thus extends

how we understand O&G SOE internationalization by postulating that O&G SOEs develop

their international relationships both directly and indirectly.

One more finding of this thesis is that discriminatory pressures in the host country have an

especially negative effect on (O&G) SOEs. Specifically, this thesis contributes to the literature

that SOEs can only lower discriminatory pressure to a certain level, and that this process is

53

slower for O&G SOEs. This challenges the existing view of Johanson & Vahlne (2009), whom

argue that firms can overtime completely reduce psychic distance by learning from and

adapting to the local environment. This is interesting as it brings about another argument for

why the internationalization of SOEs is a distinct topic worthy of its own research.

Lastly, this thesis found that foreign policy goals of the home country affect O&G SOE

internationalization. More specifically, the ability to generate non-monetary value by pursuing

home country foreign policy goals appears to motivate O&G SOEs to internationalize. This

finding stresses the role of politics in O&G SOE internationalization. While the extant literature

already argues that politics influences SOE internationalization (Schneider, 2009), this thesis

extends this view, by highlighting the unique ability of O&G SOEs to generate international

non-monetary value in the (geo)political domain.

6.3 Managerial and policy implications

This thesis, in addition to having theoretical implications, also has managerial relevance. To

start, managers at O&G SOEs that seek to expand beyond the near abroad stand to benefit from

accepting longer payback periods. Doing so would enable the SOE to engage in the

infrastructural development necessary to reach markets farther away. It also appears that

managers at O&G SOEs can benefit from lobbying the home government. More specifically,

lobbying the home government ministry of foreign affairs so as to motivate it to allocate more

resources to develop inter-governmental relationships with potentially lucrative host countries.

This is likely to improve the SOE’s standing in the host environment, subsequently aiding

internationalization. Lastly, policy makers of O&G importing countries should be aware that

suppliers might also seek to generate (geo)political value from exports. To combat this, policy

can be written, when possible, to require business involvement of the importing country (share

in the project). Thereby creating a mutual hostage situation. This could disincentivise the

foreign O&G SOE to behave opportunistically in the (geo)political domain.

6.4 Limitations

Even though a thorough approach was taken, this thesis still has some weak spots. To start, the

research method of conducting interviews is subject to some limitations. Because the

qualitative nature of interview data causes the results to be dependent on the how the researcher

interprets the data (Moeckli, 2011). This limitation, however, was somewhat mitigated by also

54

analyzing annual reports, which provided a basic background with which to compare the

interview data. However, cross-referencing interviews on a sensitive topic with official annual

reports might mean that not all findings from the interviews are also found in the reports.

Moreover, cultural and linguistical differences between the researcher (Dutch) and

interviewees (Russian) could have caused misunderstandings to occur, rendering data less

reliable. Still, this was largely mitigated by asking confirmatory questions and carefully

transcribing the interviews. On a different note, the secretive nature of Russian O&G SOEs

could have caused interviewees to leave out certain pieces of information during the interviews,

limiting reliability. Another limitation of this study is its limited time-frame. Identifying

relevant interviewees, conducting interviews, and analyzing interview data requires a lot of

time. Because of these time-constraints, only a small, country specific sample could be studied.

Solely managers from Russian O&G SOEs are asked about their experiences. Thus, even

though the selected cases are of an extreme nature, the generalizability of this thesis’s findings

should be met with healthy skepticism. Because of this, future research should focus on

studying a larger sample, consisting of O&G SOEs from multiple countries.

6.5 Future research

Several avenues for future research emerge from the findings of this thesis. First, this thesis

shows that (Russian) O&G SOEs have other, additional factors influencing their

internationalization. To examine these influencing factors further, forthcoming research could

use a larger sample consisting of O&G SOEs from various countries. This way it can be

established whether the identified influencing factors are strictly generalizable, or if

adjustments need to be made based on the characteristics of the SOE’s home country.

Additionally, future research could study the identified relationships further through

quantitative data. What’s more, the finding that (O&G) SOEs can only lower discriminatory

pressure to a certain level gives reason to believe that psychic distance effects SOEs differently.

Future research should further explore this finding by studying the relationship between

psychic distance and SOE internationalization. Lastly, the finding that inter-governmental tie

strength has a large impact on how an O&G SOE is perceived, brings into question how much

control an SOE has over its own image. Future research should therefore study whether SOEs

can shape their own brand, or if their image is a merely a perpetual reflection of the home

country.

55

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APPENDICES

APPENDIX I: Interview questions

Interviewee background:

Name:

Company:

Function:

Introductory comments to make:

• Thank you for taking time out of your busy schedule to partake in this interview. Ask

if it is okay for the interview to be recorded.

• Briefly discuss the topic again, and ask if there are any questions regarding the

provided summary (appendix II).

o Mention that complete confidentiality is given, unless the respondent asks to

have his name and function published. Additionally, mention that in the thesis

the interviewee will be referred to as: Manager [1,2,3,4, etc.].

• The information will take between 30 and 45 minutes.

• How the interview is conducted

o If yes to recording, then mention again that everything will be recorded.

Mention that open questions will be asked and that I am interested in hearing

his view on the topics.

o If no to recording, mention that as I am asking mainly open questions a lot of

information is expected to be discussed, making it difficult to write and listen

at the same time. Therefore, ask it the interviewee can answer in a slower

tempo, so as to give me the time to write down key points.

• Any other questions before we start?

63

Interview questions

1. Interview start – interviewee information

To get a better understanding on your experience within the field, first a few questions will be

asked on your time in the industry and with the company.

Question guide:

• Please tell me, how long have you been working for the company?

• How did you first become involved in the oil and gas industry?

o Is this something that always had your attention?

Note: These questions are only asked to ease the interviewee, and make him more

comfortable. If, due to secrecy preferences, the interview does not want to disclose parts of

this information this section can be skipped.

2. Internationalization of Russian oil and gas SOEs

As you mentioned before you have experience with the internationalization decision making

of [Firm name]. To better understand which factors influenced the outcome of this

internationalization process, I would like to ask you some questions about your experiences

during this period. Which factors made the process easier? Which challenges did you face?

And what, according to yourself, are important factors that cause the success or failure of the

internationalization? This is important for my research as I seek to identify what motivates a

Russian oil and gas SOE to internationalize, and whether this decision making is different from

a private energy firm such as Shell.

Question guide:

• Could you tell me about your experiences with internationalization decision making at

your firm? Give examples if possible.

• Can you describe which factors made internationalization swifter/speedier?

• Can you describe which factors made internationalization challenging?

• How would you say the internationalization experiences of SOEs differ from private

companies?

64

Question guide follow up questions:

• Which factors do you think influence the internationalization of oil and gas SOEs?

• Which factor plays the biggest role in the successful internationalization of oil and gas

SOEs?

• Would you say that the internationalization of your SOE is driven more by the

exploration rather than the exploitation of resources?

• Do non-business arguments, such as governmental objectives, play a role in the

internationalization of oil and gas SOEs?

• Do conditions in the host country, such as attitudes of individuals, towards your firm

have an influence on internationalization?

o Can give example of protests against Nord Stream 2 (leave for last question)

o How much do differences between country culture, political environment, etc,

matter for internationalization?

• Being a company with strong state ownership, research found that this sometimes

brings financial and diplomatic support from governments influence

internationalization decision making for oil and gas SOEs?

o Can specific further: does your firm take more risks in internationalization due

to governmental supporting lowering the risk profile of the undertaking.

3. Finishing questions

• To summarise this interview, the most important factors that you have experienced

during an internationalization decision making process are …?

• Any other comments from your side? Would you like to add anything else?

• Can I get back to you at a later time if I have any more questions?

Thank you very much for taking the time to conduct this interview. I wish you a pleasant

continuation of your day.

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APPENDIX II: Research summary send to interviewees.

Dear Mr./Ms. [Last Name],

Thank you for being willing to partake in this research for my master thesis. My thesis focuses

on the internationalization of Russian oil and gas state-owned enterprises (SOEs). SOEs are

enterprises where the state, in this case the Russian government, has ownership or control over

the firm. As, following this definition, both [Case 1] and [Case 2] are considered state-owned

enterprises I am very interested in identifying the factors influencing the internationalization

decision making processes of both these firms.

Your experiences with the internationalization of your firm are important and can significantly

contribute to the existing literature. The reason being that the extant literature makes no

distinction between the industry in which the SOE operates (an oil SOE is seen in a similar

light as an electronics SOE). With your help I seek to close this gap by moving the discussion

on SOEs to become more industry specific, by highlighting that oil and gas SOEs have other

different factors influencing their internationalization. I believe that the Russian oil and gas

industry is a great starting point as it can function as an extreme case (making findings

generalizable to other oil and gas SOEs) due to its size and relevance in today’s globalized

world.

I hope to have sufficiently informed you. If this is not the case, feel free to direct any questions

to me via either email or phone.

For your information I’d like to make clear that all data obtained during the interview will

remain confidential, unless you specifically ask for your name to be published.

I look forward to conducting the interview.

Best regards,

Daniel Niekel

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APPENDIX III: Illustrative quotations interviews.

In this appendix illustrative quotations for the identified influencing factor are shown per

interviewed manager.

Factor Illustrative quotes manager #1

Perceived reliability as

supplier (+/-)

“Another reason why the Turkstream is built is because Turkey and Southern Europe

wanted to increase the security of their energy supply by mitigating somewhat the

unreliable factor of the Ukraine-Russia relationship”.

Inter-government tie strength

(+)

“When governments such as Turkey are investing billions into an energy project, as well

as putting their energy dependence in our hands, they need to know we are good for it. And

trusting a privately held company with that much responsibility is not something many

politicians want to do, or even can do. So, for such project’s energy importing countries

seek political involvement from governments with which they have good relationships”.

Political conflict (-) “The poor relationship between Ukraine and Russia made many of our [Case 1] customers

fearful. Because Ukraine could decide to shut down gas pipelines that cross Ukrainian

land, to return some political pressure on Russia. When this happens [Case 1] cannot meet

its obligations towards Turkey, Romania, Bulgaria, all those customer countries I

mentioned. And this is a problem for our customers, because they need gas to power their

economies, but also for us [[Case 1]] because when we cannot charge for gas that we can’t

deliver.”

Discrimination (-) “I do know of course that there was, and [laughing] still is resistance by some people in

Germany, America and other western countries against Nord Stream II, because Russia is

involved. These few, but very loud people, apparently think that this project will destroy

the environment and European democracy, which is nonsense of course.”

Importance to governmental

budget (+)

“Because Russia is so financially depended on income from natural gas of course the

[Russian] government wants to make the exports as efficient and profitable as possible by

removing middleman such as Ukraine and Moldova”.

Control over infrastructure “That is the crux of gas internationalization, you need infrastructure, you need the

pipelines and the land on which to build these pipes”.

Transit fee foreign

infrastructure

“The problem is that [Case 1] had to pay each of these countries for transit rights for gas

that went from Russia to Turkey or another final customer. And these transit costs are

enormous. With the TurkStream [Case 1] saves more than $450 million a year in transit

fees to the Ukraine, and that is just the Ukraine, I think in total we are saving more than

$600 million a year.”

Home government foreign

policy goals

“All I can say is that the decision to become less dependent on Ukrainian gas pipes is not

just a financial one”

Non-financial government

support

“The government is quite supportive of our international activities, which really helped

with this project at least.”

Unfavorable domestic market

conditions

“Turkey and South-East Europe are very good customers for Russian gas, because these

countries have high demand and they pay relatively well. Not as good as Germany and

western countries but still much better than Central Asia, and larger Asia and domestic of

course!”

