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David Caploe PhD

David Caploe PhD

David is a writer for the popular economic news site Economywatch.

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Putin Turns His Back on BP as Rosneft Deal Turns Sour

BP’s investment with Russia's national oil company, Rosneft, was announced in January, it was generally seen as a coup, giving BP access to exploration licenses in one of the world’s last unexplored basins.

We made it a special point to observe that "a seal of approval from the Russian government for the deal also guaranteed some safety to operate in what has proved in the past to be a challenging country for BP and other oil majors."

Well, guess what ???

It now seems that seal of approval from the Putin regime is worth a little less than it originally seemed, and Russia, once again, seems like not the easiest place in the world for BP and other oil majors in which to operate.

What happened ???

Last week, a Swedish arbitration tribunal upheld an injunction that indefinitely blocks its share-swap agreement with the state-owned oil company Rosneft. BP’s chief executive, Robert W. Dudley, might still be able to salvage the approximately $7.8 billion Rosneft deal.

But the ruling may indicate how seriously Dudley misread Russian politics in striking that agreement. The key is the fact that, before striking the deal with Rosneft, BP had a separate and private joint venture with ANOTHER group of Russian billionaires. And apparently they didn't find the prospect of their erstwhile partner BP making time with their hated state-owned competitor in the oil game, Rosneft.

So they went to an arbitration tribunal in Sweden once the Rosneft deal was announced, arguing that deal breached their own shareholder agreement with BP in their partnership, called TNK-BP. What a surprise -- NOT !!!

BP tried to cover up their shock by saying the ruling was simply a deferral and the company would continue with arbitration hoping for a favorable final ruling. But they also said, “we will now also be exploring possibilities for a reasonable commercial solution with all parties.”

The Russian billionaires in TNK-BP, who do business as a group known as AAR, issued a statement on Friday calling the tribunal’s ruling “fair, balanced and thoughtful.”

Prospects looked decidedly better for BP when Prime Minister Vladimir V. Putin of Russia presided over the signing ceremony for the Rosneft agreement. The deal called for the companies to invest in each other through a stock swap representing about 5% of BP and 9.8% of Rosneft, and jointly explore new oil fields in the Russian Arctic.

It seemed a strategic victory for Dudley, the American who rose to the top post at BP after the Deepwater Horizon spill in the Gulf of Mexico last year. On taking that job in October, he quickly sold more than $22 billion of BP assets to help pay claims and cleanup costs and to focus on the company’s most lucrative operations.

Then came the deal with Rosneft, which as we pointed out was considered Dudley’s first bold move to help the company expand in new directions. But now, with the suspended Rosneft deal having cost the company more time and investor support than planned, Dudley will no doubt find himself facing hard questions when BP holds its annual shareholder meeting in London on Thursday.

Especially difficult for him to be able to justify is how he could have so badly mis-read the Russian scene, having spent five years in Moscow running the TNK-BP joint venture from 2003 to 2008.

Given that, shareholders might also ask why -- in light of his intimate association with the AAR dudes -- he failed to think ahead of time about about the rather obvious possibility his erstwhile pals might be ready and willing to play hardball.

After all, Dudley’s previous Russian experience led to his being forced into hiding in 2008 when disputes with the government and those same partners led to the revocation of his work visa !!!

I mean, dude, what did you think AAR was going to do -- cry and moan and just sit there ???

This is Russia, and you SHOULD have known what was coming. Perhaps he thought having Putin "godfather" the deal - and the fact that Rosneft’s chairman, Igor I. Sechin, is a powerful deputy prime minister - would shield him from what otherwise seems like an easily predictable reaction.

A senior BP official with knowledge of the company’s work in Russia said BP lawyers had ALWAYS understood the Rosneft deal was “on the edge” of violating the TNK-BP shareholder agreement. And this is all the stranger because, Dudley’s own tempestuous history with the TNK-BP partners aside, that partnership has been an unalloyed financial success for BP to date.

Indeed, BP’s operations in Russia are now as important to the company's bottom line as those in the US. For a founding stake of $6 billion in cash and assets to the TNK-BP venture in 2003, BP has since made $14.3 billion in dividends — and still holds 50% of the assets.

So even as BP fights with AAR over Rosneft deal, the TNK-BP joint venture is itself an important part of the British company’s portfolio.

“There’s hardly a day when we don’t have to remind ourselves how valuable this business is,” said a senior BP employee who declined to be identified because the company does not officially comment on its disagreements with the TNK-BP shareholders.

So what WERE they thinking ???

Apparently they assumed the Kremlin would muscle the Russian shareholders in TNK-BP away from making trouble. But that seems spectacularly short-sighted, since, according to one witness to the January 14 signing ceremony, Putin mentioned in a quiet aside that the AAR group was known to be litigious.

And, sure enough, the AAR billionaires began threatening to sue almost immediately.

“BP assumed any difficulties with the local shareholders would be resolved at a local level,” Christopher Weafer, the chief analyst at Uralsib bank, said in an interview. “That hasn’t happened. At least it hasn’t happened yet.”

Oil analysts, too, say BP’s patron Sechin may not have been as powerful as the company had hoped - or, more likely, that if he was sufficiently powerful in January, he no longer is.

Part of the reason is a recent order by Dmitri A. Medvedev, the president of Russia, that ministers to step down from the boards of state-controlled companies, citing conflicts of interest. Good thing they're not indulging in any such foolishness in China ;-) .

So Sechin now seems to have a choice of resigning one of his two powerful positions -- head of Rosneft or deputy Prime Minister.

Not only that, the ever-wily Putin now seems to be backing away from his endorsement of the deal. In March, he told Russian journalists at a news conference Dudley had not warned him of the possible legal challenge from the Russian oligarchs. Uhhh, wait a second, Vladimir -- wasn't it YOU who noted how litigious the AAR guys are ???


“I was completely in the dark,” he allegedly told the newspaper Vedemosti.  As if Putin is in the dark about ANYTHING big that goes on in Russia.

The AAR partners, for their part, argued the deal with Rosneft would significantly impinge on their rights because the TNK-BP venture would be sidelined from future growth opportunities in Russia. And while we have no particular horse in this race, you can't help but think the AAR guys DO have a good point.

That said, some say the AAR partners could be positioning themselves to sell their stakes in TNK-BP, possibly to Rosneft. That would effectively nationalize TNK-BP, which is Russia’s third-largest oil company after Lukoil and Rosneft.

Although the AAR partners have denied using the legal challenge to try to negotiate a sale of their shares, that's NOT an unrealistic scenario.

Some BP investors apparently still welcome the Rosneft deal despite its problems, since any link with Rosneft would make it easier for BP to win future exploration contracts in Russia, the world’s largest oil-producing -- though not exporting -- country.

Still, the Rosneft deal, hanging in the balance, is all about future growth through new oil exploration. Which is why it probably remains as important to BP and Dudley as it was in January. Especially given the questions that remain for BP given the still-unresolved mess they made in the Gulf of Mexico.

The only thing I don't get is how an arbitration tribunal in SWEDEN has jurisdiction over a deal between the RUSSIAN government and a BRITISH multinational.

That make any sense to you ;-) ???

The only way I can figure is BP wanted to make sure they avoided a Russian legal setting, and insisted on some sort of framework outside the ex-Iron Curtain.

If that's indeed the case, it seems to have backfired -- yet ANOTHER thing Dudley will have to explain ;-) .

David Caploe PhD
Chief Political Economist
Economy Watch

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