Wednesday, June 6, 2012

BP's Russia exit' as clear as crude....

'BP's Russia exit' as clear as crude....

By Robert M Cutler

MONTREAL - New skepticism over an announced share sale fueled a rise in stock of the energy company TNK-BP on Russian equity markets Monday after a four-day decline last week. The British energy major BP had said that it would will seek to sell its half of its Russian joint venture TNK-BP to an unspecified buyer who had submitted an unsolicited bid for its stake in the joint venture (estimated at a minimum US$15 billion with other guesses ranging up to $20-25 billion), even though its Russian partners threatened to block such a deal. TNK-BP is Russia's third-biggest oil producer.

On Monday, a high Gazprom official told the press that his firm has no interest in buying BP's stake in TNK-BP. Speculation had centered on the state trust Rosneftegaz as likely to be the prime candidate if there really is one.

Rosneftegaz holds over three-quarters of Rosneft, the country's biggest oil company, with which BP tried to close a deal last year before TNK-BP's other partners - three Russian oligarchs together in the Alfa Access Renova (AAR) group - obtained an injunction from the High Court in London that blocked the BP-Rosneft agreement on grounds of lack of transparency and ordered arbitration. The AAR group had maintained that BP was not transparent with them and that their contract gave them the right to a veto.

Last year's deal between BP and Rosneft that AAR challenged in London involved a reciprocal share swap between the two companies together with an agreement jointly to explore and develop prized Siberian offshore licenses in the Arctic region. It collapsed in the wake of the court case, and last August the deal for those blocks in the Kara Sea went to the US-based ExxonMobil.

The agreement covers the Vostochno-Prinovozemelskoe field, between the Novaya Zemlya archipelago (where the USSR once carried out atomic testing) and the Yamal Peninsula (site of still other energy exploration), in the South Kara Sea.

Established in 2003, the TNK-BP joint venture originally cost US$7 billion. The current announcement comes following the cancellation of a board meeting resulting from last year's resignation of two independent directors including former German chancellor Gerhard Schroeder. Their departure deprived the board of a quorum and they have not yet been replaced.

Also last week TNK-BP's chief executive, Mikhail Fridman, resigned as a result of a breakdown in corporate governance at the joint venture, according to an Agence France-Presse report. As a result of the board meeting's cancellation, the company was unable to declare first-quarter dividends for its shareholders. In this context, BP issued the public statement that it was considering unsolicited offers for its stake in TNK-BP due to the need "to maximize shareholder value".

A sale to the Russian state would increase state-sector domination of the country's oil production to over 50%. Such a development would be in line with President Vladimir Putin's clear preference for state-centered development and marketing of the country's energy resources both at home and abroad. A little over a year ago it had seemed that neither Putin (then prime minister) nor the group of then president Dmitry Medvedev within the elite was inclined to step in on behalf of BP in its travails with TNK-BP.
Indeed, at the time Arkady Dvorkovich, one of Medvedev's assistants, noted publicly that investment confidence in Russia was so poor that resolving the BP issue would not improve the general situation. In April 2011, Medvedev, as part of his triple-headed policy initiative against corruption, in favor of investment and for administrative streamlining, ordered government cabinet ministers holding company positions to leave their posts.

Deputy prime minister Igor Sechin then accordingly resigned his position as chairman of Rosneft's board of directors, which he had held since 2004, the year he also became deputy head of the Russian president's executive office before moving on to become deputy prime minister. Since Putin became president again this year in May, Sechin has not formally rejoined the government or presidential administration; rather he has formally rejoined Rosneft as the company's president and chairman of its management board.

Nevertheless, it is instructive that, following a weekend to reflect on last week's brouhaha, business analysts in the Moscow investment community had begun to come around to thinking that the sale would make little sense from the standpoint of BP corporate strategy.

A research note from VTB Capital, for example, called the "recent spike in media attention ... part of both sides' [ie BP and AAR] strategy ... to draw in the interest of potential buyers," as quoted by Bloomberg News.

Interestingly, the existence of such a media strategy is not fully in contradiction with the prospect that Rosneftegaz puts in a bid for part of TNK-BP. Nor is such a bid in contradiction with the prospect that the principals are seeking other suitors. All this just goes to show the dangers of taking press releases and even non-anonymous media leaks at face value, especially on such as a high-stakes and occulted playing field as the Eurasian hydrocarbon energy complex.

Dr Robert M Cutler (, educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia.

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