Coopetitive buyer-buyer-supplier triads, contracts and risks: A case study in the oil & gas industry.

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Coopetitive buyer-buyer-supplier triads, contracts and risks: A case study in the oil &

gas industry.

January 2017

Vagelis Kalathas

Student number: s3001997

E-mail address: e.kalathas@student.rug.nl

University of Groningen

Faculty of Economics and Business

MSc in Supply Chain Management

Supervisor: Jasper Veldman

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Acknowledgements

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Abstract

This research paper investigates coopetition in a triadic buyer-buyer-supplier setting in the oil and gas industry, where two buyers collaboratively invest on a third party. Third party in this research paper is a joint venture, which through the investment that the two buyers make, are able to provide them with better services. The aim of this paper is to connect coopetition risks with certain contract mechanisms that are typically used in coopetition agreements. The interaction between coopetition risks and contracts mechanisms leads to the investigation of some supply chain outcomes. This research used a case study in order to combine it with relevant coopetition literature in order to make some propositions. The results presented that information exchange is restricted in operational joint ventures due to competition law. In addition, research joint ventures face the challenge of spillovers that give competitive advantage to the competitor. Conflicts and opportunistic behaviors were found fiercer in non-equity joint ventures, where cultural differences are bigger. Reputational risks make oil and gas firms collaborate in improving safety standards and reduce facilities, as this leads to less reputation risks. In the contracting part was found that contract mechanisms should entail lots of details like certain standards about joint ventures, share the costs properly and include some extra golden rules in order to comply with competition law. Proper contracting was found that leads in better supply chain coordination and subsequently in more punctual deliveries of products which is important in countries with low stock base in oil and gas and bad infrastructure.

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1. Introduction

The entrepreneurial world would regard it as rather unconventional for a firm to collaborate with its competitors in order to gain a competitive advantage. However, a significant number of competing firms cooperate and implement a coopetition strategy, i.e. a combination of cooperation and competition actions. An example of coopetition can be a strategic alliance with competitors by investing in a shared supplier in order to achieve quality, cost, delivery and service improvements (Zhang & Frazier 2011; Friedl & Wagner 2016). Through this alliance, a buyer-buyer-supplier triad is formed and contracts are signed between all of the parts in order to pursue the strategic goals that were mentioned above (Bastl et al. 2013). Another reason for making collaborative investments with your competitors can be the strive for sustainable development (Zinenko et al. 2015) and increase of supply chain security (Bakshi & Kleindorfer 2009). Strategic alliances between competitors and especially when they have both made investments in a shared supplier raise concerns about opportunistic behaviors. Therefore companies need contracting to safeguard their investments (Dekker 2004; Grafton & Mundy 2016). Several types of contractual mechanisms can be combined in order to tackle opportunistic behavior, conflicts, specify details about profit-cost sharing and coordinate the relationships in the triad (Zhang & Frazier 2011; Grafton & Mundy 2016). Contracts should also be able to tackle reputational risk that might occur from the collaboration of two competitors, in coopetition triads (Jawaad & Roehrich 2014). Contracts are affected by these risks and they are shaped in a certain way to cope with them (Croson & Kunreuther 1999). A good example of a sector that is involved in high risk taking due to the nature of the product and the size of the market is the oil & gas industry (Ramos & Veiga 2011).

Coopetition in a buyer-buyer-supplier triad has been already briefly discussed in a number of articles yet in depth research is lacking (Friedl & Wagner 2016; Gnyawali & Park 2011; Zhang & Frazier 2011; Wang et al. 2014). Most of the research that has already been done in coopetition in general focuses on the different formations of coopetition and there is scarce knowledge in the part of investments in shared suppliers (Veldman et al. 2016). During the last years, contracting in cases of coopetition has been scarcely addressed in past scientific papers and is limited on some certain contracting mechanisms mentioned in some papers, without having in depth research (Qi et al. 2015; Friedl & Wagner 2016). Apart from the limitations existing in current coopetition literature regarding contracting, there is lack of knowledge on the way that contractual mechanisms should be combined in order to protect firms from risks that occur in a coopetitive buyer-buyer-supplier triadic setting, with two buyers collaboratively investing in a shared supplier (Friedl & Wagner 2016). Also, the way contractual mechanisms interact with risks and how this interaction is able to affect potential outcomes remains unclear in the aforementioned setting.

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5 the structure of the contract as well as specific mechanisms need to be mentioned in order to lead to some specific outcomes. Contracting and risks have not been addressed in coopetition triads, in this specific setting and on this specific industry. Furthermore, the relationship between coopetition risks and contracts mechanisms, which leads to specific supply chain outcomes, has not been previously addressed. This is the main gap of the literature. This research aims to address the issues of how the aforementioned types of risks interact with specific contractual mechanisms (profit-cost sharing, reputation managing and information sharing mechanisms) and how are some outcomes going to be affected from this interaction. What makes it interesting is the fact that contracting will be connected with coopetition risks as there is scarce literature about contracting in coopetition agreements. Also, it is interesting that a high profit market sector like the oil and gas will be investigated conducting a case study, with several experienced managers shedding light on this topic.

A theoretical background part follows in order to gain better understanding of what has already been studied and help the reader understand the context behind this research. In this part the research framework is also included in which the three research questions are mentioned. This is followed by the methodology part discussing in detail how this research will be conducted. The next parts the presentation of the results, a discussion about findings and comparison with literature, leading to the conclusion part, where there are suggestions for further research.

2. Theoretical background

2.1 Coopetition and the paradox of the coopetitive relationships

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6 coopetition as a strategy is to exploit the combination of benefits gained by collaboration and competition as such a practice enables the companies involved in coopetition to share key resources and simultaneously competition is important in order to maintain creative tensions between these organizations (Chiambaretto & Fernandez 2016).

