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The Oil and the Glory
The Weekly Wrap — June 1, 2012
Divorce, Russian style for BP: Four days after its Russian oligarch partners called for a split-up, BP says it received an unsolicited bid for its 50 percent share in TNK-BP, the Russian oil company. The bidder seems to be a Russian state company. The cash price could be big — at upwards of $20 billion ...
Divorce, Russian style for BP: Four days after its Russian oligarch partners called for a split-up, BP says it received an unsolicited bid for its 50 percent share in TNK-BP, the Russian oil company. The bidder seems to be a Russian state company. The cash price could be big — at upwards of $20 billion and more. But the deal will not be that straightforward — that is not how Russia works. Rosneft, for example, will not simply hand over $20 billion in cash. Nor would President Vladimir Putin wish to be seen to be showing BP the door. Look for a deal with cash-and-stay components, perhaps involving talks about the Arctic.
This outcome is a long time coming. BP’s relationship with the oligarchs has been star-crossed from almost its beginnings in 1997. The very next year, BP lost the main value of this first joint venture — a company called Sidanco — after paying $571 million for a 10 percent stake. In the subsequent six years, BP handed over some $7.5 billion more in cash to the oligarchs, and ultimately ended up with the 50 percent stake in TNK-BP as we know it today. Throughout, banking oligarch Mikhail Fridman and his partners — known collectively as AAR — have regularly taken BP for a shellacking. In 2008, things got so dicey that current BP CEO Bob Dudley — then in charge of TNK-BP — went into hiding incommunicado for several months.
BP has been paid handsomely for its misery. Last year, TNK-BP accounted for 29 percent of BP’s global oil production, and 27 percent of its proven reserves. In 2011, BP received $3.75 billion in dividends from TNK-BP, or 17 percent of its $22.2 billion in cash flow. Accumulatively, BP’s dividends since 2003 have been about $19 billion, according to BP. This makes its share of TNK-BP theoretically of great value. Bernstein Research puts the value of BP’s stake at $18.5 billion to $20 billion, but others think the price could be more. Richard Griffith and Nick Copeman, analysts at Oriel Securities, estimates the value at $24 billion.
Even though no one likes to suffer like that, this does not mean that BP goes easily. Nor incidentally is BP necessarily interested in mere cash, notwithstanding its large remaining financial exposure after the 2010 Gulf of Mexico oil spill. BP is interested in really big future oil production. Like in the Arctic, the sort of exploration acreage recently acquired in separate deals by ExxonMobil, Eni and Statoil. One suspects that negotiation toward a BP Arctic deal will be an explicit or implicit component of a TNK-BP sale.
In an email exchange, BP spokesman Toby Odone told me that the Arctic will play no role in any sale. He said:
This is the first stage in what could be a very lengthy process to sell our share in TNK-BP. It is far too early to say what we will do with the money. All we have done today is announce an intention to look further at expressions of interest in purchasing some or all of our stake in TNK-BP. It is not about Arctic or other businesses in Russia, current or future.
Russia’s Chinese conundrum: Will Moscow find natural gas salvation in China after struggling to achieve it in Europe? For six years, Moscow and Beijing have failed to reach agreement on the terms of shipping 68 billion cubic meters of Russian natural gas a year to China, and building a pipeline that would carry it. Today in Beijing, they resume their efforts to do so. China is keenly interested in nearby gas supplies, since its projected demand for the fuel will soar for the next two decades; for Russia, a large, long-term supply agreement with China would resolve its uncertainty over Europe, which, uneasy over its heavy reliance on Russian gas, is seeking actively to diversify supplies. The sticking point between Russia and China has been price: According to Ria-Novosti, the Russian news agency, Russia’s Gazprom insists on $400 per 1,000 cubic meters, while the Chinese want to pay $250 per 1,000 cubic meters. That being nowhere close, the two countries have been at loggerheads.
In Beijing today, a ministerial-level set of talks will begin, to be followed up by Russian President Vladimir Putin, who arrives next week in the Chinese capital. Russian Deputy Prime Minister Arkady Dvorkovich is playing down the chances of a breakthrough. But, as I write at EnergyWire, there is a glimmer of hope because of need in both countries, especially in Russia. Chris Weafer, chief strategist at Troika Dialog in Moscow, told me that Putin has prioritized an agreement with Beijing. That suggests an opening for compromise. Andrew Kuchins, who watches Russia for the Center for Strategic and International Studies, remains skeptical, but thinks that "Putin is in a pretty tight spot," so one never knows. Even successful negotiations rarely go in a straight line, and in that sense the talks have gone according to script.
Getting fracking right: Shale gas has much on its side — it is in large supply in the U.S., and potentially around the world. Because it burns far cleaner than coal, it can go a long way toward reducing projected greenhouse gas emissions. But the folks who do the fracking are a defensive bunch. On Tuesday, the International Energy Agency issued a set of "Golden Rules for a Golden Age of Gas," a 150-page report that embraces shale gas, but notes that its growth could be stunted unless people around the world are convinced it is safe. The rules are sensible (here are the easy-to-digest slides), such as the full disclosure of fracking chemicals, minimization of gas flaring, and practices to avoid potential seismic zones. If the rules are followed, the IEA predicts an enormous surge in shale gas production around the world. If they are not, coal could end up as a substitute for some of that gas. "If this new industry is to prosper, it needs to earn and maintain its social license to operate," IEA Chief Economist Fatih Birol, the report’s chief author, said in a statement released by the agency. "This comes with a financial cost, but in our estimation, the additional costs are likely to be limited."
How have frackers responded? "In calling for the industry to ‘address’ environmental issues, the IEA has ignored concrete steps that have been taken and effective practices already in place to produce this vital resource while protecting our other natural resources," America’s Natural Gas Alliance, an association of frackers, said in an emailed statement. The statement never diverges from a stout defense of what it is already doing, while also never acknowledging that Birol is effectively on ANGA’s side, and also is mostly right.
ANGA notes, as it is want to, that it already posts fracking chemical content at fracfocus.org, an industry Website. But Fracfocus falls short — companies omit what they wish to for proprietary reasons, and they organize the site in a way that is nearly impossible to search. One is reminded of the prosecutor who opens the defense counsel’s door, throws in a pile of a million papers, then says, "There. I have provided you all the evidence."