Some thoughts on the BP-Rosneft deal (sorry for the long post)

As I clearly have been (and still am) preoccupied with basketball, I have been late getting this post out. Maybe too late, because things have been happening pretty fast, sort of under the radar, so a lot of these thoughts could be irrelevant already. I am talking about the share swap between BP and Rosneft that took place a couple of weeks ago.

Putting aside the question of whether anyone should be happy that BP is now going to be involved in Arctic exploration (see the link at the bottom for an interesting Frontline documentary on BP’s safety record leading up to last year’s Gulf of Mexico spill; in fact, all the links for this post will be at the bottom), I have been comparing Russian and US coverage of the deal, and have some personal thoughts about BP since before the trade went down that seem relevant now:

So, to start, this is a share swap ($8 bln a piece, plus the Arctic project) that seems innocuous enough, but already there are some signs of a miscommunication:
– The first place I saw mention that this deal could give Rosneft Chairman Igor Sechin a seat on BP’s Board of Directors was Steve Levine’s blog. Igor Sechin happens to be the Deputy Prime Minister of Russia. BP says that was not part of the deal at all, but Rosneft says that this issue is still open for discussion.

– It is this type of uncertainty that probably contributes to the sentiment behind Representative Markey’s comment that “BP now stands for ‘Bolshoi Petroleum’. For the US, this could be made into a national security issue as BP supplies a good chunk of the oil consumed by the US military.

Some other stuff I’ve been thinking about:

A typical analysis of this deal in the Western media usually will go something like this,
– This is a strategic deal for BP to increase its reserves and will lead to long-term growth (good news for the share price)
– This should enhance the profile of BP’s Russian subsidiary, TNK-BP
– This could be a growth model followed by other oil companies, who will also start partnering with state-run concerns.

In contrast, most Russian reports (you see this in some English reports, but not most) emphasize the political dimension of this deal, which kinda makes sense given that it was personally approved by Prime Minister Putin (see Эксперт, 24-30 January “Кандидат на вылет”). The political dimension is that
– This is about Russia vs. USA, and not just because BP is getting frozen out after the Gulf of Mexico spill. BP supposedly received a contract in Libya in exchange for lobbying for the release of Lockerbie bomber Abdel-baset al-Migrahi, which may have further alienated BP from the US.

– This also changes the ongoing debate about Mikhail Khodorkovsky. Some people say that the treatment of the jailed Yukos oilman (a “dissident”) is a human rights violation or an example of corruption in the current Russian government. His old Yukos assets were ‘stolen’ by Rosneft. Well, now BP is a part-owner of those assets and thus is complicit in his arrest, trial and sentencing.

Without going into the politics too much, all of this does make one doubt the validity of some of the economic and strategic analysis that we see in Western media and in Western investment banks.

And to address this, I would like to make two points about BP’s subsidiary TNK-BP, two points that are actually holdovers from before the latest deal went down.

(1) TNK-BP was never seen as a high-value asset by BP. Never, never, never. This is my sense from the few projects I have worked on that dealt with either BP or TNK-BP dating back to 2006-2007. Add to that the fact that current BP head Robert Dudley was kicked out of Russia when he was running TNK-BP, and the sense was always that TNK-BP was in a tenuous situation. Thus, I find it hard to believe that this new deal was part of BP’s long-term strategy and not a desperation move.

And in fact, those who thought that this deal would enhance TNK-BP’s profile were immediately proven wrong, at least in the short-term, when the owner of TNK-BP, Mikhail Fridman, and some other partners (the AAR group) announced they would withhold dividends from TNK-BP and seek an injunction against the BP-Rosneft deal in the UK.

Remember, BP already had a 1.3% stake in Rosneft, so the new deal gives it overall 10.8% share, not 9.5% as most outlets are reporting. Instead of a long-term strategic plan, this seems more like someone decided to cut their losses and go all-in.

(2) So, second of all, if this is an all-in move, why should things be any different now than they were in the past? Russia, for better or worse, has a history of squeezing foreign investors from energy projects (expropriation). I’m talking about Shell and Sakhalin II, I’m talking about BP and the Kovykta gas field, and I’m talking about the hassles Exxon has experienced at Sakhalin I (we can expand the list outside Russia to include the experience of foreign investors like Chevron and Eni in Kazakhstan). As I observed those developments, the running joke in the industry had always been that even after being squeezed, these companies will just keep falling over themselves any time Russia dangles a carrot in front of them. The Arctic deal is a pretty big carrot, and so doesn’t the old logic still apply? Why is this deal any different?

One point that the journalists and bankers were right about was the potential for this deal to turn into a model, as new reserves are mainly located in countries with a lot of state control over natural resources (not just Russia). In Russia, the early results confirm this trend, as Exxon was quick to engage Rosneft in a Black Sea joint venture and Shell stated that it would follow suit, somehow. (see links). So there is most definitely a pattern, but is this even a good thing?

Finally, a drum that has been banging for years now about Russia-EU relations is also relevant to this discussion, and I dont think its been mentioned too frequently. Before the BP-Rosneft deal, you could always find people claiming Russia was trying to ‘divide-and-conquer’ the EU through its energy policy. The examples given were that Russia had managed to draw out and form individual partnerships with three major EU players, leading to a conflict of interest within the EU. The examples were Russia-Germany (E.On and Wintershall have stakes in the Nord Stream pipeline), Russia-France (Total has a stake in the huge Shtokman gas field), and Russia-Italy (Eni has a stake in the South Stream pipeline). In light of this new deal, shouldn’t we add Russia-UK to the list?

One side will say that Russia is dividing and conquering, while one side will say that these EU companies are simply divying up the resource riches of Russia among themselves… In the meantime things seem to be moving at a faster pace than they have in a long time.

Here are some links:

Frontline on BP (the documentary is like 54 minutes, very interesting):

BP Press release on the Rosneft deal:

Levine on Sechin joining BP’s board:
I think this is what Levine had in mind:

AAR files an injunction against BP-Rosneft deal:

BP lobbies for release of Lockerbie bomber:

Rosneft’s new deal with Exxon:

Rosneft’s possible deal with Shell:

Shell lost Sakhalin II:

BP lost Kovykta:

Exxon hassled at Sakhalin I:

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2 Responses to Some thoughts on the BP-Rosneft deal (sorry for the long post)

  1. onion dome says:

    Interesting scenarios, vote for which one you think is most likely:

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