Despite the aforementioned expectations, a paradox appears as two contradictory and interrelated dualities emerge in order to form coopetition (Raza-Ullah et al. 2014).The paradox appears because on the one hand cooperation is established in order to create added value and on the other hand competition seeks opportunistic behavior in order to gain private benefits(Das & Teng 2000). This contradiction creates paradoxical relationships between the different members that take part in coopetition projects (Smith & Lewis 2011). Both positive and negative emotions can be released from the collaboration between competitors. These emotions combined with the conflicting interests developed between partners when competition starts result into more distant relationships. A good example for this is the collaboration between Google and Apple. These two companies started working together for the first iPhone but then they distanced from each other when Google developed Android and they became competitors. But through the interaction with other partners, they still cooperate in cases like the joint bid for Eastman Kodak (Raza-Ullah et al. 2014). Coopetitive relationships, like this, can be coordinated by different types of contract mechanisms and this subject will be explicitly discussed below (Palsule-Desai 2013).

2.2 Risks of coopetition

Firms that implement coopetition are involved in high risk taking because of the opportunistic behaviors that might occur between the competitors (Wang et al. 2014). Opportunistic behavior can be categorized in two types. The first is strategic manipulation, in which one partner influences the orientation of the alliance in order to pursue own interests and goals. The second type of opportunistic behavior is knowledge appropriation, i.e. a firm using their partners knowledge for their own benefit without any previous agreement mentioning it (Walter et al. 2015). Opportunism may contain a variety of behaviors, mainly of self seeking interest that leads to violation of promises. Opportunistic behavior in strategic alliances can be observed when the partner is inconsistent with previous agreements. Every opportunistic behavior can lead to loss of market share (Gnyawali & Park 2011), harming the reputation of the partner hence specific attention should be paid to contracting mechanisms (Dagnino & Rocco 2009).

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7 decreased if two competitors invest in safety and improve it, but if it does happen, it can still cause supply chain disruptions and also cause financial and reputational damage (Ritala & Hurmelinna-Laukkanen 2009). Tensions and conflicts are often the reason for partnerships to break up and for contracts to be terminated. They can be used interchangeably in terminology (Tidstrom 2014). Tensions are contradictory forces that have conflicting goals (Fang et al. 2011) and conflicts can be defined as a situation of incompatible behaviors (Tidstrom 2014). These conflicts and tensions can result from opportunistic behavior on the part of the competitor or from power and control disparities (Osarenkhoe 2010). Conflicts can be observed in a series of forms in supply chains like transportation delays, accidents, natural disasters, quality issues, IT system breakdowns as partners may potentially have serious disagreements on handling these situations (Blackhurst et al. 2008). In coopetition conflicts can be grouped in three categories: organizational conflicts (e.g. differences in control perception, individualism / togetherness), relational conflicts (e.g. incompatible goals, role confusion) and external conflicts (e.g. late deliveries, unexpected high customer demand, political reasons) (Tidström 2009). The amount and the severity of the aforementioned types of conflict can be reduced through trust which is usually a main characteristic of the partnership (Chin et al. 2008). Sometimes trust is not enough to secure the competitive positions and the investments made in coopetition projects (Grafton & Mundy 2016). As a result, firms in order to protect their investments usually safeguard them by means of formal agreements and contracts (Wu 2014).

Another major category of risks in coopetition, has to do with information exchange risks and knowledge spillovers (Bouncken & Kraus 2013). Firms participating in coopetition need to ensure that apart from the competitive advantage that they will gain from joint learning, they will also gain competitive advantage for their own firm (Loebbecke et al. 2016). Spillovers may harm innovation performance and they need to be managed by formal mechanisms, i.e. legal instruments able to mitigate the spillovers (Estrada et al. 2014). Information spillovers can be managed by different means such as setting certain procedures and structures. An example of industry that is facing this type of risks is the oil & gas industry because it plays a very important role in every country’s economy being an industry that enjoys large profits, so information spillovers can lead to loss of competitive advantage and huge financial damage of the firm (Schwartz 2013).

2.3 Triads-The case of buyer-buyer-supplier triad

Triads represent the smallest formation of a supply network (Pathak et al. 2014). It can be seen as a subset of actors and ties (Bastl et al. 2013). Structurally, two nodes in the triad may not be directly connected, except only through a common third node. The absence of a direct link between the two nodes may result into competitive tensions between these two nodes. There are three types of triadic formations in supply networks and these are buyer-buyer-supplier, buyer-supplier-supplier and buyer-intermediate-supplier (Pathak et al. 2014). In this paper we specifically focus on the buyer-buyer-buyer-intermediate-supplier triad.

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8 problem as the three parties seek to be integrated. This problem appears because this integration can influence reputational risks, as companies involved in the triad, have a common brand image from this collaboration (Jawaad & Roehrich 2014). Complexity in triads can lead to role confusion and power inequity (Choi & Wu 2009).

2.4 Investing in a shared supplier and coopetition in a buyer-buyer-supplier triad

There are a lot of cases that firms, even competing ones source from the same set of suppliers. Sometimes they both invest, each one on its own in this supplier in order to mitigate some risks (Qi et al. 2015). A figure of the triad as it described by Friedl & Wagner (2016) is provided below.

Graph 1: Buyer-buyer-supplier coopetition triad with cooperative investments (Friedl & Wagner 2016).

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9 investment in order to avoid conflicts (Du et al. 2006). Careful contracting should be carried out in order to mitigate all the risks involved in coopetition (Qi et al. 2015).

2.5 Oil & gas industry and coopetition

The oil & gas sector is special for coopetition. More specifically, one of the main areas in which oil & gas companies cooperate despite being direct competitors is for the establishment of social and environmental responsibility standards (Berkowitz et al. 2016). Oil is a product that is needed for energy and is on high demand globally. So, it is a highly international product which requires to be managed implementing certain strategy models, like coopetition. This provides the opportunity to improve relationships between players that are competitors (Meckling et al. 2015). Technology transfer, swap of products and volumes are also reasons for cooperation in this field (Markwell et al. 2014). Another way that oil & gas companies are coopeting in is with the creation of joint ventures aiming to improve their relationships and cooperate in technical matters such as the reduction of emissions (Hiatt et al. 2015).