Macro-economic “Turkey and South-East Europe are very good customers for Russian gas, because these

countries have high demand and they pay relatively well”.

External pull from

international customer

“Turkey and some other countries actively sought conversation with the Russian

government and [Case 1] to work together on making the gas supply chain more stable.”

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Factor Illustrative quotes manager #2

Long-term view of controlling

shareholders (+)

“(..) For us the government is the controlling shareholder, and they care more about the

long-term health and profitability of the natural gas industry than short term profits from

a singular gas field.”

Number of political borders “(…) Russia and China share a direct border which makes organizing the project easier in

a regulatory sense, and cheaper of course because there are less stakeholders for us to

engage with and give concessions too (..)”

Political conflict between

home/host country

“(..) Geopolitical ambitions of the government might threaten [Case 1]’s international

cashflows. (..). This of course became clear after Crimea when the EU and America placed

sanctions on us, while China didn’t (..).”

Importance to governmental

budget (+)

“The Russian government has always seen its natural resources as the best way to develop

its economy, president Putin even wrote his doctorate on this topic”

Diversifying income streams “You need to diversify your clientele and investments; you don’t want all your cashflows

to be dependent on a few countries and a few pipelines that go there.”

Home government foreign

policy goals

“Before this project the European countries had a lot of bargaining power over the gas

price, which also gave Russia little diplomatic manoeuvrability. Because European

countries would band together and bluff that they would buy American or Arabian gas if

Russia continued conducting certain activities. And before Russia couldn’t risk calling this

bluff because Europe was the main source of income, but by constructing the power of

Siberia project we now receive significant cashflows from China as well. And this reduced

dependence on European gas money of course gave Russia more foreign policy flexibility.”

Financial government support “(..) We got uhm tax exemptions on gas exports through this project to make sure we could

maintain our [Case 1] required profit margins, because of course China currently pays

much less for gas then European countries.”

Non-financial government

support

“The government also made border crossings easier between Russia and China for this

project”

Unfavorable domestic market

conditions

“We really go abroad to sell the natural gas, because we have such large reserves and

price wise it has little value domestically [laughing], so we need to sell it abroad where it

is scarcer.”

Made in Russia “The state-ownership aspect brings some expectations as well, (..) the government wants

to use our projects to create domestic jobs (..). So almost all technologies and materials

like pipes had to be produced domestically.”

Sanctions “(..) the EU and America placed sanctions on [Case 1] and other Russian companies, while

China didn’t, so in that sense it was a good country to internationalize too (..)”

Mace-economic “(..) the financials are also very important, because exporting gas is very expensive, and

yes I think it is important to mention that this industry is all about scale because the margins

are very small so we need to make up in volume to reach our desired profit margins.”

Technological “Even though we would really like to internationalize to countries farther away such as

India, with large populations and increasing demand. But it is just not technologically

feasible to build pipelines all the way over there, so if we want realize such projects in the

future, we need to allocate more resources to R&D in shipping and other transportation

methods.”

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Factor Illustrative quotes manager #3

Long-term view of controlling

shareholders (+)

“In the gas industry, especially here in Russia because the gas reserves are quite far away

from demand centers, the investments are large and planned around how we and our

stakeholders see the market develop over the long-term.”

Inter-government tie strength “For us, actually one of the more important factors I think is having good relationships

with partners, both at home such as the government and local suppliers, but also with the

costumer, which can be a government or a private company, because these projects you

really do together.”

Number of political borders “The political challenges are less when we don’t have to cross as many borders, which is

why we build the Nord Stream under water. So [laughing] we basically replaced political

challenges, to a certain extend at least, with technical ones, but we are more capable in

tackling those.”

Bureaucracy “I also struggled with the slow speed of bureaucracy that comes with government

involvement both within and outside of [Case 1].”

Political conflict between

home/host country

“Iinitially the plan was to develop a joint venture with these companies, to ensure a strong

legal basis for everyone involved. But because of European competition laws every member

state needed to agree with this joint venture, but Poland found it to be [laughing] in their

words dangerous to European energy strategy, as well as monopolistic. So because of this

a joint venture was removed for the list of options”

Discrimination in host country “Because Germany is the most important market for Russian gas, a decision was made to

ensure that we have a good image in the country. [laughing]. It was decided that the best

way to achieve this is to become an active part of German football, so yes, we are the main

sponsor of Schalke 04, and of course we were the sponsor of the Bundesliga for a long time

as well. And we found that this works very well to achieve acceptance, even though it may

sound weird but yes having your name on the shirt of players millions of people like to

watch did enhance our image a lot”.

Importance to governmental

budget (+)

“We also are an important source of income for the government, so it’s not like it’s a one-

sided deal, these emergency credit lines ensure that the project survives, that jobs are not

lost and of course more future income for the state once the prices rise again and we can

now export more.”

Control over infrastructure “If you don’t have access to the pipelines you need someone else with access, uhm German

energy companies in this case, to sell it to the British end users, but then you function as a

middle man for your own product and [Case 1] didn’t want that”

Transit fee foreign country “Russia and [Case 1] had some political problems with countries that the pipelines crossed

asking high transit fees and others things”

Home government foreign

policy goals

“You have so many different interests that you have to account for. We have the Russian

interest, of both [Case 1] itself and the government. And also, the demands of the countries

that the project crosses, so for the Nordstream 2 we have the Estonian, Finish, German,

French, Dutch, Belgian, Austrian interest, and they all have somewhat different objectives”

Financial government support “We do have access to credit lines from the government if the financial situation really

worsens to such an extent that the entire project is at risk.”

Mace-economic “The British gas price was really unpredictable so the models from our side didn’t show

it to be very profitable.”

Technological “An evaluation was started in 2011 to see whether two additional pipelines would be

financially feasible, and of course technically possible with the resources available in

Russia.”

69

Factor Illustrative quotes manager #4

Perceived reliability as

supplier

“In this industry reliability is very important, it is our bread and butter. Because natural

gas is an important energy source that keeps the economies of our costumers functioning

(..). So, countries that buy from us might look for other suppliers when political or

technological issues arise around our pipelines, or even around the extraction of the

resources at home, because if they cannot reliably receive our product it poses a significant

national risk to them.”

Inter-government tie strength “(..) We basically need to have our own foreign policy, much like a government, to create

and maintain good relationships so that our customers trust us to reliably and consistently

deliver this important resource.”

Number of political borders “To reduce these costs, and to somewhat mitigate the political vulnerability of our gas

exports we decided to build these pipelines so as to not have to cross as many country

borders anymore.”

Increasing oil/gas reserves “Former soviet states in central Asia (..) have their own gas reserves, and sometimes we

receive minority ownership in return for helping with extracting and marketing because we

have the technical and managerial capabilities, whereas the local firms don’t, and access

to these foreign reserves can be profitable for us in the long term.”

Diversifying income streams “The continuous threat and imposition of sanctions by the West really showcased to us that

we needed to diversify (..).”

Transit fee foreign

infrastructure

“We also had some issues with countries such as the Ukraine, and to a lesser extend

Moldova that wanted more compensation for the transit of gas over their land, and also

some occurrences of illegal gas extracting and such.”

Home government foreign

policy goals

“(..) the government wants to keep good relationships with these former Soviet countries.

Because it is considered the Russian sphere of influence so we (..) help these countries with

extracting and making better use of their own gas reserves, not because it is so profitable

but mainly to create a Russian presence and influence and dependence in the area”

Financial government support “There are grants available for this exploratory work, and for our exports to Kazakhstan

we get some tax incentives as well from the government to make sure that exports there are

profitable”.

Non-financial government

support

“And when private companies have a political issue with one of the countries in their supply

chain, they are sometimes just forced to abandon the project, leaving many customers

without a reliable gas supply, because they don’t have the government support and the

diplomatic weight to tackle these issues. Whereas for us the government has always helped

with international issues if these issues threatened the reliable supply of gas to our

customers.”

Unfavorable domestic market

conditions

“We started to look for new places to diversify into because (..) within Russia the prices

are low, so domestically we cannot make much more profit.”

Made in Russia “(..)we had to buy almost everything Russian made, because that was a request from the

government. And not everything we needed had a production line ready, so that was very

expensive to develop (..).”

Need to respond to competitor

initiatives

“In 2016 the Americans sold nothing, nothing, zero, natural gas to Europe, but since the

sanctions (..). Well Suddenly they now supply about 15% of the European liquid gas market.

And yes, this is only possible because these sanctions distorted the market and created an

opening that normally would’ve never been there, because of course our product is much

better priced.”

Sanctions “The continuous threat and imposition of sanctions by the West really showcased to us that

we needed to diversify (..).”

Macro-economic “At one point due to sanctions and other factors Iran was unable to reliably supply its

market share in this region with natural gas, and we saw this as an opportunity to increase

our market share in this region”

External pull from

international customer

“German chancellor has many times said that she did not agree with these sanctions and

will continue to buy when possible from us.”

70

Factor Illustrative quotes manager #5

Long-term view of controlling

shareholders

“We see a future in these developing countries, especially in Africa we expect a continuous

increase in oil and gas demand, so we need a foothold in the area to stay competitive in the

long-term”

Perceived reliability as

supplier

“Gerhard Schroeder is the chairman of our board of directors, and he was the chancellor

of Germany for 7 or 8 years (..). This shows show that we are about business first, and that

the Russian state is willing to involve anyone with expertise in the industry to ensure an

efficient export process, which I think sends a good message to our international

customers”..

Inter-government tie strength “When the Egyptian president calls Russia a trusted and close partner (..) we noticed that

this trust is extended to us as a company because the Russian state is one of our owners”.

Discrimination in host country “The U.S. perceived us as being a bad company for being in Venezuela, while Venezuela

perceived us as good for being there so it mainly all depends on your perspective”

Importance to governmental

budget

“It is (..) not in the interest of Russia if China would get access to a large amount of

resources in Africa or other areas which it can then ship back home, because then China

would buy less Russian oil, leaving a hole in the national budget”.

Home government foreign

policy goals

“A government objective is to (..) ensure that China must buy Russian, and then it doesn’t

matter whether China buys oil and gas from a Russian company in Siberia or in Egypt,

because Russia would still a piece of the pie.”

Financial government support “In Venezuela we received financial support from the government, especially with the low

oil prices now, because otherwise the operations there just wouldn’t be profitable.”

“To ensure that the Venezuelan government could continue to export and receive some

income the Russian state compensated us for the operational losses that we were making.”

Non-financial government

support

“The Russian government has very good relations with the Egyptian government so that

makes (..) obtaining the required permits and network easier”

Unfavorable domestic market

conditions

“We have a government mandated low price domestically so we need international

operations to increase our revenues and profits for our shareholders”

Sanctions “Because U.S. sanctions limited Venezuela’s access to global oil markets we helped them

with marketing their oil products, to try and mitigate the effects of these sanctions on the

Venezuelan economy.”

Macro-economic

“We make (..) internal analyses of which economies we expect to grow and where the

demand for oil and gas and the price is expected to increase in the future, to decide where

we internationalize to”

Technological “The first reason why we went to Egypt, (is) because it has significant energy resources

within its border and a continuously increasing demand for these resources, but it also

lacks the technology to effectively extract these resources so that is where we come in.”

