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BP’s unhappy marriage to the Russian oligarchy

The Independent

Sean O’Grady: BP’s unhappy marriage to the Russian oligarchy

Wednesday, 4 February 2009

Outlook The BP chief executive, Tony Hayward, is a man who knows exactly what his business needs to survive during difficult times: stability. He must also be only too well aware that, in this most volatile of businesses in a volatile world, he is likely to encounter mixed fortunes.

First, he makes no secret of his ambition to see oil at a long-term price range of $60 to $80. He said as much at the Davos World Economic Forum last week, and it’s an idea that finds ready support in Opec circles. A $70 barrel, say, blends Opec’s needs for development with the oil giants’ need for a return on their investment, and doesn’t threaten global economic growth.

Yet Opec’s attempts to balance supply with demand have rarely been entirely successful, and BP’s management and shareholders may have to cope with oil at considerably lower levels than $60 to $80 such is the “destruction of demand” described by the Opec secretary general last week. Still, longer term, oil should return to a profitable level, so Mr Hayward may eventually get his wish.

Second, and even more dicily, he is committed to trying to make BP’s joint venture with four Russian oligarchs work. This is a far tougher job than trying to fix the price of a barrel of West Texas Intermediate. The oligarchy redefine the word “challenging”. BP’s joint venture in western Russia, TNK-BP, has been an unhappy marriage since it was contracted in 2003. It is of huge strategic importance for BP – a quarter of its output and reserves – and contains huge promise. Disappointingly, it recorded a loss of $700m in the last quarter of 2008, helping push BP’s overall results into negative territory for the last three months of last year.

The oligarchs have caused BP no end of anguish, and, with their allies in government, have used every kind of bureaucratic device to pressure BP into ceding more control of the enterprise and more of the profits, when they arrive. They evicted the sitting chief executive, Robert Dudley, and a short but bitter war of words ensued between BP chairman Sir Peter Sutherland and one or two of the wealthier figures in Russian society.

Crockery has been thrown, and insults exchanged, but the time seems to have come for the parties to kiss and make up. In any marriage, you can either decide to make it work or leave. Mr Hayward is obviously the patient type, even if his Russian spouse doesn’t understand him.

Like a lot of oil folk, he seems wearily ready to accept that bad weather and idiosyncratic business practices are usually discovered in close proximity to oil, and that, in Russia, the oligarchy come with the territory. If it is any consolation, Shell’s venture with Gazprom in Sakhalin went even further awry. It is arduous indeed, but it is hard to see a company of the stature and ambition of BP, or Shell for that matter, opting out of the Russian growth story.

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