2.6 Contracts and coopetition in a buyer-buyer-supplier triad.

Investing in shared suppliers involves a lot of risks and contracting can be the main way to shield a firm from potential opportunistic behaviors of their competitors during their alliance (Qi et al. 2015). As inter-organizational relationships become more complex, contracting becomes even more necessary as it controls and coordinates the partners yet simultaneously competitors too (Mellewigt et al. 2007). Contracts can reduce complexity and manage the interdependencies existing in supply chains (Arshinder et al. 2011). Firms should be able to combine their resources without wanting to kill their competitor and try to achieve common goals (Czakon et al. 2014). Despite trust being an important factor of coopetition as it makes the collaboration easier without conflicts and tensions, safeguards are also required in every economic exchange in order to protect the investments that were made and keep opportunism out of the game (Grafton & Mundy 2016). Formal contracts are able to mitigate relational risks, vertically and horizontally (Anderson et al. 2014). This happens because they state the obligations and the responsibilities that both parts are engaged in and also they mention the legal penalties that might be imposed if contracts are not respected (Cao & Lumineau 2015).

Contracts should be formed in a way that they will be considered complete otherwise they cause problems related with ambiguity and they give space for opportunistic behavior to raise. Complete contracts are contracts that are able to cover a lot of different uncertainties and scenarios that might occur during a collaboration and are able mitigate opportunistic behaviors (Loebecke et al. 1999). In case of coopetition in innovation projects, explicit contracts can be used in order to protect the big investments that were made (Wagner & Bode 2014).

2.7 Contractual mechanisms and coopetition

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10 facilities and capacity exploitation, exchange of information, role distribution, process and responsibilities clarification decision-making, operations, distribution in general, coordinating the supply chain (Arshinder et al. 2008). This will help the firms avoid conflicts and opportunistic behaviors (Loebecke et al. 1999). Lastly, contractual mechanisms are also able to tackle reputational risks (Agrell et al. 2004).

Detailed mechanisms about the sharing of costs should be included in a contract, as it is one of the main incentives of coopetition (Qi et al. 2015). Costs in coopetitive alliances are really high due to the heavy investments made (Cheong et al. 2016) and they need to be allocated to the partners (Bhaskaran & Krishnan 2009), (Qi et al. 2015). Cost sharing contractual mechanisms include details about costs that have to do with innovation, integration and investments. Also, they include fixed costs about money too that was spent to acquire resources. In addition, cost-sharing contracts are able to help in the coordination of relationships (Linh & Hong 2009). Cost-sharing and profit-sharing contractual mechanisms are complementary and usually profits and costs are based on the percentage that each firm owns in the agreement for investments or the share percentage they possess, if the two firms cooperate by forming a joint venture (Bhaskaran & Krishnan 2009). Another advantage of using profit-cost sharing contractual mechanisms is that the performance of the supply chain will increase, offering a wide range of coordination mechanisms to different supply chains and different supply chain partners (Zhang et al. 2012).

Furthermore, triadic supply networks, especially in coopetition, raise the complexity level as more variables, behaviors and actions have to be controlled in order to mitigate reputational risks (Thorne et al. 2016). Partners in coopetition projects need to establish common safety norms and share similar values for all partners in order avoid reputational risks for their firm, coming from their partners problematic actions and behaviors (Klimas 2016). Contractual mechanisms like penalties and clauses can be used in order to make the firms more careful on the activities and have the minimum downgrading effect on the environment (Barari et al. 2012)(Xu & Beamon 2006). Competitors need also to cooperate in the establishment of other contractual mechanisms like norms and regulation standards in order to encourage sustainability (Gopalakrishnan et al. 2012). They can also resort to these mechanisms in order to cope with behaviors, such as codes of conduct (mostly for suppliers), common rules and memorandums of understanding. As a result these mechanisms mitigate reputational risks and they can increase supply chain performance (Chen et al. 2013)

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11 case of a joint venture, rules about information exchange are really strict due to competition law but that can also be beneficial as that ensures that the risk of leakages is restricted (Sampson 2004). Despite that, as it can be understood, it is important that contractual mechanisms clearly state what kind of information is explicit and which topics the firms are allowed to discuss (Loebbecke et al. 2016).

2.8 Research framework

This framework will discuss the use of contractual mechanisms in coopetitive buyer-buyer-supplier triads with collaborative investments in a shared supplier, in the oil & gas industry and try to explain how mechanisms work in this context. It has been observed in the existing literature of coopetition that coopetition as such involves some risks. The risks that are studied specifically in this research are conflicts, reputational risks opportunistic behaviors and information sharing risks. Also there are specific types of contractual mechanisms like revenue-cost sharing mechanisms, reputational risk managing mechanisms and information sharing mechanisms that are addressed in coopetition literature. It can be assumed from the theoretical background part, that the four types of risks and the three categories of contracts addressed interact with each other(Loebecke et al. 1999; Olander et al. 2010; Grafton & Mundy 2016). This happens because contracts can have an effect on the risks in order to manage them and the risks that emerge from coopetition seem to affect the formation of contracts, as buyers have to make them as complete as they can, in order to avoid the risks (Friedl & Wagner 2016). The model below illustrates the effect that risks and contracts in coopetition have on each other. From this parallel effect that risks and contracts have on each other, related coopetition literature states that specific outcomes are expected to rise and be affected. These outcomes are: supply chain coordination, supply chain performance and reputation protection.

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12 In the previous literature, there is little known about the contractual mechanisms, the risks and the outcomes from this interaction, as the available research has not explored these topics in depth. In this research paper we are going to investigate the interaction between risks and contracts, in certain coopetitive buyer-buyer-supplier triads with collaborative investments in a shared supplier, in the oil & gas industry. Hence the aim is to reach deeper levels of the topic as we investigate them in a specific triadic setting, with competitors collaborating when making collaborative investments in a supplier and also in a specific type if industry.

Firstly, the research will aim to investigate the specific types of conflicts, reputational risks, opportunistic behaviors and information exchange risks that are going to be managed in coopetition buyer-buyer-supplier triads with collaborative investments in a shared buyer-buyer-supplier in oil & gas industry. So the second research question will be:

1. What kind of conflicts, reputational risks, opportunistic behaviors and information exchange risks occur and how do they influence the use of contractual mechanisms in coopetitive buyer-buyer-supplier triads of the oil & gas industry?

