OUTSOURCING VS VERTICAL INTEGRATION IN OIL & GAS INDUSTRY IN RUSSIA: A CASE OF VIRTUAL ORGANIZATION?

In theory, when we look at any oil and gas company, most elements of its value chain can be outsourced. Ultimately, such an imaginary oil and gas company may look like a virtual organization having retained only oil or gas reserves and finances. In practice, this never happens. On the contrary, in oil-producing countries the majority of oil and gas companies strive for vertical integration and a wide reach across various businesses. This is especially true for Russia. This article explores the history of outsourcing in the Russian oil and gas industry since the demise of the Soviet Union to present date. We have conducted the analysis using the “five forces of outsourcing” methodology. It is a blend of five existing and new theoretical approaches to outsource analysis, namely: transaction costs, competitive advantage, trust and social exchange, level of economic development and the sourcing cycle. The state of outsourcing in the industry has evolved greatly for the past 20 years from level “zero” to quite a mature state with upstream segments, especially oilfield services and logistics, being widely outsourced. At the same time, midstream and downstream businesses are heavily concentrated within oil and gas companies and include chemistry, utilities and even shipbuilding facilities. This happens because companies are not truly public and are controlled either by the state or by a single person. The state and oligarchs distrust market forces and competition, which prevents outsourcing taking deeper root within the industry. At the same time, elements of the value chain will surely continue to be outsourced and size of the outsourcing market will grow to 2.5 trillion rubles in the near future. The analysis of the evolution of outsourcing in the Russian oil and gas industry can help in drawing parallels to outsourcing processes in other oil-producing countries worldwide