International Herald Tribune: BP may have to cede some control of Russian venture

By Heather Timmons and Andrew E. Kramer

When BP announced a landmark investment of $6.15 billion in Russia in 2003, the event was celebrated with a healthy dose of British pomp and circumstance.

President Vladimir Putin flew to London for the announcement and stood with the British prime minister, Tony Blair, who called the deal a “concrete testament” to Britain’s long-term confidence in Russia. The BP chief executive, John Browne — who resigned unexpectedly from the oil and gas company Friday — was personally instrumental in brokering the deal.

In some measures, that may have been the high point for the venture. TNK-BP, as it is known, has already suffered numerous setbacks and is excluded by national security rules from developing large new fields. Now BP may be required to cede some control over the venture, analysts and investors say, as the Russian government increases its grip on the country’s natural resources.

The state-controlled energy companies Gazprom and Rosneft are jockeying for the rights to buy out BP’s Russian partners, a move that could come as soon as this spring, analysts say, and might eventually leave BP with a minority stake in the venture.

TNK-BP is the second-largest private oil company in Russia, after Lukoil, and the only energy company with partial foreign control, something analyst say has made it a takeover target.

BP’s position in Russia is looking more tenuous after another oil major, Royal Dutch Shell, was forced in December to cede control of the world’s largest oil and natural gas development, known as Sakhalin 2, to Gazprom, the Russian energy monopoly.

“Time is not on their side, just as it was not on the side of the foreign owners of Sakhalin 2,” James Fenkner, a managing partner at Red Star brokerage in Moscow, said by telephone.

Shell and two Japanese partners, Mitsui and Mitsubishi, sold a controlling stake in Sakhalin 2 after an environmental regulator threatened to freeze work on the $22 billion project. Ominously, that same agency, Rosprirodnadzor, has accused TNK-BP of illegal logging and drilling at a massive Siberian gas field called Kovykta. Now one of Browne’s partners in the venture, the Russian oligarch Viktor Vekselberg, is negotiating on behalf of TNK-BP to resolve this dispute.

Even if BP manages to retain a 50 percent stake in the company, its Russian state-backed partner will have “huge leverage,” said Stéphane Foucaud, an oil and gas analyst with Société Générale in London.

“Does that mean that going forward, TNK-BP would make decisions that are more in the Russian government’s interest” than in its shareholders, he asked.

Any change to the TNK-BP structure could have serious repercussions for BP.

TNK-BP, which has 10.5 billion barrels of reserves, provides about a quarter of all of BP’s production. It also brings in 15 percent of BP’s net earnings. The company has no other major projects in the works that could take the place of TNK-BP if production falls over the short term.

The best-case scenario is that Gazprom buys out the Russian oligarchs and that the big projects that TNK-BP has planned still go ahead, said Neal McMahon, an analyst with Sanford C. Bernstein in London. The worst case is that Gazprom takes an even larger stake in the gas fields, including Kovykta, that TNK-BP is developing and forces BP to accept its pipeline and marketing plans, he said.

The project had been viewed as one of Browne’s diplomatic achievements, and any disintegration or changes to it would figure in any re-examination of his legacy as BP suffers from a spate of problems. BP said last week that Browne was leaving the company 18 months earlier than expected. The company has recently suffered an explosion in Texas, a pipeline leak in Alaska and allegations into market manipulation at its trading desks.

On Tuesday, James Baker, the former U.S. secretary of state, will release the results of an investigation into BP’s health and safety practices that is expected to be critical of the company’s overall strategy.

Browne and dozens of top executives in London were interviewed for the report.

Still, BP has already profited handsomely from Browne’s Russian ventures, whatever their future prospects. The company has also maneuvered well to adapt to the country’s mercurial politics.

Just in three years, it has earned in dividends more than enough to cover its initial investment in cash and shares in TNK-BP. By the third quarter of 2006, BP had earned $6.9 billion, according to Tony Odone, a spokesman for BP in London.

“We’re happy with our position in Russia at the moment,” he said. “We’re getting on well with our partners and the government.”

Separately from the TNK-BP deal, BP bought $1 billion of shares in Rosneft, the Russian state oil company, during an initial public offering in July, in what was seen as a gesture of acceptance of the Kremlin’s dominant role in the industry.

Since Rosneft is one of the companies likely to benefit from any nationalization of TNK-BP assets, that investment also served as an unusual form of hedging, analysts say.

“Lord Browne was well known here in Russia, but his legacy will not disappear with his departure,” said Caius Rapanu, oil and gas analyst at the brokerage concern UralSib. “BP has shown to be more in tune with Russia than the American companies.”

Monday, January 15, 2007

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