After that, the research will be focused on how the contractual mechanisms should be shaped in order to influence the risks that are mentioned in coopetition such as conflicts, reputational risks, opportunistic behaviors and information exchange risks

2. How should contractual mechanisms be used in order to influence and mitigate conflicts, reputational risks, and opportunistic behaviors in coopetitive buyer-buyer-supplier triads of the oil & gas industry?

Lastly, we would like to investigate how some specific outcomes of contracting in coopetition are going to be affected by the contracts in coopetitive buyer-buyer-supplier triads with collaborative investments in a shared supplier in oil & gas industry. These outcomes are supply chain coordination, supply chain performance and reputation protection. So the third research question will be:

3. What kind of outcomes can be observed from the use of proper contractual mechanisms in coopetitive buyer-buyer-supplier triads in oil & gas industry? How are supply chain performance, supply chain coordination and reputational safety going to be affected from the use of proper contractual mechanisms?

3. Research method

3.1 Sample and Research Setting

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13 but also in business models (Mohsenian et al. 2014). Two case companies with coopetitive triads were found and these are the unit of analysis of the research.

Coral S.A (Shell Hellas) and Shell and MOH Aviation Fuels were two companies that met all the aforementioned criteria. They are both located in Athens, capital of Greece and they both belong to the oil & gas industry. Coral S.A is a distributing and oil product trading company that manages Shell’s retail stores, products and brand name in Greece. Shell and MOH Aviation Fuels is the firm that is responsible for the marketing and supply of Aviation fuels under Shell’s trademark in Greece. Its main activities are the marketing and supply of Aviation Fuel JET1 and other fuel related services. Both organizations participate in coopetitive projects with competitors, in which they have collaboratively invested in order to develop a shared supplier. These suppliers in our cases are joint ventures that both companies created in Greece with one of their most fierce global rivals (Competitor A). These projects were done for several reasons such as environmental protection, reduction of accidents, improvement of product quality but mainly for economic reasons.

Shell and MOH Aviation Fuels are collaboratively investing with Competitor A in a supplier that is a joint venture which is responsible for the storage and distribution of Aviation Fuels in 20 airports throughout Greece. The supplier possesses its own assets like vehicles and facilities located all over Greece in order to cope with the difficult infrastructure of the country. They do business with most airlines in several airports in Greece, like Athens International Airport, Thessaloniki Airport, airports in major Greek islands and a number of airports in Crete.

Also Coral S.A has cooperated with Competitor A in order to manage and develop facilities in two remote parts of Greece. This cooperation was established in order to improve the infrastructure and supply network and the delivery of oil products, especially in remote places of Greece like islands. Also, these facilities would not be beneficial, if companies did not cooperate with competitors due to low volumes of fuel that are required in these regions of the country.

Interviewing both organizations will allow the researcher to get an insight on the similarities and the differences that these two companies have in their contracting strategy in coopetition projects with collaborative investments. Both companies belong to the oil & gas industry but they have differences: they operate in a different way, they provide different contracts and the joint ventures that supply them with services have different goals. Also they were created for different reasons and this can be seen in the way of contracting. Both companies have a big market share and with their strategies are able to define the structures and the strategies of the whole industry.

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Organization Function Industry Duration Location

1.Coral S.A Site manager (Engineer)

Fuel products 1h and 3 mins Perama,Greece

2.Shell&MOH A.F

Supply Chain

Manager

Aviation Fuels 57 mins Amaroussion,Greece

Head of Legal Department

Aviation Fuels 50 mins Kifissia,Greece

Supply Chain

Developer

Aviation Fuels 48 mins Kifissia,Greece

Table 1: Respondents

The respondents were experts in coopetition topics as they have years of experience in cooperating with different competitors for the construction of pipelines and facilities in Greece. Also occasionally, they cooperate on product swapping in order to decrease costs of distribution. The lawyer who was interviewed was an expert in coopetition and anti-competition law. In addition, respondent number 1 and respondent number 2 were both in the boards of the joint ventures so they were able to discuss topics on the parts of the supplier and that of the buyer, which was interesting and made the results clearer as both sides are presented.

3.2 Methodology

Different methods can be used in order to test theory in operations management such as survey, case study, extensive literature review and design methods (Karlsson 2009). In this specific research a case study was conducted since coopetition is a complex phenomenon with complex relationships and this is the research method that enables us to study this in depth (Pathak et al. 2014; Karlsson 2009). It is basically promoted in cases that theory building needs to be done and it is not constrained by the use of questionnaires and models. New insights were created and new theory was developed that will have high validity with practitioners (Voss 2009). As Meredith (1998) mentions, case studies should be used in order to answer ‘’how’’ and ‘’why’’ questions, to test a phenomenon in its natural setting and are highly recommended for cases that the variables are unknown and the phenomenon is not clearly understood, such as contracting in coopetitive buyer- buyer-supplier triads. Multiple types of case studies exist in the literature about the methodology of the case study and these are: single, multiple, retrospective and longitudinal cases.

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3.3 Data collection and analysis

3.3.1 Data collection

In this research semi-structured interviews and archival data were used in order to collect the data needed. An interview protocol was selected and pilot tested before each interview. The interview questions are derived from the literature and more specifically from the research framework that includes topics such as conflicts, reputational risks, opportunistic behaviors and information sharing in coopetitive buyer-buyer-supplier triads and how these risks should be faced by contractual mechanisms. Also we aim to discuss the means through which these contracts are able to provide some positive outcomes and protect the firm’s reputation against economic and non-economic risks in coopetitive projects with collaborative investments made by two competitors in the oil & gas sector. Other topics of research and discussion were to see which specific types of conflicts, reputational risks, opportunistic behaviors and information are able to be managed in coopetition, by specific categories of contractual mechanisms during coopetitive buyer-buyer-supplier triads with collaborative investments in a shared buyer-buyer-supplier in the oil & gas industry, and how potential outcomes are going to be affected from the interaction between contracts and risks. These interviews were conducted face-to-face in scheduled meetings with the interviewees and this helps the researcher to get a clear picture of the working environment of the interviewee. This also affects the flexibility of the respondent (Karlsson 2009). Permission will be asked on whether the interview can be recorded or not. After the interview, the records should be transcribed and sent back to the respondents to confirm that the data extracted are accurate. Apart from the semi-structured interviews, archival data were used in order to supplement the data collection, namely specific contracts and shareholder agreements were provided to the researcher in order to study the contracting part more in depth.

