The Oil and the Glory

Why is BP sending Tony Hayward to Russia?

When a CEO is pushed out of a company, he is usually given a graceful exit: a plum emeritus position and a nice pot of money. So how is it that BP’s Tony Hayward is headed to Moscow to sit on the board of TNK-BP, the company’s highly problematic partnership with four Russian oligarchs? True, ...

Alex Wong/Getty Images
Alex Wong/Getty Images

When a CEO is pushed out of a company, he is usually given a graceful exit: a plum emeritus position and a nice pot of money. So how is it that BP's Tony Hayward is headed to Moscow to sit on the board of TNK-BP, the company's highly problematic partnership with four Russian oligarchs? True, the partnership produces 25 percent of BP's oil, but the gig itself is a step down for any CEO.

For an answer, I asked Chris Weafer, chief strategist for Moscow-based investment bank Uralsib and the dean of Russian oil analysts. Weafer thinks that Hayward's appointment coincides with a probable move by Russia to force BP to agree to allow the partnership to be bought by a Russian oil company; Hayward's job will be to make that transition a smooth one. After the jump, Weafer's full reply:

When a CEO is pushed out of a company, he is usually given a graceful exit: a plum emeritus position and a nice pot of money. So how is it that BP’s Tony Hayward is headed to Moscow to sit on the board of TNK-BP, the company’s highly problematic partnership with four Russian oligarchs? True, the partnership produces 25 percent of BP’s oil, but the gig itself is a step down for any CEO.

For an answer, I asked Chris Weafer, chief strategist for Moscow-based investment bank Uralsib and the dean of Russian oil analysts. Weafer thinks that Hayward’s appointment coincides with a probable move by Russia to force BP to agree to allow the partnership to be bought by a Russian oil company; Hayward’s job will be to make that transition a smooth one. After the jump, Weafer’s full reply:

I definitely see Hayward’s appointment as associated with the probability that BP will have to restructure its Russian business.

BP’s existing equity ownership in Russia would not be allowed today. The legislation to limit any foreign investor’s interest in Russia’s strategic sectors to a minority stake was passed after BP’s acquisition of a 50 percent stake in TNK. It remains the only such investment by a foreign company that is out of sync with the legislation and the Russian government would like to correct that.

I do not believe that the government will force the issue, eg in the same way that it pushed Shell to cut its 51 percent stake in Sakhalin II to 25 percent. Instead I do expect the government to take full advantage of BP’s current problems to try and push BP into agreeing a restructuring. Not by selling equity, as Shell did, but by merging BP-TNK with another company. State owned Gazprom Neft is considered a likely candidate. That is because Gazprom, which bought Gazprom Neft (then called Sibneft) from Roman Abramovich, has done almost nothing with the company. But it has made clear its ambition to be a much bigger player in the oil industry.

This crisis for BP may well offer both the government and Gazprom the opportunity that they have been waiting for.

Hence (sorry about the waffle thus far) Hayward’s role is very likely to act as liaison between BP and the government in these negotiations.  BP will not want to sell Russian assets, I believe. Quite the opposite, especially if it continues under pressure in the US. Then it may be that BP becomes much more of a Russian company than a U.S. company.

The advantage for BP of agreeing to such a restructuring or merger is that it can get out of the production cull-de-sac it is now in. As a company non-aligned with one of the big state companies, especially given its 50 percent foreign ownership, it is not getting access to new production or licenses. If it were to align with Gazprom Neft, e.g. it would get that access and could look to long term growth.

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>

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