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The march of the oligarchs

Would you rather bet on Russia or Nigeria? When Lord Browne, BP’s former chief executive, posed this question a few years ago everybody knew the answer. Of the two big oil prospects outside the Middle East, Russia seemed infinitely preferable.

Yes, corporate contracts could be ripped up and the hand of Kremlin was never far away, but those difficulties looked like a picnic in comparison with Shell’s task of dealing with violence in Nigeria. BP’s investment in a half-share of TNK-BP in 2002, after one false start in Russia, was regarded – and still is in many quarters – as Lord Browne’s finest achievement.

The bet hasn’t gone wholly sour yet, but BP’s 50:50 partnership with four local tycoons has. It is hard to see how it can survive after the events of the past few months, culminating in Monday’s withdrawal of work permits for many of TNK-BP’s foreign executives.

Bob Dudley, the BP-backed chief executive of the operator, is among those to be refused visas, meaning there is a real prospect that the boss of one of Russia’s biggest oil producers will be barred from the country. There is no positive spin to be put on that development, as BP knows. It can call the visa ruling “utterly disgraceful,” but the reality on the ground is that day-to-day control of TNK-BP is leaking towards the oligarchs, who BP strongly suspects of orchestrating the visa refusals.

BP’s hand has been exposed as weak, and the interesting question is why the Kremlin has refused to intervene. A definitive answer is impossible but the assumption must be that Kremlin would one day like to shove TNK-BP into a merger with a state-backed producer such as Gazprom or Rosneft, and damn the consequences for foreign investment. Its task would be easier if local hands, not BP’s, are at the helm, and if the Brits have been so worn down by bureaucracy that they come to regard such a deal as an escape route.

BP’s thoughts seem to be turning that way already. The company has been comprehensively outmanoeuvred by the oligarchs. Political intervention now, from Downing Street or Brussels, would probably be ineffective. The company knows that its share price would probably rise if it was able to turn its half-share in TNK-BP into cash.

What’s it worth? The joint venture currently accounts for roughly 5% of BP’s cash flow, 10% of operating profits and 20% of production. So maybe TNK-BP represents about 10% of BP’s current value. But the business may also account for about a third of the group’s potential reserves.

So the option of selling up (assuming it could be done) is deeply unpalatable. But, if the news from Moscow doesn’t improve, it may soon be pragmatic.

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