3.3.2 Data analysis

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16 Graph 3: Coding methodology

In this specific research first order codes were grouped and translated into descriptive codes which comprise the second order codes. Then again, descriptive codes were pooled in order to lead to interpretive codes. In order to be more precise with results, the interpretive codes were assigned to one of the three main topics which are risks, contractual mechanisms and outcomes. Also they were linked with specific connection codes derived from the interviews and official papers that were provided by the case firms and are able to connect the third order codes with second order codes of another main topic of the research, in order to make the formation of the results easier and their presentation clearer. The table below gives an overview of the descriptive and the third order codes and the way that they were assigned to the main topics of discussion in this research.

On the table above in Appendix C, it is clearly presented which second order codes were pooled in order to create the third order codes, which interpretive codes are assigned to each main topic and how they are connected with other second order codes in order to present the effect that seems to exist between risks and contractual mechanisms and their inter-effect influencing some of the outcomes. This is also done in order to answer the second part of the research questions that has to do with the effects between the variables.

3.4 Validity and reliability

The questions that were asked were based on relevant literature and increase the validity of the research. Also construct validity is increased by the fact that semi-structured interviews will be used and the questions that will be asked are standardized (Eisenhardt & Graebner 2007). These interviews enable the respondents to be more flexible in their answers but this may be also be a disadvantage as people tend to express themselves differently and this may cause problems in coding. The respondents were selected carefully based on their experience on coopetition and are part of different operations of the selected companies in order to increase the internal validity. This research was be a comparative one. Two different companies were tested and this contributes also to the increase of the external validity. The language of the interviews was their native one for both respondents and researcher (Greek), so both researchers and respondents will be able to clearly understand each other and express themselves freely thus increasing internal validity making it less difficult to translate the results and understand them. All the data like transcripts, audio recordings, clarifications by interviewees and official papers that were provided during the data collection coming from this research are available to be retrieved in order to increase the reliability and ensure that if the research is repeated , the results are going to be the same (Karlsson 2009).

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4. Results

The research focused on two cases. The first case is collaboration between Coral S.A. and Competitor A, which leads to the creation of the Joint Venture A, which was created in order to manage and operate facilities in remote areas. It is a non-equity joint venture where Competitor A has major percentage of shares compared to CORAL S.A. and members of the two buyer firms participate in the board of the joint venture. The second case is collaboration between Shell & MOH Aviation and Competitor A which leads to the creation of a joint venture named Joint Venture B with the latter being responsible for the distribution and storage of aviation fuels that the two buyer firms produce. It is an equity joint venture and members from both companies participate in the board of the joint venture. The joint venture has its own assets and facilities, so operationally it does not largely depend on the buyers firms, regardless of the buyer firms still making investments in the joint venture in order to improve their assets. The main incentive for cooperation in both cases was the reduction of costs.

Graph 4: Triad 1 Graph 5: Triad 2

Triad 1:

 Equity joint venture

 Collaboration in order to reduce costs

 Operational joint venture for aviation fuels

 Possesses its own assets( vehicles, facilities etc,)

 Investments made in order to improve quality of distribution and storage of aviation fuels

Triad 2:

 Non-equity joint venture (62% Competitor A-38% Coral S.A.)

 Collaboration in order to manage remote facilities and reduce costs

 Assets formerly belonging to Competitor A

 Operational joint venture

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4.1 Findings about risks

During the interviews four topics were mentioned as the main risks that can occur from coopetition. In both cases, coopetition was achieved through a joint venture created from an alignment between the two companies with the supplier in the triad being the entity under investigation in this paper.

It was mentioned in the interviews that the most important risks for both cases is the exchange of

information. The exchange of information should be carefully done as the coopeting companies are straight competitors and they need to protect sensitive business information from each other and simultaneously comply with competition law. The penalties for information sharing between competitors are huge and that is another reason why they must be avoided. The risk is greater in joint ventures as members of the buyer firms often get in touch with each other. The main topics that should be prohibited to share are the volumes of sales, the pricing of products, strategic and commercial topics and explicit information about clients. The only topics that are allowed to be discussed are the topics that are discussed in the joint venture board meeting as these are strictly operational topics that have to do with storage and distribution and some matters of technical support that usually have to do with safety standards.

The second risk that was mentioned in the interviews is the conflicts. Conflicts can be observed in the routine operations of a joint venture as two great and fierce rivals in the oil & gas industry are coopeting. Conflicts usually have to do with operational standards, because each company has different culture and a different way that operates. Other topics can be disagreements in terms of roles, strategies and power. The amount of power that each company has in a joint venture depends on the amount of shares that the two competitors possess. This also happens because usually if one of the two partners has a larger share than the other then, it has also more representatives in the board of the joint venture. Another type of conflict comes from pricing policies. Both firms belong in huge groups of companies and sometimes there is a different pricing policy for the companies in the group and outside the group. So the two competitors should have a certain pricing policy if they want to obtain products or services from some other companies of the rival group. the last type of conflict that was mentioned is the loss of clients that might occur for the joint venture because one of the two partners does not agree in cooperating with the particular client because it is not beneficial for the strategy of the parental firm

The third topic of risks that was mentioned was the reputational risks. Coopetition involves cooperation with partners so it creates some complexities. The oil & gas industry has some special characteristics and the main characteristic that the firms should deal with is safety. The two buyer firms should set some standards to ensure that the employees of the joint venture and the employees of the competitor will follow so that both firms can avoid reputational risks. These standards have to do with health and safety as there are specific ways that fuels and other products are to be stored and distributed in order to avoid accidents and environmental pollution with potential spills. Also the employees should be protected by wearing specific uniforms, because fuels are easy to be set on fire and they should also act in a certain way so that they do not harm with their actions or behaviors the reputation of the joint venture and the buyer companies. Companies try to reduce their assets and use joint facilities in order to reduce the risks of accidents that are able to harm their reputation.

