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The Oil and the Glory
The Weekly Wrap — July 20, 2012 (Part I)
Oligarchs in the Kremlin: For the last dozen years, we have seen ample evidence of Vladimir Putin’s policy on Russia’s oil and gas industry — a paramount strategic asset, it is to be jealously held, only begrudgingly ladled out to foreigners, and always, always to remain in firm Russian hands. That being the history, what ...
Oligarchs in the Kremlin: For the last dozen years, we have seen ample evidence of Vladimir Putin’s policy on Russia’s oil and gas industry — a paramount strategic asset, it is to be jealously held, only begrudgingly ladled out to foreigners, and always, always to remain in firm Russian hands. That being the history, what are we to make of the assertion of a group of Russian magnates that Putin has changed his spots — that he is now prepared to allow BP to assume 100 percent ownership of Russia’s third-largest oil producer?
We are speaking of course of TNK-BP, the star-crossed, nine-year oil marriage between BP and AAR, a consortium led by a take-no-prisoners Russian financial titan, Mikhail Fridman. Over the years, the two companies have gone to war numerous times, only to regroup again and earn outsized mutual dividends. But this time, both sides seem prepared to call it quits. A few days ago, AAR announced that it will enter negotiations with BP to either rebalance or — in the more optimal alternative — dissolve the marriage. In AAR’s preferred scenario, it will be bought out in a cash-and-share deal that gives it 10-12 percent of BP’s shares, possibly the largest single stake in the British company. No one can say how the end game turns out, but as a mind exercise what say we kick the tires of AAR’s strategy?
We start with AAR’s view that over the years it has been on the receiving end of the unfair insinuation that it is a mere band of self-interested brutes looking generally to pillage a lamb-like BP. With that feeling of unappreciation in mind, Fridman recently made the rounds of BP investors in Boston, London and New York, armed with a short, four-slide Power Point. Contrary to the opinion of some, Fridman suggested in his crisp presentation, it is BP that has been on the winning end of the partnership. Unlike BP’s other "poorer assets," Fridman said, TNK-BP is a "local champion" in Russia, producing "best in class financial performance," and in fact spitting out more than 90 percent of the dividends distributed by BP to its shareholders last year. Fridman’s takeaway? Let us really nice guys do BP shareholders a favor and sell you our 50 percent of TNK-BP.
Okay … but what about Putin’s history, and the fact for example that Mikhail Khodorkovsky has been sitting in a Russian prison since (among other transgressions) moving to sell a large stake of his oil company (Yukos) to Exxon and Chevron? According to the AAR folks, that sort of thinking is well out of date.
"[Putin] is more progressive then you assume," I was told. "There [have been] preliminary conversations" with the Kremlin. The result of those conversations are that "under certain circumstances" Putin would go along with 100 percent BP ownership of TNK-BP. There was no reply when I asked for an example of those circumstances.
Should BP shareholders take relief in such assurances? Not necessarily. "I would very much doubt [that BP] would be allowed to hold such a high equity percentage in a company holding what are still Russian strategic assets," Bernstein Research’s Oswald Clint told me. Personally, I am reminded of the comfort that Progress Energy chief Bill Johnson must have felt in the hours before the Machiavellian Jim Rogers swooped in and reclaimed the job of CEO of Duke Energy earlier this month.
But for argument’s sake let’s say that BP more or less embraces AAR’s argument, and agrees to the cash-and-share deal. Being a smart fellow, BP CEO Bob Dudley would still be on guard for the sort of shellacking that the company has regularly suffered in Russia. And even if Putin has changed from a leopard into a tiger, we are talking the same general animal, and he would be looking out for Russia’s best interests as well. As was intimated at the Davos session in St. Petersburg last month, Putin knows that Russian oil needs the West’s technology more than ever; in addition, Russia’s newest objective is to go global. So Putin would dispatch his main oil adviser — Rosneft chairman Igor Sechin — over to see Dudley. And what would Sechin look for? Joint development of difficult but potentially rich older fields in Russia, such as a recent agreement with ExxonMobil to apply hydraulic fracturing to the enormous Bazhenov structure in Siberia. Plus joint work in promising BP fields abroad. Again, a model is Rosneft’s agreement with Exxon, which includes a Rosneft role in developing fields in Texas and the Gulf of Mexico.
In this scenario, the operative phrase for Dudley would be averting a shellacking. BP seems very much to be playing a weak hand both against AAR and Putin — no outsider has done exceedingly well in Russia when playing the long game, and BP has generally fared worse. The test for Dudley would be avoiding overpaying for AAR’s half of TNK-BP, and making sure that Rosneft does not underpay for the assets it seeks.
Go to Part II of the Wrap.