71

Factor Illustrative quotes manager #6

Long-term view of controlling

stakeholders

“One of the benefits of state ownership is that it allows for a long-term focus, because the

government is most concerned with the long-term profitability of the company and the

Russian oil and gas industry in general, then uhm the short-term profits from one particular

reserve. (..) this gives the company and us managers the time to really think through

strategy and optimize our processes”

Perceived reliability as

supplier

“When the deals in Mozambique were signed President, Putin accompanied our corporate

delegation and that instils a lot of trust (..), more so than the presence of only a CEO, which

would be the case for private companies like Total or Exxon”.

Inter-government tie strength “The trade war between America and China was causing our Chinese colleagues to

worry about the reliability of the American energy deliveries. And, well, because of this

the Russian government promised that they would continue to supply oil and gas to China

no matter what, and this helped us obtain lucrative deals.”

Number of political borders “When you have a direct border it is much less hassle and requires less negotiations to

build the infrastructure necessary to export our products, because we can take care of all

the permits up until the foreign border ourselves, and it’s up to the customer to take care

of linking their domestic pipeline infrastructure to ours.”

Political conflict between

home/host country

“(..) the trading platforms are interconnected on a global level, and the Americans have a

strong control over these platforms, so yes, conflicts between America and Russia hurt our

ability to export because we are denied access to the marketplace so to say (..).

Discrimination in host country “In some of these Western countries state-ownership is seen as something bad whereas in

many countries it is actually normal”

“We have been seen as a political tool of the Russian government. But of course, this is not

the case, so to remove any doubt around this unfair perception numerous non-Russians

have been appointed to the board of directors by our shareholders”.

Importance to governmental

budget

“Business is our political objective, because [Case 2] is the main contributor to the Federal

budget. So naturally it is a political objective of the government to ensure that we can

continue to bring in money to pay for government programmes at home and abroad.”

Diversifying income streams “Because of political tensions and (..) more renewable energy being produced in our main

European markets a decision was made to diversify exports to a larger variety of countries,

so that we can continue to generate strong returns for all our shareholders.”

Transit fee foreign

infrastructure

“Another benefits of being able to build the infrastructure completely yourself is that you

don’t have to pay transit costs to other parties”

Home government foreign

policy goals

“Without the government policy to keep our operations in Venezuela running we would

have I think at least slowed down activities there”

“For these projects I believe that the goals of our [Russian] government and the goals of

the Mozambique and Chinese governments align pretty well, so in that case political

objectives can be beneficial because then we receive resources to achieve these shared

goals.”

Financial government support “We [Case 2] have in the past received financial support from the government [Russian]

to overcome sudden downsides in the global markets or when our international assets take

longer to turn a profit for instance.”

“We wouldn’t need financial support from the state if the state wasn’t an owner of our

company, because that is why we were hit by sanctions in the first place”

Non-financial government

support

“(..) things can move pretty fast when the government wants to, so if it’s necessary we do

receive various forms of legislative support for a project. (..) mainly regarding construction

and environmental permits, but is can also smoother visa procedures for foreign experts.”

Made in Russia “The government as a shareholder requires us to use a certain amount of Russian

technologies, products and employees when we do business at home. and abroad when

possible. (..) it just makes internationalization a bit more difficult and lowers the financial

return (..).”

Need to respond to competitor

initiatives

“China has also been investing heavily in African oil and gas reserves and shipping these

resources back to China. So, this is a threat to our business”

72

Sanctions “State-ownership makes us a prime target for sanctions, because when foreign

governments want to financially pressure Russia, they sanction us, so [laughing] I think

you can call us the Achilles heel of the Russian budget, and the Russian budget the

Achilles heel of us [laughing].”

Macro-economic “China (..) is a growing market that needs more and more gas every year.”

“(..) countries in Africa are great potential customers in terms of demand and price

developments.”

Factor Illustrative quotes manager #7

Long-term view of controlling

stakeholders “Compared to private firms we are able to focus more on the long-term strategy because

our controlling shareholder, the Russian government, has its own objectives such as

developing oil and gas trade with China, which are not achieved in just a few years”.

Perceived reliability as

supplier

“(..) I know, and you can check our track record, that we are a reliable supplier that always

puts the customer first, but for some reason we are not always seen this way in the West,,

and this is a problem because these customers are then less likely to trust us with the

security of their energy supply.”

Discrimination in host country “(..) sometimes people are distrustful of us and our motives because we are partly owned

by the state. (..)”.

Importance to governmental

budget

“When we are faced with significant threats to our business such as sanctions the

government [Russian] has often stepped in to help us, to ensure that over the long-run we

keep generating tax-able income.”

“(..) more like an Oligopoly. Because when more firms can operate in Russian oil and gas

competition will increase, like a price war who can be the cheapest, which will drive down our revenues, and as a result the government, our shareholder, receives less tax income

which isn’t a good thing.”

Home government foreign

policy goals

“(..) we do explorative work in central Asia, mainly Kyrgyzstan and Turkmenistan (..) [and]

if it wasn’t beneficial for the Russian government to have some presence, and dependence

on us in this area it is likely that these resources would be deployed elsewhere for higher

returns.”

Financial government support “We receive financial support, mainly loans, from our government when the situation

requires it, and because of this we can continue to operate in countries and environments

such as Venezuela, where other companies will likely fail.”

Non-financial government

support

“We have access to a large network of diplomats and foreign representatives through our

government and this makes the earlier steps of internationalization, such as getting in

contact with the necessary and most important local stakeholders easier”

Unfavorable domestic market

conditions

“(..) domestically our commercial potential has a ceiling because there are laws that limit

the amount you can charge for petroleum and gas products in Russia.”

Made in Russia “Most of the employees, products, technologies (..) must come from Russia. Because the

government wants to create jobs, and well it has always been a Russian thing to want to be

independent from other countries so yes, we are required to develop most assets

domestically. And this sometimes causes projects to be more expensive, or difficult because

we cannot just buy an existing technology to fix a problem with a well.”

Sanctions “(..) the situation in the Ukraine has brought many sanctions on Russian firms, including

us, so the policy of the government regarding this area has had a negative impact on us.”

Macro-economic “Our industry has very low margins in general, and we make up for that by selling large

volumes, so of course sometimes it is more cost efficient to extract and refine the product

abroad because then you’re geographically closer to certain end costumers.”

73

Factor Illustrative quotes manager #8

Long-term view of controlling

stakeholders

“(..) because the government assigns the rights to reserves, we, as a state-owned company,

expect to always have access to Russian resources, and this allows us to invest in long-term

export infrastructure such as pipelines. Because we know that the possibility that we lose

access to these reserves, through either renegotiations or appropriation is close to zero.”

Perceived reliability as

supplier

“(..) when a private firm can’t make good on its promise they can restart under a new name

or just exit the country, but for a state-owned company the reputational damage is lasting

and thus much more important. If [Case 2] gets a bad reputation Russian oil and gas get a

bad reputation, which will hurt the entire Russian economy, so it is beneficial to the

[Russian] government to make sure we are always considered a reliable supplier.”

Inter-government tie strength “When Cuba struggles with meeting its own energy needs because they lack engineering

and managerial capabilities, in addition to being sanctioned by the U.S, the Russian

government feels it as a sense of duty to help this friend.”

Political conflict between

home/host country

“It is very close to the United States the largest petrol consumer in the world, uhm even

though currently under the Trump administration the relationship between Cuba and the

U.S. is deteriorating we believe that in the future it could be useful to already have assets

in Cuba to make exports to the U.S. easier for when the necessary political developments

take place.”

Discrimination in host country “In countries that have the right to demonstrate and have access to free media like

Russia, Germany, the UK, Italy, in such countries it is important to of course consider for

individual attitudes. And because of this we are doing many social investments in and

outside of Russia such as hosting cultural exchanges and sponsoring sports teams of

different levels, because we want to contribute something back to the countries we export

to.”

Importance to governmental

budget

“The government as a shareholder wants us to continue to have steady and predictable

cashflows which they can tax and receive dividends from to be able to balance the state

budget, and thus we have started to more aggressively diversify into Asia, and mainly

China.”

Diversifying income streams “(..) besides the sanctions these [European] countries are also rapidly moving towards

using other renewable energy sources. So, these events show that we cannot and should not

continue to rely solely on European customers for the bulk of our profit.”

Home government foreign

policy goals

“(..) we are internationalizing to what many perceive as risky countries, such as Venezuela

or Mongolia, because the government benefits from this in other non-monetary ways. But

this is not unique to us of course, the Chinese national oil companies for instance are

internationalizing into central Africa which is also very risky.”

“(..) the Russian government creates a presence in countries such as Cuba, Venezuela and

Mongolia through [Case 2] by offering training and helping to develop the local energy

industry. And in return for this help perhaps Cuba will vote to recognize Crimea as part of

Russia at the united nations assembly, (..) and Mongolia could be persuaded to let Russia

instead of China develop its oil and gas industry (..).

“When we look at an economist such as Friedman, he basically says that a firm’s only

responsibility is to create value for shareholders, nothing else. The controlling shareholder

for us is the Russian government, so they determine what they define as value, and we act

accordingly.”

Financial government support “In terms of internationalization I would say that for projects that generate value for our

shareholders, with as I said the controlling one being the government, in a non-monetary

way. For those projects we receive financial compensation either through changes in

taxation or in loans with low interest.”

Non-financial government

support

“(..) in China where the legal framework isn’t as developed as in Europe because of that

we are more afraid of, to borrow your terminology, opportunistic behaviour. But since

the government is offering us diplomatic support this risk of losing keys assets and

knowledge is mostly alleviated, and therefore we decided that a joint venture with

minority ownership would make strategic sense.”

Made in Russia “Something that we always struggle with is the government requesting us to use only

Russian employees and Russian made products. But because these projects are so large,

74

very complicated and just technological challenging we don’t always have the necessary

assets in-house.”

Sanctions “Even though Germany and Italy have communicated to us that they would like to continue

buying our petrol products, it has become more difficult for them due to sanctions.”

Macro-economic “China is a market of growing importance for us, so it makes sense to allocate more

resources to develop this market (..). Because actually in 2018 Asia, for the first time,

bought more of our products than Europe, and well the largest buyer in Asia was China.”

“(..) our most profitable customers margin wise are still in Europe. Germany, Italy, these

and some other countries, which is why exports processes to these countries are

continuously being optimized”.

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APPENDIX IV: Illustrative quotations annual reports.

In this appendix illustrative quotations for the identified influencing factor are shown per

analysed annual report for both [Case 1] and [Case 2]

Factor Illustrative quotes [Case 1] 2010

Technical “Technological advances are an integral part of [Case 1]’s gas business development”

Macro-economic “The most noticeable characteristic of 2010 was surely the strong recovery of the world

economy after the global crisis, which brought with it a concomitant increase in natural

gas consumption.”

Number of political borders “In line with company goals to diversify gas transportation routes

“The Group’s top-priority projects abroad are the Nord Stream and South Stream gas

transportation systems aimed at diversifying Russian natural gas export routes to Europe.”

Long-term view of controlling

shareholders

“By actively developing [Case 1]’s business areas and finding advanced technical

solutions, the company is ensuring its long-term competitiveness.”

Inter government strength “Croatia and Austria joined the list of countries that support construction of the gas

pipeline at the governmental level.”

“In 2010, the number of countries supporting the South Stream gas pipeline at the

government level increased to seven.”

“Mutually beneficial cooperation in the area of science and technology based on

agreements and joint programs is an integral part of [Case 1]’s interaction with foreign

partners.”

“[Case 1] holds regular consultations and carries on a dialogue with the European

Commission.”