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19 collaborations with clients that will end up in a strategic collaboration for their own benefit and not for the benefit of the joint venture which is also the main goal of collaboration in the researched cases. In the second case with the joint venture for the transportation and the storage of the aviation fuel it was mentioned by the manager that opportunistic behaviors can sometimes be observed but not so often because it is stated in the shareholder agreement that if the two buyers do not agree then no action can be taken. Specific parts of the shareholder agreement can tackle opportunistic behaviors and these are the parts that set the scope of the alignment and the parts that mention how the board of the joint venture takes decisions.

Risks are influencing the structure of the contractual mechanisms, as due to the risks contracts should be more complete and detailed in order to face the. The shareholder agreement is the main contract that is used for horizontal collaborations like joint ventures. The table below is presenting as a summary the contractual mechanisms that are influenced by each risk as they need to be carefully written in order to face them.

Table 2: Shareholder agreement mechanisms influenced by each coopetition risk

4.2 Findings about contracts

Both Shell and Shell & MOH Aviation stated through their representatives that there is limited trust between the competitors and that formal contracts are needed in order to find a common ground in terms of standards and operations to make the joint venture develop.

The first category that was mentioned in the interviews is the profit and cost sharing mechanisms. In these parts, the shareholder agreement states the names of the two buyers (shareholders) and the name of the joint venture which is the supplier in this coopetitive triad. Then they state the percentage of shares that each parental company holds and the percentage that each company has on the investments that they are made or will take place in the future. With these percentages it is easier to share the profits and the costs coming from the joint venture. In the case of Joint Venture A the costs that are charged to the buyer companies are only for distribution and storage because the joint venture has its own assets and by that we mean the facilities and the vehicles that do the distribution of the aviation fuel. Additionally, there is a fixed

Risks of coopetition Contract mechanisms used in shareholder agreements

Information exchange

Range of allowed information, Confidentiality part, Laws and regulations

about information sharing

Conflicts Scope of alignment, Procedures, Obligations of partners, Roles

Reputational risks

Environmental protection, Environmental standards, Responsibilities in case of accident, Code of conduct, Conduct of

operations

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20 profit that is equally distributed to the two buyers and their shareholders. In the case of Joint Venture B, both companies share the costs of maintaining the facilities and also other operating costs like the wages of the employees, indirect costs and the depreciation of assets. The distribution of profits in the case of Joint Venture B is done based on the percentage of shares that each company has in the agreement

The second category of contractual mechanisms that was mentioned in the interviews is the contractual mechanisms that protect reputation. To begin with, it is very important to include a part about liabilities in the shareholder agreement in order to state who is responsible in case of an accident. In both cases, the interviewees stated that both companies were liable in case of an accident. Also it is mentioned in the agreement that there are certain environmental standards that need to be followed and in the second case with the joint venture about aviation fuels, it was mentioned that the company complies with the JIG safety standards that are established for every joint venture. Other parts that are mentioned in the shareholder agreement and they protect reputation are safety norms, penalties in case of an accident or in case the parental companies cannot supply the joint venture and as a result cannot support the clients i.e. the airlines. If a plane is grounded due to lack of fuels then automatically there is pressure from the media that can easily harm the reputation of the company, so both partners should agree on the actions and the behaviors they need to follow. In order to do so, there is a certain code of conduct mentioned in the shareholder agreement; along with raw policies and a technical support part that states who is responsible for setting all these standards and inspecting if everything is done according to the shareholder agreement. The third and last contractual mechanism category is the mechanisms about information sharing. These mechanisms state the range within which information is allowed to travel and in the case of the aviation fuels. It also states the way that the accounting department of the joint venture should operate in order to avoid revealing valuable sensitive information to the two competitors. Furthermore, these mechanisms state the regulations and the competition law that they need to conform to. Usually the companies have to conform to the regulations of the country they want to establish the joint venture in. In the case of the aviation fuel joint venture, the supply chain manager mentioned that both firms have established three golden rules that are included in the shareholder agreement and protect the exchange of information between the two competitors. The first rule states that only operational matters are allowed to be discussed between the two parts during their meetings for the joint venture. Commercial topics like volumes, prices and volumes are prohibited. The second rule is that the members that attend the board meetings should not have a commercial position in their firms. The last rule states that a lawyer must attend every board meeting, having a specific agenda of discussion topics and when exchange of sensitive information is suspected, he is empowered to intervene and stop the discussion.

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Contract mechanisms in shareholder agreements

Coopetition risks that were reduced

Profit-cost sharing Conflicts about power, roles, budgeting and Opportunistic behaviors about profits Reputational risk mechanisms

Reputational risks about behaviors, environmental damage, accidents, health

and safety standards, confusion about conduct of operations

Information sharing mechanisms

Information spillovers, Fines from information exchange, Conflicts due to strategic changes, opportunistic behaviors

for reasons of strategy Table 3: Coopetition risks mitigated by each category of coopetition mechanisms.

4.3 Findings about outcomes

Proper contracting is able to improve the quality of the supply chain. Increased supply chain performance can be achieved, because after the use of contractual mechanisms, operations can run smoother and there are fewer disruptions in the supply chain, leading to gaining more benefits from the side of the joint venture. Also another outcome is that there is better coordination of the supply chain because in the shareholder agreement the roles, the procedures and the operation standards that need to be followed are clearly stated. So there is less confusion among the employees and everything runs smoothly. The next is that there is increased safety and less risk of reputation damage, according to the shareholder agreement the mechanisms through which better safety and high-level working environment can be achieved. Another outcome that was mentioned is that better service of the clients can be achieved and operations will run more smoothly in the joint venture with less danger of stock-outs and less waiting time on the part of the clients. Stock-outs are unacceptable in the oil and gas sector, because oil and gas are sources of energy and they are first need goods. Without them, means of transportations cannot be used, people cannot travel or they freeze because they don’t possess oil and gas to do so. Complete contracts are especially needed in countries with difficult infrastructure conditions, due to geomorphological specialties. They are also needed due to the bad logistics services and the low stock bases, as they need to ensure that the product will be distributed on time. Moreover, proper contracting is able to cause cost reduction as some unnecessary action will be avoided due to better coordination. The last outcome has to do with better product quality that can be achieved as there are specific transportation and quality standards established regarding operations in the shareholder agreement.

