Vertical integration and diversification perspectives on entry decisions : analysis of a refiner’s decision to enter E&P

Abstract

Some oil refining companies have recently entered the field of exploration and production (E&P). Both the relatively high financial performances of E&P companies and the shrinking refining margin may motivate refiner’s decision to enter E&P. However, in making this decision, there are other factors to be considered. This study utilizes vertical integration and diversification theories to develop an integrated framework. This framework determines the factors which should be involved in a firm’s decision to enter another business area. In this theoretical approach and its application to Korean refining companies’ decision to enter into E&P, we discuss both the cost benefits and the advantages to acquiring strategic assets of the new business. As sources of short-term cost benefits, the paper discusses site specificity and regional performance. As long-term requirements, the paper explores the need to acquire E&P strategic assets. In early-stage decision making, the best mode may be a small equity investment in regional consortia. As a company acquires more and more strategic assets, it can decide to pursue global opportunities and/or to acquire an E&P company.