Unfavorable domestic market

conditions

“The government regulates the wholesale prices for gas which [Case 1] applies to the major

portion of domestic sales.”

Importance to governmental

budget

“The government is interested in the company’s effective development because [Case 1] is

one of the largest Russian taxpayers (..)”

Government support “With regard to the major non-payers in a number of FSU countries the mutually

acceptable financial vehicles related to outstanding receivables settlement including those

by means of government securities have been developed.”

Need to respond to competitor

initiatives

“Withdrawal of Russian natural gas was affected by excessive LNG volumes, which

appeared in the European market as a result of large-scale simultaneous commissioning of

new gas liquefaction capacities in the world (projects in Qatar, Australia, Indonesia,

Nigeria, and Yemen) and regasification capacities in European countries.”

Diversifying income streams “Enter new markets within the geographic diversification of supply and particularly

arranging for the export of pipeline gas to the Asian and Pacific Region countries.”

“For the purpose of diversifying its operations [Case 1] considers the Asia-Pacific

countries as new markets.”

Home government foreign

policy goals

“The development strategy of [Case 1] has been designed and implemented in cooperation

with governmental agencies and is an integral part of the Russian Energy Strategy.”

Factor Illustrative quotes [Case 1] 2011

Technical “Automated systems of remote control and management of wells in electrified and non-

electrified clusters, systems managing vital infrastructure of gas fields on the principles of

minimal manned technology.”

Macro-economic “We are consumer-oriented, i.e. are guided by the current and long-term fuel consumption

plans of our clients.”

Number of political borders “We took a number of fundamental steps to diversify the transportation routes. First of all,

Nord Stream was commissioned – the first gas route to directly connect the Russian and

76

the European gas transportation systems. To ensure uninterrupted exports it is planned to

commence another strategic construction, the South Stream, in 2012.”

“We steadily reduce the zones of transit risks between Russia and Europe”

Long-term view of controlling

shareholders

“(..) coherent long-term strategy that consistently brings [Case 1] closer to its ultimate

objective – to become the strongest company in the world’s energy sector.”

Inter government strength “As of 31 December 2011, twelve representative offices of [case 1] are registered abroad,

including Algeria, Brazil, Belarus, Iran, Qatar, Kazakhstan, Kyrgyzstan, the People’s

Republic of China, Latvia, Moldova, Turkmenia and Ukraine.”

Unfavorable domestic market

conditions

“The Russian gas market is now becoming the main rival to the exports and the number

one market for [Case 1] – both in terms of sales and profit.”

“[Case 1] is actively cooperating with federal executive bodies on improving government

pricing policies in gas sphere.”

Importance to governmental

budget

“The government is interested in the company’s effective development because [Case 1] is

one of the largest Russian taxpayers (..)”.

Government support “Federal government relations activities to adjust gas prices to a level, securing equity

capital to finance investments, required to support operations and development of gas

sector and also equal margins from gas delivery to external and domestic markets.”

“Transition to financing social programs with government support.”

Diversifying income streams “[Case 1]’s strategy is based on the principle of diversification, which is applied in three

key areas: products, transportation routes and sales markets.”

Home government foreign

policy goals

“The development strategy of [Case 1] has been designed and implemented in cooperation

with governmental agencies and is an integral part of the Russian Energy Strategy.”

Political conflict between

home/host country

“Oil market interventions of the International Energy Agency and US government.”

Factor Illustrative quotes [Case 1] 2012

Long-term view of controlling

shareholders

“The global energy industry knows many large companies. However, not all of these are

capable of implementing unprecedented projects”

“Portfolio of long-term contracts of gas supplies to European customers.”

“[Case 1] is focused on maintaining its global gas industry leadership in the long-term.”

Diversifying income streams “(..) one of the major suppliers of natural gas on the planet, and it [Case 1] continues to

focus on further diversification of deliveries of this fuel to its inter- national customer.”

“[Case 1]’s strategic goal is to establish itself as a leader among global energy companies

by diversifying sales markets, ensuring reliable supplies, increasing operating efficiency

and using scientific and technical potential.”

“The Group plans to increase its presence at markets of foreign countries, for example,

[Case 1] targets to increase its European market share to 32 %, North-Eastern Asian

market share and share in the global LNG trade to 10–15 %.”

“European countries pursue a policy of encouraging the use of renewable energy sources

development including by means of the government grants for developing this industry. (..)

can result in displacing gas generation and reduction of gas consumption by major

European customers.”

Number of political borders “The first gas pipeline in history to directly connect gas transportation systems of Russia

and Europe.”

“To mitigate its dependence on transit countries the group is implementing gas

transportation projects aimed at diversification of export routes.”

77

Inter government tie strength “When South Stream reaches its designed capacity, [Case 1]’s transit risks for supply to

its European consumers will be brought down almost to zero.”

“ [Case 1] and Agency for Natural Resources and Energy of the Ministry of Economy,

Trade and Industry of Japan signed “Vladivostok-LNG” project memorandum.”

“Years of experience with foreign partners and reputation as a reliable supplier.”

“[Case 1]’s representative offices abroad are operating to enhance efficiency of [Case 1]’s

inter- action with governmental agencies, enterprises, companies and organizations of the

respective countries and regions and provide information and analytical support to

managing the international projects.”

Unfavourable domestic market

conditions

“Over 70% market share in the Russian market.”

“Russian market, which is a top priority and a largely strategic area for [Case 1], could

see gas consumption volumes exceeding 500 bcm, increasing by more than 7 % versus 2012

consumption level.”

“[Case 1] measures to increase profitability of natural gas sales under significantly higher

tax burden.”

“Strict government regulation of pricing and marketing policies of [Case 1] gives

independent manufacturers significant advantages in domestic gas sale.”

“Lack of a consistent liberalization program for Russian gas market (including delay of

gas pricing liberalization timelines) (..), make it difficult for the investment community to

simulate development projections for the Company and increase uncertainty.”

Macro-economic “Despite ongoing crisis effects in the global economy, the population growth trend will

continue and living standards will keep on increasing, especially in developing countries,

driving global energy demand upwards in the long-term.”

“It is expected that environmental and economic advantages of natural gas will help it to

maintain much higher demand growth rates, than such fuels as crude oil and coal.”

“Growing demand in Asian countries will be the determining factor for development of

global natural gas market.”

Increasing oil/gas reserves “In 2012 [Case 1] continued to purchase gas in the Central Asia and Azerbaijan under its

gas marketing cooperation.”

Technological “Unique climate and geological conditions of new production regions that [Case 1] plans

to develop require the development and implementation of new technology, equipment, and

materials.”

“To ensure better forecasting and optimization of gas exports to the European Union joint

R&D activities with Gasunie were conducted.”

Discrimination in host country “A Russian economy leader, [Case 1] is heavily involved in implementation of multiple

social projects at various levels, including those of national significance.”

Government support “(..) government support measures for gas sector enterprises, including taxation and

pricing approaches to ensure conditions for cost-effective operations to supply gas to

consumers (..).”

“[Case 1] has developed proposals to the Government of The Russian Federation on

measures of state support of entities executing investment activities and realization of Far

East and Eastern Siberia gas industry development projects.”

“Tax legislation is the most flexible area of law.”

Importance to governmental

budget

“The government is interested in the Company's effective development because [Case 1] is

one of the largest Russian taxpayers (..)”.

Home country foreign policy

goals

“The development strategy of [Case 1] has been designed and implemented in cooperation

with governmental agencies and is an integral part of the Russian Energy Strategy.”

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Factor Illustrative quotes [Case 1] 2013

Technical “This project provides us with a wealth of invaluable experience that is unique in Russia

and will be used in other projects in Russia and abroad.”

“Cooperation facilitates an exchange of best operating practices, an exchange of

information on prospects and priorities of global gas industry, identification of topical

R&D issues the joint solution of which creates a platform for new international knowledge

and technology.”

Need to respond to competitor

initiatives

“The Company took consistent efforts to grow its share of the global LNG market, with

decisions taken in 2013 to start construction of LNG plants in the Primorye Territory and

the Leningrad Region.”

“[Case 1] continues its projects intended to diversify operations, including projects to

develop Russian and international NGV fuel markets.”

Increasing oil/gas reserves “By participating in foreign projects, [Case 1] aims to expand its resource base outside

Russia to consolidate its positions in the global gas markets.”

Government support “The Government-sponsored Eastern Gas Programme, coordinated by [Case 1], is a key

document to guide the gas industry development in Eastern Siberia and the Russian far

East.”

“ [Case 1] is also engaged in the drafting of civil law and bills governing land matters.”

Diversifying income streams “[Case 1]’s key strategic objective is to become a global energy leader. This objective is

to be achieved by diversification of sales markets and products, increased supplies

reliability, improving performance, and the most efficient utilization of inherent R&D

capacities.”

Long-term view of controlling

shareholders

“Long-term financial investment was mainly related to [Case 1]’s involvement in the

construction of the South Stream gas transportation system.”

“[Case 1] sees the use of natural gas as fuel for the road, rail and water transport as its

new business line in the Russian and European markets.”

Political conflict between

home/host country

“European Union member states are actively liberalizing their gas markets to encourage

tighter competition and boost spot trading. Liberalization may lead to a system where long-

term contracts are partially discontinued. The liberalization policy also implies separation

of gas production assets from transportation networks within the EU. This could mean that,

unless legally exempted, the Group would find itself unable to hold and control the

transportation business, and will also constrain investment initiatives in the EU.”

Unfavorable domestic market

conditions

“To control inflation, maintain consumer demand for goods, and incentivize domestic

production the Government of Russia plans to introduce in 2014–2016, a number of

additional restrictions on indexing regulated gas prices at which [Case 1] supplies natural

gas to the domestic market.”

“Restrained increase of gas tariffs in 2014–2015 and further delay of gas pricing

liberalization in Russia resulted in a more modest [Case 1]’s financial outlook.”

Made in Russia “All social and labor relations within [Case 1] Group were regulated by the labor laws,

the General Agreement between the National Associations of Trade Unions and Employers

and the Russian Government, the industry agreement for oil, gas and construction

companies, collective agreements and other local legal acts of the Group companies.”

Macro-economic “A number of developed countries, mostly in Europe, consistently encourage the use of

renewable energy sources (wind, solar, biomass, small scale hydro, geothermal and waste

heat energy), including through government subsidies to foster the sector.”

“Total gas consumption by FSU importing countries also decreased due to general

economic conditions and further decline of industrial production, as well as increasing

share of coal and other energy resources in their fuel and energy mixes.”

Importance to governmental

budget

“The government is also interested in efficient development of [Case 1] as the Company is

a major Russian taxpayer.”

Number of political borders “The bulk of natural gas marketed in Europe is supplied via FSU countries, including

Ukraine, Belarus and Moldova. Gas transit via these countries carries the risk of their

79

default on transit obligations. This, in its turn, entails the risk that [Case 1] will default on

its obligations under contracts for gas supply to Europe.”

“The strategy aimed at providing direct access to suppliers and reducing transit risks

includes the fully completed Nord Stream project; the South Stream and feasibility study of

the Yamal – Europe-2 pipeline are underway.”

Inter government tie strength “ [Case 1]’s overseas representations work to enhance its relationships with government

authorities, companies and organizations in relevant countries and jurisdictions, and to

provide information and analytical support to international projects management.”

