The waters have become so muddy in British oil giant BP's long running battle with its troika of oligarch partners in TKN-BP, Russia's third largest oil company - that it is all too easy to allow the details of the coming divorce between the parties to divert attention from the larger move, namely the next phase of BP's long dance with Russia's number one oil company, Rosneft. This move is also likely to put BP, once again, in a favorable position to benefit from the coming lucrative - and highly dangerous - opening up of massive Arctic oil reserves.
Irrespective of how the sale of BP's stake in TKN-BP pans out, following a meeting with Vladimir Putin, BP has got the green light to use its stake money from the sale to buy a significant chunk of Rosneft. If Rosneft is successful in the bid for BP's TKN-BP stake, it is said to be ready to provide BP with a share swap amounting to 12.5% of Rosneft shares, to add to BP's existing 1.3% stake. The sale of TKN-BP is no small thing for BP. The venture is said to provide BP with almost a third of its total crude production and some 10% of its net income. It needs the deal with Rosneft to plug what would otherwise be a very large hole in its income and proven reserves holdings.
There is an extraordinary general meeting of Rosneft shareholders scheduled for 30 November, which should shed a good deal of light on where things are going. Rosneft is reported to have amassed a war chest of US$15 billion from banks to fund the purchase, and is expected to throw in some $10 billion in shares as well, since TKN-BP is currently valued at around $50 billion. A good chunk of that purchase price would, however, return to Rosneft as BP buys in to Russia's number one oil company.
So why is Russia, which has been pretty keen to keep its oil champions Russian, now so interested in foreign inflows into the oil sector? It is not just BP. Putin has made it clear that he is throwing open the doors to foreign joint participation ventures. Exxon Mobile has already bought in to a Kara Sea exploration and production deal - the very one that BP was discussing with Rosneft last year - and Norway's Statoil and Italy's ENI also have significant ventures in hand. The basic reason is that Russia's policy of using the oil and gas sector as a cash cow to support the modernisation of its economy has resulted in a tax regime that has starved the sector of capital expenditure. An analysis of what this flight of cap ex from the sector would mean to Russia's ability to remain the world's number one oil producer - it is now ahead of Saudi Arabia - is said to have woken the Kremlin up to some harsh realities. Russia needs the capital and management/development expertise of western oil companies to keep the oil flowing. At bottom, it is as simple as that. As a final note, one should never forget that Rosneft as a company is the result of Putin's astonishing and piratical "land grab" of Yukos, which had been Russia's largest oil company from 2001 to 2005. That act of lawlessness saw the Russian State jailing Yukos CEO Michael Khodorkovsky and nationalizing the company on the grounds that Khodorkovsky had been cheating the State out of tax revenues due. Putin's thumb was said to be heavily on the scales when Khordorkovsky's appeal against his prison sentence was rejected last year. In a Viewpoint for QFinance, Brian Misamore, the former financial director of Yukos was asked what his advice would be for anyone from a developed market who was offered a senior management position in Russia. He replied:
"I would not want to share my talents with Russia today because the situation there is far, far different from what it was like when I went there in 2001. Until the Russian government explicitly supports transparency in its businesses and gets a handle on government corruption, I don’t think anyone should waste their time in Russia. There’s currently no sign of that happening."Yet despite its own difficulties in pursuing Russian ventures, BP is clearly convinced that the stakes are high enough and the likely returns strong enough to make the hassle worthwhile. Time will tell if it is right.
Tags: Arctic oil reserves , BP , Brian Misamore , government corruption , Rosneft , TKN-BP , Vladimir Putin