5. Discussion

5.1 Discussion about risks

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22 business information. Bouncken & Kraus (2013) define spillovers as a potential threat for coopetition agreements, because they can threaten the competitive advantages gained from coopetition (Bouncken & Kraus 2013). Spillovers are able to harm joint ventures, especially when there is cooperation on R&D, because it is difficult to write a contract that specifies every right regarding the use of technology that was created by the joint venture (Müller & Schnitzer 2006). Another reason is the fact that R&D spillovers are able to give competitive advantage to the competitor as with every dollar the firm spends on R&D spills over to competitor and they reduce the unit costs, resulting into making the competitor tougher (Kamien et al. 1992). On the other hand, competition law was stated as the main restriction for information sharing in operational joint ventures. This happens because horizontal cooperation agreements, like joint ventures, can lead to competition problems, if the two cooperating parties decide to fix prices, outcomes and share markets, along with increasing their market powers (Article 101 Treaty on The Function of the European Union, 2014). Respondents also stated that, exchanging information about clients, sales volumes, prices and other commercial topics is not allowed due to competition law. Parental firms in oil and gas sector cannot exclude other competitors from getting services from their joint venture. If firms violate the regulations and get caught, they face penalties for forming cartels. However despite the references made about cartels in Article 101, this Article is not intended to give guidance on what does and what does not constitute a cartel. Moreover, the main reason why anti-trust committees set their eyes on this industrial sector, is because it has a reputation for being clubby, therefore attracting the involvement of several politicians (Schwartz 2013). It is also stated that the less frequent the exchange of information is the more sufficient will be in order to achieve a collusive outcome without harming competition (Article 101, 2014). Joint ventures in Greece can be authorized and be legal only after the decision of the Hellenic Competition Commission. Contracts of joint ventures in the oil & gas industry were found that use specific mechanisms and parts that clearly define the kind and range of information that is allowed to be exchanged. This is also supported by Bjurling and Hansen (2010) stating that the right contract in collaborative network should entail clear and specific parts which describe how every employer involved should exchange information. Also they describe all the specific roles and the spillover fraction (Veldman et al. 2016). The buyers can exchange information only for operational and technical matters that are mentioned in the related sections of the shareholder agreement specifically written to address these risks. The aforementioned discussion leads to a proposition:

Proposition 1

Exchanging information in operational oil and gas joint ventures about prices, volumes of sales, markets and clients is restricted, due to competition law, as there is fear for cartel formation. On the other hand, in R&D joint ventures the main challenge is to manage the spillovers, so they will not give competitive advantage to the competitor.

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23 they are avoided due to competitors having as their main incentive for cooperation the fact that they had similar culture and similar standards. Sampson (2004) points out that the main reason for creating an equity joint venture is indeed the alignment of cultures between the competitors. Regarding the contractual part the respondents answered that in order to avoid conflicts, some certain parts like scope of alignment; obligations and procedures need to be carefully written in the agreement between the two competitors. These formalized means were also mentioned from Inkpen and Currall (2004) as the main method for the two competitors to set their relationship in place. So we end up with another proposition:

Proposition 2

Conflicts are usually fiercer in non-equity joint ventures in the oil and gas industry, because usually firms have distance in terms of culture, which plays a decisive role in conflict creation.

Furthermore, several reputational risks were addressed in the interviews. Reputational risks occur mainly in the areas of health and safety of the employees, environmental protection and accident prevention. The oil & gas industry is a sector very sensitive about safety related matters and firms that belong in this sector are prone to develop corporate social responsibility (Spence 2011). To be more accurate, they face environmental, health and safety and liability risks leading to reputational risks (Spence 2011). The oil & gas industry is ruled by some of the richest companies in the world, so society expects them to present socially responsible behaviors (Gillies 2010). Companies set eyes on using joint facilities, because facilities are subject to disruption and reputational risks (e.g. natural or man-made hazards) (Chen et al. 2011). Contracts when two competitors cooperate in the oil & gas industry must set common standards in order to avoid reputational risks (Spence 2011). As it was observed from the interview data, contracts must entail specific parts about liabilities, obligations, environmental standards and a code of conduct.

Proposition 3

Reputational risks lead to coopetition in the oil and gas sector, in order to improve health, safety and environmental standards along with making use of joint facilities. Less facilities lead to less hazards and reputation risks.

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24 Proposition 4

Opportunistic behaviors can become critical and affect result mainly in non-equity joint ventures in the oil and gas industry, due imbalance of power between the parental firms

5.2 Discussion for contracts

Interviews presented that price and cost sharing in coopetition is usually done based on the percentage of the shares that the two buyers hold in the joint venture or based on the percentage of the investment that they have made in collaborative investments. Bhamra (2012) stated the same in their paper. Profits though, were not very high in the cases of joint ventures that the research was based on as they had only fixed profits. Costs differed in two cases, as aviation fuel JV charges only the service costs of distribution and storage while the second one charges all the costs coming from the facilities like fixed costs and wages of the employees. Price and cost sharing mechanisms are able to tackle conflicts and increase performance according to the respondents as they provide better coordination, as Zhang et al. (2012) state in their paper. Reputational risk mechanisms that were mentioned during the interviews were mainly standards that the buyer firms set in order to remain vigilant against environmental risks that involve safety, norms, health and environmental standards of conducting business and liabilities so it is clear who is responsible for which operation. Main finding were the specific JIG standards that are used for the inspection of oil and gas joint ventures, mostly in aviation fuels. Mechanisms like these are really important in order to control various behaviors and actions that can cause reputation damage. This is due to the high complexity level that exists in the triad as a result of coopetition (Thorne et al. 2016). Mechanisms that protect reputation are also needed because of the nature of the oil & gas industry which can cause immense disasters if specific measures are not taken (Spence 2011). Also, managers addressed several mechanisms about information sharing, namely parts about the range and type of information allowed to travel between partners, regulations of the country of cooperation, coopetition law restrictions and some specific golden rules that occur in oil and gas joint ventures. The last one is the main problem of information sharing as the exchange of information is restricted in joint ventures and firms face the risk of penalties imposition (Sampson 2004). These mechanisms according to the managers help mitigating information spillovers and deter firms from exchanging information due to competition law.