“The Festival finals were held outside Russia – in Vitebsk, Belarus, in May 2013, attended

by over 1,300 participants from 36 Russian and Belarusian subsidiaries of [Case 1], as

well as guests representing the Group’s international partners such as CNPC (China),

OMV AG (Austria), GDF SUEZ (France), and Comita (Slovenia).”

Discrimination in the host

country

“The Football for Friendship project was widely praised by the international media, which

contributed to improving [Case 1]’s image internationally as a socially responsible

business.”

Factor Illustrative quotes [Case 1] 2014

Long term view of controlling

shareholders

“By implementing new ambitious projects, entering new markets, launching new products,

and introducing new technologies [Case 1] confidently maintains its position at the

vanguard of the global energy industry, building a foundation for sustained success over

the coming decades.”

“The Company is taking efforts to develop a mechanism to roll out the long-term planning

framework to [Case 1]’s international operations.”

Macro-economic “Given the huge size of the Chinese energy market, [Case 1] Group is contemplating

launching another, «western» route for its gas supplies to China.”

“According to global experts, the outlook for long-term gas demand in the region[Europe]

is highly uncertain due to differing views on growth prospects for the Eurozone economy,

gas price elasticity, future government policies on subsidizing renewable energy, use of

cheap coal and introduction of energy saving technologies, and assessment of the impact

of the EU’s current initiatives towards tougher energy sector regulation.”

Number of political borders “Measures have been taken to significantly reduce transit risks and improve the reliability

of gas supplies to [Case 1]’s traditional export markets—Europe and Turkey.”

“When completed, the project will allow the Company to fully abandon the transit route

via Ukraine, which is prone to systemic risks.”

“Gas transit via the FSU countries, in particular Ukraine, is associated with the risk of the

counterparties defaulting on their transit obligations, which exposes [Case 1] Group to the

risk of improper performance of its obligations under gas supply contracts. The following

steps are taken to reduce reliance on transit countries: diversification of export routes;

expanding access to UGSF abroad; development of LNG trade.”

Inter-government tie strength “A long history of cooperation with foreign partners and a strong reputation as a reliable

Supplier.”

Political conflict between

home/host country

“The forced decision by [Case 1] to stop the implementation of the South Stream project

was caused by a number of negative external factors such as: the European Commission’s

pressure on the Bulgarian government and other participating countries to prevent

construction for the project; conflict between provisions of the EU’s Third Energy Package

and the earlier bilateral intergovernmental agreements between Russia and the

participating countries (..).”

“The situation is complicated by government initiatives in a number of countries to restrict

LNG exports.”

“The situation in South-East Ukraine prompted the EU, the United States, and other

countries to impose limited economic sanctions on the Russian Federation and certain

80

Russian companies. However, if no progress is achieved in resolving the crisis in South-

East Ukraine or if the conflict worsens, the sanctions list and restrictive measures are very

likely to be expanded.”

Government support “the Company pro-actively liaises with federal and regional authorities to secure state

support for the gas industry.”

Unfavorable domestic market “The Group completed 105 inter-community gas pipelines in 33 Russian regions,

measuring 1.4 thousand km, to connect gas supply to 236 communities, 29.6 thousand

households and apartments, and enable a switchover of 200 boiler plants to natural gas.”

“The growth of domestic regulated gas prices is capped by the Forecast of Social and Eco-

nomic Development of the Russian Federation prepared by the Ministry of Economic

Development of the Russian Federation and approved by the Russian Federation

Government in September 2014.”

“A dialogue with the government authorities is maintained with a view to improve the

pricing policy on gas sales in the domestic market.”

“The industry has seen a significant growth in tax burden over the recent years, with

regulated prices in the domestic market prioritized by [Case 1] currently growing at lower

rates than its tax burden.”

Technical “[Case 1]’s prospects as one of the global leaders of the energy industry are closely

connected with technological progress in hydrocarbons refining.”

“Through its active involvement in international exploration and production projects,

[Case 1] Group is gaining invaluable experience for the future development of fields in

Russia and abroad.”

Need to respond to competitor

initiatives

“(..) [Case 1] needs to undertake large-scale internationalization activity (..) to ensure

agility to major trends in the global hydrocarbon market on the whole, and to the moves of

its competitors.”

“In other regions (Europe, China, Australia, Argentina and Saudi Arabia), the shale gas

branch is still at its infancy stage. This means zero competition from shale gas in

international markets to which [Case 1] supplies, or plans to supply, gas from Russia.”

Sanctions “The geopolitical situation around Ukraine and the economic sanctions imposed against

Russia by the United States and the European Union affected most of the Russian

companies.”

Diversifying “ [Case 1] pursues the strategic goal of establishing itself as a leader among global energy

companies by diversifying sales markets, ensuring reliable supplies, improving

performance, and utilizing R&D capacities.”

External pull international

customers

“China’sCNPCsigneda30-yeargassupplycontractforover1tcm. 1 September: Welding of

the first joint of Power of Siberia trunk pipeline to transport gas from Yakutsk and Irkutsk

gas production centers to consumers in the Far East and China.”

Factor Illustrative quotes [Case 1] 2015

Increasing oil/gas reserves “[Case 1] shows a strong interest in hydrocarbon exploration projects in Bolivia, which

ranks third in Latin America in terms of natural gas reserves.”

Long-term view of controlling

shareholder

“In line with its forward-looking approach, [Case 1] builds major gas production centers

in new promising regions.”

“The new route will run from Russia to Germany, through the Baltic Sea, and have a

capacity of 55 bcm of natural gas per annum. It will eliminate transit risks and significantly

improve the reliability of gas supplies to European consumers for decades to come.”

Number of political borders “[Case 1] diversifies routes for transporting gas to foreign consumers, including by

building cross-border gas pipelines. In particular, the North Stream gas pipeline, which

crossed the Baltic Sea from Russia to Germany (..).”

Control over infrastructure “[Case 1] owns gas transportation systems in Belarus, Armenia and the Kyrgyz Republic.

The Group is responsible for reliable gas supplies in these countries.”

81

“Another major function of underground gas storage facilities (UGSF) is to maintain

strategic gas reserves in case export transit risks.”

Inter-government tie strength “To improve the reliability of gas supplies under export contracts [Case 1] has secured

access to UGSFs in the FSU and far abroad countries, including Austria, Germany, Latvia,

the Netherlands and Serbia.”

Diversifying income streams “[Case 1] is strategically focused on the Asia-Pacific market, where a significant potential

for growth in energy demand is concentrated.”

“Diversification of Russian natural gas exports is among [Case 1] Group’s strategy pillars.

In order to achieve this goal, the Company is transitioning from the European to Eurasian

global strategy.”

Technological “Liquefied natural gas trade is an effective tool of [Case 1]’s global expansion strategy.”

Macro-economic “One of the most important global economy and energy industry trends of 2015 was further

slow- down of the economic growth in China.”

“Price cuts were agreed upon with gas suppliers from Kazakhstan and Uzbekistan to reflect

the decline in selling prices on the European gas market.”

Sanctions/ political conflict

between home/host country

“Starting from 2014, Russia is under sanctions imposed by the EU, the United States and

other countries over the conflict in Ukraine. The continuation of the conflict is very likely

to extend both the list of restrictive measures and the duration of the sanctions.”

“The decision to lift economic sanctions against Iran was one of the most prominent

developments in 2015.”

Transit fee foreign

infrastructure

“Most operating expenses are out of the Group’s control and include taxes and gas transit

charges.”

External pull from

international customer

“With gas demand growing in Azerbaijan, the national government approached [Case 1]

with a request to organize gas deliveries to the country.”

Discrimination in the host

country

“The reporting year marked the end of a three-year cycle of the Company’s partnership

with the Union of European Football Associations (UEFA), which organizes the UEFA

Champions League, one of the most spectacular and prestigious tournaments in Europe. A

survey run by independent social research firms suggests that the level of awareness for

[Case 1] brand rose in Europe by 20% during the contract’s term.”

Government support “The signing of the Import Substitution Programme by [Case 1] and the Russian Ministry

of Industry and Trade, covering production of industrial products to meet the needs of

[Case 1], its subsidiaries and affiliates, and offering government support to manufacturers,

including through cost subsidies and soft lending.”

Importance to governmental

budget & unfavorable

domestic market conditions.

“Given the challenging economic situation in Russia due to volatility in FX and commodity

markets and the resulting growth of the government’s budget deficit, the risks of changes

in currency regulation and tax legislation persist, along with the risk of a heavier tax

burden on companies in the fuel and energy sector.”

Factor Illustrative quotes [Case 1] 2016

Macro-economic “2016 was a challenging year for the global energy industry, as it had a number of macro-

economic factors applying pressure, including low prices of oil.”

“Every year, declining domestic gas production in Europe increases the demand for

additional import gas volumes. In 2016, the European market demonstrated the highest

demand for Russian gas in the entire history of its commercial supply.”

Inter-government tie strength “New export trunk gas pipelines will considerably improve the reliability of Russian gas

supplies to foreign consumers, and, consequently, the energy security of respective

countries.”

“Trust-based relationships with our consumers are the foundation for building long-term

business value.”

Sanctions “Starting from 2014, Russia is under sanctions imposed by the EU, the United States and

other countries over the conflict in Ukraine. The continuation of the conflict is very likely

to extend both the list of restrictive measures and the duration of the sanctions.”

82

Control over infrastructure “[Case 1] Group companies own the gas transportation systems in Belarus, Armenia and

Kyrgyzstan. [Case 1] transgaz Belarus is the Group’s core gas transportation asset

abroad, supplying natural gas to consumers in Belarus and carrying transit supplies of gas

to Europe and the Kaliningrad Region/”

Transit fee foreign

infrastructure

“Most operating expenses are out of the Group’s control and include taxes and gas transit

charges.”

Importance to governmental

budget

“[Case 1] is Russia’s major taxpayer. In 2016, the taxes payable by the Group (net of

income tax), totaled RUB 900.4 bn, up by RUB 95.3 bn year-on-year.”

Number of political borders “Gas transit via FSU countries, in particular Ukraine, is associated with the risk of the

counterparties defaulting on their transit obligations, which exposes [Case 1] Group to the

risk of improper performance of its obligations under gas supply contracts.”

“A number of measures are taken to reduce reliance on transit countries, including

diversification of export routes, expanding access to UGSF abroad, and development of

LNG trade.”

Long-term view of controlling

shareholder

“The Company is actively taking efforts to develop a mechanism to roll out the long-term

planning framework to [Case 1]’s international operations and its oil and power

generation businesses.”

Technological “The Company carried out science-based research to back up technical requirements for

technologies and equipment used to maintain and repair subsea facilities in challenging

ice conditions without divers.”

Made in Russia “The import substitution efforts undertaken in 2016 resulted in technological independence

of [Case 1] for 233 items on the List of Priority Products for Import Substitution and

Production Localization to Promote the Technological Development of [Case 1], reduced

the consumption of imported equipment and enabled its phased substitution with domestic

counterparts.”

Diversifying income streams “The EU pursues a policy of diversifying its gas supply sources and increasing the share

of natural gas exchange trade, which affects [Case 1] as one of the main suppliers of

natural gas to the EU countries.”

Government support “To ensure higher performance for [Case 1]’s capex, regional authorities in Russia should

avoid discontinuing state subsidies.”

Discrimination in the host

country

“Surveys run jointly with the UEFA Champions League show that positive attitudes

towards [Case 1]’s brand and awareness of its operations continue to improve.”

Unfavorable domestic market

conditions

“Gas produced by subsidiaries of [Case 1] is sold mostly at prices fixed by the

Government.”

