Page 72 - Azerbaijan State University of Economics

N.V. Abdullayeva: Value creation through mergers and acquisitions in energy sector

confirm that United States has been investing heavily in energy sector both on

domestic and foreign levels. Target companies were mainly from United States,

Canada and Norway. Surprisingly, emerging countries were not on top of potential

target lists of acquirers. This can be partly explained by complex regulations, high

level of corruption, poor infrastructure and lack of highly skilled engineers, which

are crucial in energy industry in developing countries.

Despite, potential economic gains companies refrain from investing or entering

those markets being afraid to damage company reputation, not to be able to guarantee

safety to their employees and incur big amount of sunk cost in case of shutting down

operations in those locations. Libya is one of the recent examples, demonstrating

which type of challenges oil companies may face when investing in culturally,

economically and politically dissimilar country. Companies operations have been

interrupted by civil war and instability in Libya. Biggest energy company in Italy by

market capitalization, Eni which produced 12% of its total global oil production in

Libya incurred the losses due to turmoil. Saras, Italian refinery company reported a

total loss in the sum of €44.3 million. The figure below shows impact of different

historical conflicts on oil production capacity (PIRA Consulting, 2011).

Oil and gas are one of the significant sources of energy. Historically, the

ownership of oil reserves meant power in economic, political, and military

relationships among 12 Corporation, BP, ChevronTexaco, ConocoPhillips Company

and Royal Dutch/Shell Company are mostly integrated along the value chain. These

companies are active in most activities from sourcing, drilling to distribution to end

72