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The Wall Street Journal: Why Teaming Up With Gazprom Wouldn’t Be Worst Thing for BP

(Article published by The Wall Street Journal hours before news broke of the apparent assassination in Siberia of a top TNK-BP official.)

October 2, 2006

Apart from the rough-and-ready tactics, it could prove a good match. Russian gas giant Gazprom has finally said openly that it wants to buy out BP’s local partners in its Russian operation, TNK-BP. BP has first refusal over that 50% stake, which has a market value of about $20 billion. Yet it probably will have little choice but to defer to Gazprom.

True, the U.K. oil major would then have to live with a Russian state-controlled behemoth at its side instead of its current partners, a group of oligarchs. Efficiency and profitability might suffer. However, Gazprom could unlock TNK’s giant gas project in Eastern Siberia, now stalled. That might release a lot of value. The deal would expand Gazprom’s oil business, which fits its ambitions to become an integrated global energy company. The Kremlin would also be happy, given its desire to corporatize the Russian economy. It all sounds ideal.

But there are risks, and one of these is Rosneft. Gazprom’s only state-controlled rival is also interested in TNK and might want a slice of the company too. That could happen in one of two ways. It, rather than Gazprom, might get the go-ahead from the Kremlin to buy out BP’s Russian partners. Or it might one day displace BP itself and coexist with Gazprom in a Russian/Russian joint venture. Thankfully the latter looks unlikely. Rosneft and Gazprom are different animals; tigers and lions do not live in the same ecosystem.

If Rosneft and Gazprom have a catfight in the Kremlin over who gets to buy into TNK, that is not BP’s immediate problem either. Still, all this illustrates the limits of BP’s control over its Russian operations. Its final partner, in a deal on which it originally conducted 40,000 hours of due diligence, looks as though it will be decided out of BP’s sight, behind Kremlin walls. Not good — but a less bad result than the problems other foreign oil majors face in Russia. BP’s Russian investment looks safe, for now.

— John Paul Rathbone, Mike Verdin and John Christy

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