Factor Illustrative quotes [Case 1] 2017

Need to respond to competitor

initiatives

“[Case 1] was the first company in Russia to launch LNG production and supply

to the global market, as well as a number of international hydrocarbon exploration and

production projects across the globe, achieving a strong position in the oil and power

generation markets.”

Macro-economic “The long-term trends in the European gas market include growing consumption and

falling domestic production, which implies that Europe’s demand for gas imports will

continue to grow.”

Inter-government tie strength “[Case 1] is committed to delivering on its day-to-day tasks of ensuring reliable gas

supplies to consumers, which is especially critical during the autumn/winter period.”

“Stable, trust-based relationships with our consumers are the foundation for building long-

term business value.”

Diversifying income streams “Establishing itself as a leader among global energy companies by diversifying sales

markets, ensuring reliable supplies, improving performance, and leveraging

R&D capabilities.”

Long-term view of controlling

shareholders

“(..) decisions by the Board of Directors of [Case 1] made in accordance with

the Russian Government directives for the government representatives on the Board of

Directors of [Case 1], relating to the Long-Term Development Programme of

[Case 1].”

Home government foreign

policy goals

“(..) Russia’s Energy Strategy, the General Scheme for the Development of the Gas

Industry, (..) directives and other instructions of the Government of the Russian Federation,

as well as other documents regulating development of the fuel and energy sector.”

83

Unfavorable domestic market

conditions

“Gas produced by subsidiaries of [Case 1] is sold mostly at prices fixed by the

Government.”

Technical “activities to support the strategic priorities (..). Upgrades and technical re-equipment of

gas production facilities.”

Government support “Continued subsidies for the development of various power generation technologies.”

Made in Russia “The use of foreign equipment and technologies in [Case 1] Group’s operations is a risk

factor (..).

Sanctions/ Political conflict

between home/host country

“Starting from 2014, Russia is under sanctions imposed by the EU, the United States, and

other countries.”

Number of political borders “The construction of the TurkStream gas pipeline’s offshore section commenced for

Russian gas supplies to Turkey and Europe as a new route to avoid transit through third

countries.”

“Gas transmission via third countries is associated with the risk of the counterparties

defaulting on their transit obligations, which exposes [Case 1] Group to the risk of

improper performance of its obligations under gas supply contracts.”

Discrimination in host country “Sponsorship of one of Europe’s most popular and high-profile sports tournaments helps

[Case 1] to run ambitious social, advertising and promotion projects, raise brand

awareness and boost its profile in key international markets.”

Contribution to governmental

budget

“Most operating expenses are out of the Group’s control and include taxes. (..) [Case 1] is

Russia’s major taxpayer.”

Factor Illustrative quotes [Case 1] 2018

Macro-economic “the Nord Stream 2 and TurkStream projects, both of which are important for maintaining

energy security in Europe as its domestic gas production declines.”

“China became the world’s largest natural gas importer in 2018. Experts believe that this

trend will persist, as gas consumption in China will continue to outpace the country’s

domestic production. Therefore, another two high-potential projects are on the agenda of

[Case 1] and CNPC, our Chinese partner: the Western and Far Eastern routes.”

Made in Russia “In implementing its major projects, [Case 1] leverages domestic production and its R&D

capabilities. A stronger focus on import substitution in recent years has brought impressive

results”

“Growing the share of Russian products used in [Case 1] Group’s operations and

encouraging the development of Russian alternatives to critical imported products are

some of the key initiatives being taken.”

Technological “Innovation and technology leadership are essential to maintaining [Case 1]’s success

going forward.”

Long-term view of controlling

shareholders

“Our success is driven by our ambitious goals, smart long-term planning, clear goal-

setting, and strong performance against targets.”

Diversifying income streams “Establishing itself as a leader among global energy companies by diversifying sales

markets, ensuring reliable supplies, driving operational efficiencies, and leveraging R&D

capabilities.”

Sanctions/ political conflict

between the host/home

country.

“Starting from 2014, Russia is under sanctions imposed by the EU, the United States, and

other countries.”

Inter-government tie strength “Consumers are the focus of the Group’s business. Stable, trust-based relationships with

our consumers are the foundation for building long-term business value.

Government support “Major efforts were focused on relations with the Ministry of Energy of the Russian

Federation”

Number of political borders “The construction of the TurkStream gas pipeline’s offshore section commenced for

Russian gas supplies to Turkey and Europe as a new route to avoid transit through third

countries.”

“The UGSFs outside Russia enable [Case 1] Group to build strategic natural gas reserves

mitigating transit risks."

84

Importance to governmental

budget

“[Case 1] is Russia’s major taxpayer.”

Control over infrastructure “In the former Soviet Union (FSU) countries, [Case 1] Group companies own the gas

transportation systems in Belarus, Armenia, and Kyrgyzstan. The gas transportation system

in Belarus, which is owned by [Case 1]’s subsidiary [Case 1] transgaz Belarus, supplies

natural gas to consumers in Belarus, and carries transit supplies of gas to Europe and

Russia’s Kaliningrad Region.”

Discrimination in host country “Sponsorship efforts help [Case 1] pursue its communications strategy, run ambitious

social projects, improve brand recognition, and boost its profile in key international

markets.”

Unfavorable domestic market

conditions

“Gas produced by [Case 1] subsidiaries is sold mostly at prices fixed by the Government.”

Home government foreign

policy goals

“The development strategy of [Case 1] has been designed and implemented in cooperation

with governmental agencies and is an integral part of the global Russian Energy Strategy.”

Factor Illustrative quotes [Case 2] 2010

Government support “Status of a Company of strategic importance for the Russian Federation.”

“(..) incur other social and sponsorship costs. Partly in exchange the Company receives

regional tax incentives enabling it to further develop its business.”

Macro-economic “The better macroeconomic environment and steady growth of Company operationals and

financials strengthened our leadership on main markets.”

Increasing oil/gas reserves “Rights were acquired to a large number of new prospective blocks both in and outside of

Russia, including several on Russia’s Arctic shelf, which holds the key to future

development of Russia’s oil & gas industry.”

Long-term view of controlling

shareholders

“ (..) work on the updated [Case 2] Strategy, which will set long-term vectors for Company

development, in line with the expectations of our shareholders.”

Inter-government tie

strength/technological

“We are working with global partners and opening new markets in both East and West.

First, [Case 2] agreed in 2010 to purchase a stake in Germany’s Ruhr Oel, which will

substantially increase our refining capacities and provide access to technologies and

markets in Europe’s largest economy.”

Diversifying “Our task now is to transform [Case 2] from a national player, applying traditional

technologies at traditional oilfields, into an international oil & gas leader with a diversified

field portfolio (..).”

Home government foreign

policy goals

“The [Case 2]-sponsored faculty specializing in Global Energy Policy and Energy Security

at the International Institute of Energy Policy and Diplomacy continued its work in 2010.”

Unfavorable domestic market

conditions

The unfavorable domestic market environment at the end of the year adds to the urgency

of these tasks.

Factor Illustrative quotes [Case 2] 2011

Government support “Status of a Company of strategic importance for the Russian Federation.”

“Full-scale development of the field will only be possible once a special tax regime has

been put in place, since large investments are needed to address its complex geology and

remoteness from transport infrastructure.”

“The unfavorable verdicts of the first-level court have been amended: the verdict

prohibiting flaring of oil gas has been quashed, and a compliance schedule has been issued

with respect to the verdict requiring the Company to observe license conditions.”

Technological “Development priorities: access to technology and management expertise through

participation in international projects.”

“A new post of Vice President for Innovation has been created at [Case 2] and two

specialized innovation departments have been set up within the Company.”

85

Inter-government tie strength “The key event last year was without doubt the unprecedented agreement on strategic

cooperation between our Company and ExxonMobil. Thanks to this agreement [Case 2]

can begin work to monetize its enormous offshore potential with minimal risks.”

“The Government of the Russian Federation and the Government of Belarus signed an

agreement on crude oil and petroleum product exports.

Home government foreign

policy goals

“Providing a steady supply of petroleum products to the domestic market is a strategic

priority for [Case 2], and the Company dealt successfully with various challenges to ensure

that this task was fulfilled in 2011.”

Long-term view of the

controlling shareholder

“The resource base is the key competitive advantage of any oil company and an important

factor for sustainable long-term growth.”

“Constant expansion of resource potential by the acquisition of rights to new resource

areas is an integral part of [Case 2]’s long-term development strategy.”

Macro-economic “The Russian economy is vulnerable to market downturns and economic slowdowns

elsewhere in the world. In 2010 and throughout 2011 the Russian Government continued

to take measures to support the economy in order to overcome the consequences of the

global financial crisis. Despite some indications of recovery there continues to be

uncertainty regarding further economic growth, access to capital and cost of capital, which

could negatively affect the Company’s future consolidated financial position, consolidated

results of operations and business prospects.”

Diversifying income streams “Geographic diversification is undertaken to account for the specific conditions associated

with Company production, refining and marketing operations as well as policy

undertakings by the Russian or another relevant government.”

Factor Illustrative quotes [Case 2] 2012

Government support “Status of a Company of strategic importance for the Russian Federation.”

Technological “The application of complex and innovative solutions is crucial to the success of many

strategic projects in the oil and gas industry,”

Inter-government tie strength “We also joined a number of international projects as part of cooperation agreements with

our partners, which will give us the opportunity to acquire unique expertise.”

“[Case 2] is carrying out geological exploration work jointly with Chinese Sinopec in the

Republic of Udmurtia at the operating territory of Udmurtneft.”

Control over infrastructure “[Case 2] worked intensively on development of its distribution channels during 2012 to

ensure that its crude oil and petroleum products are sold as efficiently as possible. The

Company signed an agreement with Transneft for joint construction of a pipeline spur from

the Eastern Siberia - Pacific Ocean trunk oil pipeline to the Komsomolsk Refinery.”

Increasing oil/gas reserves “During 2012 we further strengthened our positions in Venezuela, which ranks the first in

the world by proven oil reserves.”

Importance to governmental

budget

“The business achievements of [Case 2] make a substantial contribution to economic and

social stability in Russia. The Company once again became the country’s largest taxpayer

in 2012, paying 1.6 trln RUB to budgets at all levels.”

Long-term view of controlling

shareholder

“Ensuring efficient long-term cooperation with local government to support socioeconomic

development in Russian and foreign regions.”

Macro-economic “lobal and domestic market prices for petroleum products are determined mainly by

international crude oil prices, supply and demand on the petroleum product market, and

the level of competition on different markets. Price dynamics for different petroleum

products vary.”

Diversifying “In order to minimize its economic and financial risks [Case 2] strives to diversify its types

of business and the regions where it carries out investment projects, expanding the

geography of its business and the nature of its various projects.”

Unfavorable domestic market “Decline of the margin was due mainly to the ending of tax privileges for the Vankor field,

which had operated in the same period of 2011, as well as indexation of the base MET rate

and increase of natural monopoly tariffs.”

86

Factor Illustrative quotes [Case 2] 2013

Importance to governmental

budget

“[Case 2] is the biggest taxpayer in the Russian Federation.”

Long-term view of controlling

shareholder

“Our Company’s main strategic foreign trade vector within the long-term Innovative

Development Program is participation in international projects, programs and

partnerships.”

Government support “in 2013, the president and government of the Russian federation approved a number of

important tax initiatives that will create conditions for developing key projects aimed at

future hydrocarbon production.”