Some propositions occur from the discussion about contract mechanisms and these are:

Propositions from contracts

5. Profit-cost sharing mechanisms: Operational joint ventures in the oil and gas industry have as main incentive the sharing of costs, as there are only fixed profits for parental companies. They can tackle conflicts and improve SC performance.

6. Reputation protecting mechanisms: Certain joint venture safety standards are established in the oil and gas industry, namely JIG standards. They are able to protect firms from reputation damage and prevent accidents and spills.

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5.3 Discussion about outcomes

Proper contracting had a lot of positive outcomes according to the managers that were interviewed. The main outcomes were better SC performance, better SC coordination and reputation protection, combined with better product quality and better service of the clients. Some of these have already been addressed in the literature like better supply chain performance and better supply chain coordination (Zhang et al. 2012). Complete contracts can also help with cost reduction, which is mentioned as the main reason for coopetition in the oil and gas industry. Cost-reduction is achieved by the avoidance of unnecessary actions in the supply chain. Moreover, on-time delivery is very important in the oil and gas industry and complete contracts are needed to ensure proper timeliness (Sivapornpulerd & Setamanit 2014)(Chima et al. 2007). Conflicts and confusinons are reduced with proper contracting and that leads to better coordination. Stock-outs should be avoided, as on time-time deliveries are crucial for some companies, e.g. aviation companies. Another reason is the high seasonality that oil and gas have as products (Brown & Yücel 2008). Lastly, on time-delivery is important in countries with bad infrastructure and low stock base. So it can be proposed that:

Proposition 8

Proper contracting is influencing positively the coordination of the supply chain and this leads to cost reduction (main coopetition incentive) and on-time deliveries that are crucial for oil and gas companies due to high seasonality of the product. Punctual deliveries are of great importance in countries with bad infrastructure and low stock base (e.g. Greece).

6. Conclusion and further research

6.1 Conclusion

This paper aims to clarify the concept of coopetition in oil & gas industry, give insights about the possible risks that might occur and how these risks can be tackled from contractual mechanisms. This interconnection between risks and mechanisms is able to provide the triad with some positive outcomes. The main goal was to answer the research questions that are mentioned in part 2.8.

A case study was used as a method to conduct this research and different experienced employees were the interviewees on the basis that they had a very good understanding of coopetition in the oil & gas industry and joint ventures. These interviews yielded a number of interesting observations. The main incentive for collaboration with competitors is the reduction of costs. But this collaboration raises a lot of different risks:

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26 2) Conflicts usually occur when there is disagreement about operational standards, roles or power but they are fiercer in non equity JVs where one of the two firms has bigger power in the board of directors and there is distance in firm’s cultures. In non-equity joint ventures, there are also more often opportunistic behaviors because of the power imbalance

3) Reputational risks are a serious problem in the oil & gas industry since firms have to collaborate in technical matters in order to establish health, safety, environmental and behavioral standards. Also, the less facilities, the more firms stay away from risks as facilities are subject to hazards. Specific contract mechanisms are used to mitigate risks. Certain conclusions can be found after the research that was done in the oil and gas sector. These conclusions are:

1) Operational joint ventures do share costs but their profits are not big. So, fixed profits are mentioned as contract mechanisms in order to avoid conflicts and improve SC performance and coordination.

2) Certain joint ventures standards are used for health, safety and environmental reasons in the oil and gas industry and specifically in aviation fuels market. These standards are mentioned in the shareholder agreement and are able to tackle reputational risks caused by spills or accidents. 3) Apart from regulations, joint ventures in the oil and gas industries set extra rules as mechanisms of

the contract agreement, in order to avoid penalties from violation of competiton law. These rules state that: a lawyer should attend all joint venture board meeting in order to prohibit the exchange of information, commercial topics are prohibited to be discussed during the meetings and commercial managers are excluded from the board of the joint venture.

Also, if contracting is done properly, then this leads to certain outcomes such as better supply chain coordination, which is subsequently leading to reduction of conflict and confusions, better customer service (on-time deliveries very important in the oil and gas sector due to seasonality and low stock base), improved supply chain performance and increase security about firm’s reputation.

6.2 Research and managerial contributions

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27 focuses on how risks are mitigated through effective use of contractual mechanisms. Contracting literature is enriched as JIG standards and conduct of operations guide mitigate reputational risks and conflicts, extra mechanisms are used in order to mitigate information exchange risks and profit-cost sharing mechanisms help in better supply chain coordination. When looked from a managerial perspective, this paper is valuable for managers who are willing to get involved in coopetition agreements and highlights the main risks of collaborating with one’s competitor in a buyer-buyer-supplier triad, especially in the oil & gas industry, as well as highlighting the main contractual mechanisms that protect the firms from them and the potential outcomes of good contracting.

6.3 Limitations and Further Research

One main limitation of this research is that the results are based on few respondents and the pool is not very big. Respondents from other companies in the oil & gas industry might have responded in another way, providing different results because they may follow different strategies and policies. So, the potential of generalization / generalizability could have been stronger if more case companies were included in the sample. Another limitation can be that in both cases the supplier is a joint venture and this may lead to different results from the case that the supplier would have been an independent supplier. Also the companies were very big market players in the field of oil & gas and thus the results may have been different if we had in the pool of respondents companies that were small-medium enterprises. Also, might be a good idea to research competition restriction in non-EU countries that do not comply with common regulations. For future research, several suggestions can be made. A good suggestion would be to do a comparative case study, on coopetitive buyer-buyer-supplier triads, one with an independent supplier and one with a joint venture in order to see the differences clearer. Another suggestion could be to make a research on how culture is affecting coopetitive relationships. Last, a useful suggestion would be to make a carry out more extensive research on what is competition law stating about vertical collaborations and which are the restrictions in this case.

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