BP may have to give up control of Russia venture

The Guardian: BP may have to give up control of Russia venture

Reuters, Friday April 4 2008
By Tom Bergin

LONDON, April 4 (Reuters) – Kremlin pressure on BP’s Russian joint venture, TNK-BP, may force the British oil major to cede control of Russia’s third-largest oil producer to state-backed Rosneft or Gazprom before long.

In March, authorities raided the Moscow offices of BP and TNK-BP, which BP owns jointly with a group of Russian billionaires.

Officials accused a TNK-BP employee of industrial espionage and opened an investigation into tax evasion and possible environmental violations at TNK-BP.

TNK’s chief executive Robert Dudley said on Thursday the raids and the arrest were one-off incidents, not a broad attack on the firm foreshadowing full-blown expropriation.
But investors see eerie similarities to the treatment meted out to YUKOS, formerly Russia’s largest oil producer, before it was bankrupted by a flood of back-tax claims and its assets sold to state firms.

“We are all worried there is going to be some political manoeuvring in order to relieve BP of the stake,” said Colin Morton, fund manager at Rensburg Fund Management, who holds BP shares. “Do you come in some morning and find it (TNK-BP) doesn’t exist any more?”
BP’s shares, after initially holding up despite the investigations, have weakened to underperform the DJ Stoxx European oil sector index by 2 percent since the raid on TNK’s Moscow offices on March 19.

The yield on TNK bonds has risen almost 0.5 percentage points, signalling that investors expect a higher interest-rate premium in return for holding the company’s debt.

SEIZURE SEEN UNLIKELY

But investor reaction would be much worse if investors actually expected the unit to be expropriated.

TNK contributes almost a quarter of BP’s oil and gas production. Even allowing for high Russian taxes on oil production and country risk, BP’s 50 percent interest in TNK is worth about $20 billion, Neill Morton at MF Global said, equivalent to roughly 10 percent of BP’s market value.

Investors doubt whether recent events are leading up to outright seizure of BP’s stake.
Russia’s largest gas producer, state-controlled Gazprom, has expressed interest in buying into TNK and Russian media have speculated the attacks were aimed at encouraging BP’s Russian partners to sell out to Gazprom.

Rosneft has repeatedly denied rumours it wanted to nudge out Gazprom to buy into BP.
BP executives say that, in a Russia where the government favours state-controlled companies to develop natural resources, having Gazprom as a partner would provide security against possible future threats to its assets.

However, the gas export monopoly may want more than simply to replace the oligarchs as junior partners to BP.

“We think there is a possibility that BP ends up as a minority shareholder in TNK-BP,” analysts at JP Morgan said in a research note this week.

GAZPROM’S PENCHANT FOR CONTROL

TNK-BP was formed in 2003 when BP pooled oil fields with Russian oligarchs Viktor Vekselberg, Len Blavatnik, Mikhail Fridman and German Khan. In addition to assets and cash, BP also brought management expertise.

Dudley is a former BP executive and many of the unit’s most skilled engineers are seconded from BP, although the secondees are currently off work due to visa problems.
When TNK-BP was created, the billionaires agreed not to sell their 50 percent stake until 2008. Speculation of Gazprom or Rosneft buying has been growing as the end of the lockup deal approached.

Some analysts have questioned whether Gazprom or Rosneft, Russia’s most indebted companies, have the cash to buy a majority stake in TNK.

Tax claims and environmental probes could hit the value of TNK and help Gazprom — seen by analysts and market sources as the most likely to buy into TNK — buy at a low price.

Oil assets already owned by Gazprom through its 75 percent stake in Gazpromneft, which was known as Sibneft before being sold by billionaire Roman Abramovich, could help secure a deal.

“They could use their interest in Gazpromneft as currency to inject into TNK-BP to gain a direct stake,” MF Global’s Morton said.

Potentially more worrying to BP is Gazprom’s penchant for being in charge.

After a year-long campaign of government pressure, Royal Dutch Shell Plc and its partners sold a 50 percent stake in the Sakhalin-2 oil and gas project off Russia’s east coast.

And after threats to revoke its indirect interest in the licence to the Kovykta gas field, TNK-BP agreed to sell the field to Gazprom, with an understanding it may buy back a minority stake later.

Analysts say that if TNK were a majority Russian-owned company, it may find it easier to gain access to new fields.

But BP’s operational control has helped make TNK an efficient operator and the London-based company would be loathe to give this up to a relatively high-cost producer like Gazprom.

But for many investors, even a deal which erodes BP’s stake would be welcome, if it ended the uncertainty.

“There’s a lot of negative news priced in already. If anything positive was to come out of this it could be taken quite well by the share price,” Rensburg’s Morton said.

(Additional reporting by Dmitry Zhdannikov in Moscow)

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