Transit fee foreign

infrastructure

“growing transport and electricity tariffs,”

Macro-economic “Despite unfavorable macroeconomic tendencies, the Company has succeeded in

achieving record levels of EBITDA.”

Technological “[Case 2] is the champion of qualitative modernization and innovative change in the

Russian oil and gas industry.”

Need to respond to competitor

initiatives

“Significant rise in crude oil export deliveries to Western Europe after the OPEC price

increase.”

Home government foreign

policy goals/ political conflict

between home/host country

“[Case 2] is involved in foreign economic relations, and is therefore subject to several

risks that arise from changes to legislation governing foreign economic relations, and to

customs legislation governing procedures for transportation of goods across the customs

border, the establishment and application of customs regimes, and the setting, introduction

and levying of customs charges.

Diversifying income streams “In order to minimize its economic and financial risks [Case 2] strives to diversify its types

of business and the regions where it carries out investment projects, expanding the

geography of its business and the nature of its various projects.”

Inter-government tie strength “Our Company is also actively involved in various social and charitable projects in

Venezuela, such as provision of opportunities for Venezuelan students to study at Russian

oil universities.”

Discrimination in host country “The Company notes possible influences of risks related to the international political

environment, as well as risks related to the changing perceptions towards Russian

enterprise in host environments.”

Factor Illustrative quotes [Case 2] 2014

Macro-economic “In 2014, the Russian economy was affected by a significant drop in crude oil prices and

the devaluation of the Russian Ruble, as well as by sanctions imposed by several

countries.”

Sanctions “In 2014, the USA and EU issues a number of sectorial sanctions.”

Inter-government tie strength/

technological

“Wherever necessary, foreign experience also needs to be taken on board, no doubt about

it; technological alliances with the leading global manufactures need to be entered into.”

- President Vladimir Putin

Home government foreign

policy goals

“[Case 2] is the locomotive of the Russian oil and gas industry and in its activity acts as a

guarantor of efficient use of the unique resource base and energy security of the country.”

Long-term view of controlling

shareholder

“The long-term development program is developed in accordance with the assignment

given by the President of the Russian Federation V.V. Putin on 27.12.2013 (..)).”

Political conflict between

home/host country

“Despite tough political and economic environment in Ukraine, the Company continued

supplying petroleum products to the Ukrainian market.”

Importance to governmental

budget

“[Case 2] once again confirmed its status of the leading Russian oil and gas corporation,

the biggest taxpayer in the Russian Federation responsible for a considerable part of all

tax revenues to the consolidated national budget.”

Diversifying income streams “The Company continues working on expansion of the geography of its operations and

diversification of supply routes.”

“Maintaining its old markets, [Case 2] is reaching out to new export routes and continues

expanding its presence in the promising Asia Pacific region. We consider this objective an

important priority of ours with no prejudice to the cooperation with our European

partners.”

87

Control over infrastructure “The largest part of [Case 2]’s export volumes are shipped via Transneft facilities,

including the trunk pipeline network and the ports.”

Transit fee foreign

infrastructure

“(..) growing tariffs of natural monopolies.”

Government support “different export duty exemption periods were set for the oil and derivative products

produced (manufactured) in the course of offshore projects.”

Unfavorable domestic market “The “tax maneuver” implies phased increase in the mineral extraction tax (MET) rate on

oil, offset by concurrent reduction of crude oil export duty rate.”

Made in Russia “Execution and further development of the import substitution program.”

Discrimination in host country “The Company plans to carry out the following measures of a general nature to maintain

its business in case of negative impact due to country or regional changes: to take whatever

measures are possible to support projects, which are already being developed with the

Company’s support; to work closely with executive bodies of the local national government

and municipal government bodies (..).”

Factor Illustrative quotes [Case 2] 2015

Importance to governmental

budget

“The Company’s operations become the primary factor for providing economic strength of

the Russian Federation (..).”

“We are also generating solid cash flows supporting the Company’s stability, replenishing

the state budget.”

Technological “Development of innovation technologies is another significant investment for [Case 2].”

Made in Russia “We made a move to using only domestic catalyzers at our catalyst cracker units.”

Macro-economic “2015 marked a historical milestone for the world’s oil and gas industry with the

unprecedented “perfect storm” in the global markets that contributed to uncertainty for

leading hydrocarbon producers.”

“Negative changes in oil prices considerably impacted the competition in the industry.”

Home government foreign

policy goals

“Company management will continue to implement a strategy aimed at reinforcing our

economic, technology, and professional competencies so that our country can take its rightful place as a leader in the new economic order.”

‘It is exposed to higher political, economic, social, and legal risks in developing economies

as compared to more developed countries. The risks related to operation in such countries

are in many respects similar to or may be higher than in Russia, also due to possible

changes in foreign policy.”

Government support “The Government of the Russian Federation issued Decree No. 2602-r of December 17,

2015 to approve government support measures (Roadmap) to assist with the strategic

investment project of Eastern Petrochemical complex construction.”

“Competitive advantages: Status of a Company of strategic importance for the Russian

Federation.”

Sanctions “The Company takes into account the above sanctions when performing business

operations and keeps their continuous monitoring to mitigate negative effect.”

Inter-government tie strength “Venezuelan nationals can study at the Company’s partner colleges and universities in the

Russian Federation.”

“Agreement between [Case 2] and the Ministry of Oil and Mineral Resources of the Arab

Republic of Egypt in promoting the organization of training of Egyptian nationals in the

Company’s partner universities dated August 26, 2015.”

Political conflict between

home/host country

“Despite the tough political and economic situation in Ukraine, the Company continued to

supply petroleum products in the Ukrainian market.”

Diversifying “[Case 2] continues to expand the international presence and diversify the supply routes.”

“The Company diversifies the consumers portfolio to ensure the planned gas consumption

scopes.”

88

“The most effective response measure to stiffer competition risks in the crude oil and

petroleum product market includes geographical diversification which is instrumental with

redistributing products between regions.”

Long-term view of controlling

shareholders

“Long-term gas supply agreements portfolio is a competitive advantage of [Case 2].”

Unfavorable domestic market

conditions

“The big tax maneuver in the Russian oil industry made oil refining less appealing as

compared to oil export in 2015.”

Factor Illustrative quotes [Case 2] 2016

Long-term view of controlling

shareholders

Title of annual report: “for the benefit of Russia.”

Home government foreign

policy goals

“On instruction from the President of the Russian Federation Vladimir Putin, [Case 2] is

implementing a project in the Far East to build one of the most advanced dock yards in the

world.

“In 2016, the Company’s operations were still affected by the state of the global and

Russian economy, as well as changes in foreign policy.”

Government support “as a result of the integrated approach of [Case 2], consuming countries are interested in

receiving guaranteed feedstock volumes, in the production of these volumes, their

transportation and delivery to the end user.”

Importance to governmental

budget

“It successfully completed an integrated transaction involving the privatization of 19.5%

of the Company’s shares and the controlling interest of Bashneft, and as a result RUB 1.04

trillion were transferred to the state budget of the Russian Federation.”

“[Case 2] consistently remaining one of the largest taxpayers, the Company was able to

considerably support the Russian state budget: the total payment volume in 2016 exceeded

RUB 3 trln.”

Diversifying income streams “The Company successfully diversifies its supply between the Western and Eastern routes.”

“The Company continues to take active steps to expand its international footprint and

diversify its supply routes.”

Inter-government tie strength “The fundamental principle underlying the Company’s operations is to maintain a

favorable environment in its regions of operation.”

Macro-economic “The Company’s operations in 2016 were significantly impacted by the following key

macroeconomic factors: Global and national economic growth rates; RUB/USD FX rate

and inflation rates in Russia; Global oil and gas prices.”

Need to respond to competitor

initiatives

“The Company has built an investment management system based on international best

practices in investment management.”

Increasing oil/gas reserves “The Company’s involvement in international gas projects will ensure a significant cost-

effective increase in natural gas reserves and a balanced risk profile of the asset portfolio.”

Technological “The Company engages academics from Russian and international universities and

coaches from leading local and foreign education and consulting companies to conduct

training. Training programs are adjusted to the Company’s business needs.”

Discrimination in host country “Sponsorship projects involve conducting promotional and publicity campaigns and

maintaining a positive image of the Company at high-profile venues in Russia and abroad

and during major national and industry events.”

Sanctions “Sectoral sanctions imposed earlier against Russia and individual Russian companies by

a number of countries, including the US and the EU, remained in force.”

Made in Russia “Successful implementation of the import substitution program: the Company has switched

over to the use of domestically produced catalysts at all catalytic cracking units.”

Factor Illustrative quotes [Case 2] 2017

Technological “Another focus area is transformation of the Company into one of the technological leaders

through digitalization.”

89

Inter-government tie strength “As a former Chancellor of Germany, I am particularly interested in bolstering [Case 2]’s

partnerships with European companies and I'm convinced that the Company’s recent steps

have been crucial in building productive and effective business relations with its European

partners.”

“[Case 2] and the Iraqi Kurdistan Regional Government signed an agreement on

cooperation in upstream, infrastructure, logistics and trading of hydrocarbons.”

Discrimination in host country “In Germany (..) and other countries, people often ask me why I accepted the offer to take

up an executive position in the Company.”

“Distrust and political differences can be overcome through closer cooperation.”

“The Company takes an integral approach to business development, acquiring stakes in

promising assets and engaging foreign partners in its projects.”

Diversifying “[Case 2] has gained a foothold in the high-potential, highgrowth Indian petroleum

products market, and is meanwhile greatly expanding the geographical distribution of its

petroleum products across Asia Pacific.”

Sanctions “The Russian economy has been negatively impacted by a decline in oil prices and

sanctions imposed on Russia by a number of countries.”

Government support “Exempted from the income tax proceeds from sale of shares (stakes) by companies that

are subject to sanctions imposed by foreign countries and intergovernmental associations

(..).”

“For more efficient development of the field, in 2016–2017, [Case 2] and the Government

of the Russian Federation agreed on investment incentives.”

Transit fee foreign

infrastructure

“Transit tariffs for oil transportation via the Republic of Belarus increased by 7.7%.

Made in Russia “As part of its import substitution program, the Company transitioned the Achinsk

Refinery’s kerosene hydrotreaters and the Ryazan Oil Refining Company’s catalytic

reformers to catalysts produced by the Angarsk Catalyzers and Organic Synthesis Plant in

2016, and the gasoline reforming units of the Kuibyshev and Saratov Refineries were

transitioned in 2017.”

Long-term view controlling

shareholder

“In an initiative to improve procurement efficiency, the Company transitioned to signing

long-term contracts, which provide discounts on bulk purchases.”

“[Case 2]’s LongTerm Development Program (..) was updated to include revised strategic

guidelines reflecting the Company’s new corporate structure, some detailed action plans

to achieve long-term goals, and updated initiatives which had been developed pursuant to

the Russian Government Directives.”

Importance to governmental

budget

“RUB 2.6 TRLN of taxes and customs duties paid by [Case 2] in 2017 one of the largest

taxpayers in Russia.”

Home government foreign

policy goals

“The Company notes the impact of risks related to changes in foreign policy on its

operations.”

Increasing oil/gas reserves “As part of the Zohr field development, [Case 2] began gas production as an international

consortium member. The project is implemented as a joint concession with Italy’s Eni S.p.A.

(60%) and UK’s BP (10%). With in-place gas reserves of about 850 bcm, Zohr is one of

the largest gas field in the Mediterranean.”

Macro-economic “THE COMPANY’S OPERATING PERFORMANCE IN 2017 WAS SIGNIFICANTLY

IMPACTED BY THE FOLLOWING KEY MACROECONOMIC FACTORS: Global and

national economic growth rates; Global oil prices; RUB exchange rate and inflation rates

in Russia.”

Factor Illustrative quotes [Case 2] 2018

Technological “The strategy is aimed at qualitative changes, first of all, through mainstreaming new

technologies in all areas of operations: from upstream to downstream.”

Inter government tie-strength “(..) partners from the Qatar Investment Authority (QIA) increased their direct

shareholding to 18.93%, becoming the second largest strategic shareholder after BP

(19.75%).”

90

“As a citizen and former chancellor of Germany, I have a keen interest in tracking [Case

2]’s advances in the German market.”

Political conflict between

home/host country

“Despite external pressures, [Case 2] remains an effective channel for integrating Russia

into the world economy by means of active work on foreign markets and cooperation with

the largest oil companies in the world.”

“Besides commercial risks being a part of any investment operation, assets in a number of

regions of the Company’s activities also bear political, economic and tax risks which are

analyzed by the Company on a regular basis. The Company continuously monitors projects

in Venezuela realized with its participation.”

Importance to governmental

budget

“In 2018, [Case 2] confirmed its status as the largest Russian taxpayer and a backbone

company for the government budget.”

Made in Russia “70% expected localization of foreign equipment manufacturing in Russia by 2025.”

Long-term view of controlling

shareholder

“The Long-Term Development Program was originally established in 2014 pursuant to

Instruction No. Pr-3086 of the President of the Russian Federation Vladimir (..).”

Macro-economic “Due to the growing oversupply and falling oil prices in December 2018, OPEC +

representatives decided to curb daily oil production from January to June 2019 by a total

of 1.2 mmb against the level of October 2018.”

Sanctions “Starting from 2014, the USA, European Union, and some other countries have been

consistently imposing the sanctions on the Russian Federation, including sectoral sanctions

affecting the operations of individual companies in the energy and other sectors of the

Russian economy (including [Case 2] and some its subsidiaries).”

Diversifying income streams “(..) the Company continues to successfully diversify oil supply channels with a general

ramp-up in feedstock exports in the eastern direction.”

Transit fee foreign

infrastructure

“In 2018, the growth of unit operating expenses was 4.9% year-on-year (..) the growth is

mainly due to (..) an increase in the tariffs of natural monopolies.”

Government support “The risk of financial losses resulting from the claims of the tax authorities or the

Company’s loss of the right to use tax incentives.”

Discrimination in host country “Risk related to international projects mainly originate from political risks e.g. sanctions,

and general negative attitudes of stakeholders towards [Case 2] in the host environment.“

91

APPENDIX V: Decrease in Russian oil and gas exports to Europe

following sanctions.

Net revenue from sales of crude oil and gas per region in billion Ruble - [Case 1]

Year Other countries Former Soviet

Union

Domestic Profit margin for

the year

attributable to the

owners of [Case

1]

2010 No useable

financials available

No useable

financials available

No useable

financials available

No useable

financials available

2011 No useable

financials available

No useable

financials available

No useable

financials available

25.9%

2012 No useable

financials available

No useable

financials available

No useable

financials available

15.9%

2013 128.0 50.1 31.2 15.5%

2014 141.6 16.0 51.6 4.7%

2015 155.5 27.6 77.5 13.0%

2016 307.1 23.5 81.3 16.0%

2017 438.7 29.8 71.4 11.0%

2018 631.6 38.7 64.6 18.0%

Source: [Case 1] annual reports 2010-2018

Note: [Case 1], in its geographic segmentation, only differentiates between other countries, former Soviet Union

countries and Russia. Therefore, it is impossible to identify exactly how much revenues shifted from Europa to

Asia, or other non-FSU regions. Still, the decrease in profit margin in 2014 showcases the impact of the Crimea

conflict on Russian oil and gas SOEs.

Crude sales per region - [Case 2]

Year Europe and

other

Asia-pacific CIS Domestic Net income

margin

2010 65.4% 27.2% 5.4% 2.0% 16.6%

2011 64.0% 28.0% 7.0% 1.0% 13.5%

2012 62.6% 26.9% 9.7% 0.8% 12.0%

2013 61.1% 23.0% 9.4% 6.5% 12.0%

2014 55.0% 30.1% 7.0% 7.9% 6.4%

2015 52.8% 34.7% 7.9% 4.7% 6.9%

2016 51.4% 36.0% 8.2% 4,4% 4.0%

2017 49.8% 37.6% 8.0% 4.6% 4.9%

2018 49.4% 38.1% 7.6% 4.9% 7.9%

Source: [Case 2] annual reports 2010-2018

92

APPENDIX VI: Case description

[Case 1] [Case 1] is an international integrated energy company, with its headquarters in the Russian Federation.

In 2019 the revenues of [Case 1] exceeded $100 Billion, making it one of the largest publicly listed

energy companies in the world, as well as one of Russia’s largest companies when measured by revenue.

[Case 1]’s controlling shareholder is the Russian government, which holds more then 50.00% of the

shares through several federal agencies. In addition to being state-owned, the company also floats shares

on stock exchanges, while the remaining shares are owned by International partners. As per its annual

reports [Case 1] defines its strategic goals as becoming a leader among global energy companies by

diversifying sales markets, ensuring reliable supply, and improving operating efficiency.

[Case 1] employees around 300,000+ people, most of which have Russian citizenship. Additionally,

[Case 1] pays around almost 2 trillion rubbles in taxes a year. This makes it that the company contributes

between 10-15% to the total budget of the Russian government.

[Case 1] is involved in every aspect of the gas industry (e.g. exploration, distribution, power generation,

transport, etc.) and key areas of the oil industry (refining, exploration, etc.). This wide range of expertise

is certainly useful, as [Case 1] holds access to large proven natural gas reserves. These large reserves

enable [Case 1] to be an important international player, especially in Europe and Turkey, to which it is

a large supplier of natural gas.

To sell its products internationally (as well as domestically) [Case 1] mainly uses pipelines. These

pipelines are built, maintained and owned by [Case 1] itself (sometimes together with international

partners). Moreover, [Case 1] is investing heavily into liquified natural gas (LNG) operations, this

enables [Case 1] to ship natural gas to customers all over the world without needing pipelines. This

approach however, is less profitable. An overview of [Case 1]’ sales per geographic segment is shown

on the previous page in Appendix V.

While [Case 1] is most known for being an energy company, it has also been in the news for its activities

that some consider to be of a political nature. With some examples being [Case 1] significantly raising

gas prices to the Ukraine weeks before Russia annexed the Crimea, or the EU accusing [Case 1] of

abusing market power by increasing prices to punish EU members that criticised Russian domestic and

foreign policy. These and the other aforementioned aspects of [Case 1]’s operations highlight that it’s

an interesting, albeit ‘extreme’, oil and gas SOE.

Overall the global energy market is changing rapidly, with one of the main factors being the energy

transition pushing economies towards more sustainable energy sources. With natural gas being the least

polluting fossil fuel, [Case 1] communicated that it seeks to play an important role in this energy

transition. Especially because its main customers, such as Europe and Turkey are reducing their

domestic natural gas production, while their demand increases (Henderson & Mitrova, 2015).

Moreover, [Case 1]’s strong geographic position between two of the world’s largest energy demand

centres, namely Europa and Asia, as well as having large resource reserves, place the company in a

great position for expanding its international operations. These, and other factors make [Case 1] an

interesting case to study for the internationalization of oil and gas SOEs.

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[Case 2] [Case 2], is an integrated Russian energy firm headquartered the Russian Federation. The revenues of

[Case 2] exceeded $100 billion in 2019. Making the company one of the largest companies in Russia,

and one of Russia’s largest SOE’s together with [Case 1]. [Case 2] is a large taxpayer in the Russian

federation. The company pays about 2.5 trillion rubles worth of taxes a year, making [Case 2]

responsible for contributing more than 15% to the total Russian budget. In addition to being a large

taxpayer, the company is also one of Russia’s most important employers, as its employees more then

300,000 people, most of which are Russian citizens. Moreover, [Case 2]is the top 25 largest energy

companies in the world in terms of revenue. [Case 2] has operations in more than 20 countries, making

it quite internationalized.

The controlling shareholder of [Case 2] is thus the Russian government, which owns >50.0% of [Case

2]’s shares through a holding company. The remaining shares of the company are floated on stock

exchanges, held by other Russian governmental organizations, or owned by international investment

funds.

Due to [Case 2]’s integrated nature it is involved in almost every aspect of the oil industry (e.g.

exploration, refining, marketing, sale of petroleum and petroleum products, transport, etc.). Over the

last few years [Case 2] has also started to slowly enter the Russian natural gas market, in which it mainly

competes with [Case 1] for domestic (Russian) market share.

[Case 2] has also been involved in some controversies, both in Russia and abroad. A notable example

being politicians from other countries taking a prominent executive position in [Case 2]. The

involvement of foreign former leaders in a state-owned Russian oil and gas firm sparked many questions

on potential conflicts of interest. Another example is [Case 2] conducting operations in countries such

as Venezuela, a country which the E.U and U.S. sanctioned. As a result of its operations in such

countries [Case 2] has been criticized, and sometimes even punished by relevant stakeholders.

The aforementioned showcases that [Case 2] is an operationally diversified oil and gas company that

has significant importance to Russia and other countries. Moreover, the controversies around [Case 2]

make the company an extreme case. As described in the methodology, this makes relevant factors on

the internationalization of oil and gas SOEs easier to identify. As a result, [Case 2] is considered an

appropriate and interesting case to study for this thesis.

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APPENDIX VII: Proposition four – visualisation.

In this appendix the fourth proposition of this thesis is visualized. The author expects that

private firms in industries that produce little negative externalities can, through adapting to the

local environment and CSR, mitigate discriminatory pressures quite quickly. For private firms

in industries that produce more negative externalities the process of obtaining local acceptance

is expected to take longer. As a result, discrimination has a stronger negative effect on the

internationalization of such firms, because it is a relevant factor for longer.

For SOEs, this thesis expects that discriminatory pressures can never be mitigated completely.

For the reason that locals are likely to extend any animosity towards the SOE’s home country

to the SOE as well, while private firms can change them identify to adapt to the host country,

this is less of a possibility for SOEs. Therefore, this thesis expects that SOEs are subjected to

a base-level of discrimination (0.5 in the visualization). Moreover, because of this, the initial

discriminatory pressures are also higher for SOEs. Similar to private firms, this thesis expects

that firms in industries that produce negative externalities are accepted less quickly than other

more “positive” industries.

Therefore, this thesis expects that the stronger the discriminatory pressures are in a host

country. The lower the stimulus for an oil and gas SOE to internationalize to said country.

Because, the initial discriminatory pressures will be very high, and these pressures will

diminish very slowly. As a result, making internationalization very difficult, for a relatively

long time, when compared to host countries which have weaker discriminatory pressures

towards the oil and gas SOE and its home country (e.g. in a country with weaker discriminatory

pressures the starting discriminatory pressure could be 1.1 instead of 1.3)

Source: Author; data used in the graph is simulated and only serves as an example.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0 2 4 6 8 10 12

Dis

crim

inat

ory

pre

ssu

re (

1 is

hig

h 0

is lo

w)

Time in years

Impact of industry and onwership on diminishing discrimintory pressures (Example visualization)

Private firm

Private oil and gas firm

SOE

Oil and gas SOE