BP and Russian oligarchs play chicken

 
BP logo TNK-BP accounts for a quarter of BP's output

There are two characteristics of BP's Russian joint venture: it has generated many billions of dollars of dividends for the company; and it has been a total nightmare to manage, largely because of years of appalling relations between BP and its billionaire oligarch partners.

A new governance low has been hit with the resignation of one of the oligarchs, Mikhail Fridman, as chief executive of the joint venture. What is going on and why?

Well BP believes that at least two of the oligarchs, Victor Vekselberg and Leonard Blavatnik, would like out - or at least they would like to convert their holding in the joint venture into cash and BP shares.

This is consistent with the statement by Alfa-Access-Renova, the oligarchs' consortium, that they have "lost faith in BP as a partner".

BP's belief is that the oligarchs regret the way they frustrated last year's attempt by the British oil giant to form a joint venture with the Russian state-owned energy colossus, Rosneft, which could have involved Rosneft buying out the oligarchs.

So BP sees Mr Fridman's resignation as part of a new campaign to put pressure on BP to organise a whole or partial buyout of their holding in TNK-BP.

The problem for BP is that it fears it could end up losing all of this stunningly valuable asset if it were to take its stake above 50% - because of a Russian prohibition on foreign businesses acquiring majority control of strategic assets.

BP does not wish to lift its stake above 50%, for fear of damaging those all-important relations with Putin's Kremlin. And right now BP believes it is on pretty good terms with the Russian government.

There is an impasse, which means that TNK-BP will probably function on autopilot for a while, managed by five senior executives but without direction from its own board.

In those circumstances, dividends won't be paid to either BP or the oligarchs. Colossal amounts of cash running to billions of dollars will build up in the coffers of the joint-venture, until either the oligarchs or BP become antsy about having rights to all that lovely money but not being able to touch it.

In this corporate soap opera, the end is only predictable by those with a talent for outlandish fiction. I will let you know when I've constructed a denouement so absurd as to possibly be true.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 27.

    Current fray goes back to January 2011, when Russians accused BP of betrayal: going behind its back in order to obtain a huge Arctic gas deal with Russian State. BP proceeded incorrectly; it was attempting big oil coup in effort to recover from disastrous 2010 oil spill in the Gulf of Mexico. BP violated Russian etiquette - collectively known as AAR. BP made $32B buyout offer to the oligarchs.

  • rate this
    +1

    Comment number 26.

    Is this new phase of brinksmanship, or as I think we are moving to beginning of some sort of end game (in terms of partnership). I know that BP Spokesman, Toby Odone said BP is happy with the partnership; it is not seeking out.
    It often seems Russian partners & Britons simply do not speak same language; garbled translations have usually ended up with oligarch victory.

  • rate this
    0

    Comment number 25.

    22 ComradeOglvy
    Point taken!
    Good job we have the Typhoons and a cruise equipped nuclear sub in reserve.

  • rate this
    -2

    Comment number 24.

    BP did do a good job in Azerbaijan, maybe they thought the Russian bear was a similar animal, If they have any sense they would cut and run. I suppose a poison parasol would be the Russians weapon of choice in this weather ?

  • rate this
    +1

    Comment number 23.

    Nine-year oil partnership between BP & 4 Russian oligarchs seems to have reached a new stage. Highly lucrative-but-troubled venture has "run its course." This has been in one of era's rockiest corporate partnerships; at one stage current BP CEO Bob Dudley was forced into hiding. Russian side of TNK-BP, including resignation of partnership's Russian CEO, Mikhail Fridman suggests a real shake up.

  • rate this
    +1

    Comment number 22.

    19.CC

    Very funny! You're talking about this right?

    http://www.theregister.co.uk/2011/05/20/daring_armed/

  • rate this
    -1

    Comment number 21.

    Here's a denouement. The executives and 'colossal amounts of cash' disappear. Bond is dispatched to recover the funds - traced to a chap called Blofeld. Then, after foiling Ernst Stavro, recovering the cash, saving the world from financial meltdown and getting the girl, all whilst dangling from a rope on the Golden Gate Bridge, 007 gets a margin call from his broker over some oil stocks.

  • rate this
    +3

    Comment number 20.

    17.JfH

    "Russia needs a legal revolution!"

    Don't we all! Here, we also elect a junta from the presented selection of corporate puppets.

    Trouble is governments have a habit of making overthrowing governments illegal. Odd but true.

  • rate this
    -2

    Comment number 19.

    15 torpare
    Argentina is in worst financial shape than us - militarily it could not withstand a British invasion of Argentina let alone them invade the Falklands.
    The current new UK warship on station could eliminate the entire Argentinian airforce (not updated since the 80's war) on the ground before scramble.
    Unlike Russia in the Falklands we hold all the cards (revenue sterling area too).

  • rate this
    0

    Comment number 18.

    BP exec's should stay well clear of anyone carrying umbrella's especially during heatwaves.....I'm guessing loads of talent moved from one group to another....But hey-ho former USSR is now a fledgling whatever......

  • rate this
    +4

    Comment number 17.

    "Vladimir Vladimirovich Putin is an elected DICTATOR whose administration runs rough shod over the law" - or that is the fear we all have when trying to do business in the old USSR aka Russia.

    He must work harder to show that this is not the case. Oligarchs need bringing to heal & forced to give back to the people of Russia all that they have 'legally' taken.

    Russia needs a legal revolution!

  • rate this
    +1

    Comment number 16.

    "generated billions and been a nightmare to manage"

    Not for nothing are the Russians acknowledged as masters of the game of chess. Couple this with the saying of "if you sup with the devil use a long spoon" and you will come closer to an understanding of how the game could pan out.
    B.P. has clearly not thought this scenario through properly and is in danger of being shown to be naive and stupid.

  • rate this
    0

    Comment number 15.

    #9. Concerned Citizen
    "The Falkland North and South basins look a much safer bet"

    A remarkably myopic assessment, seems to me (unless you're assuming a prior settlement with Argentina...?).

    Oughtn't you to be equally "concerned" about the geopolitics of THAT region?

  • rate this
    +3

    Comment number 14.

    #13 You mean like every US oil company?

  • rate this
    +1

    Comment number 13.

    The British are historically accostomed to dealing with corrupt warlords for mutual profit except in the case of their empire they always had the upper hand because they had the military power to enforce their will. Now the shoe is on the other foot and they don't like it. The world has turned upside down. This observer says a pox on both their houses.

  • rate this
    0

    Comment number 12.

    A sentence involving long spoons and bargepoles seems appropriate.

    We can all see how this is going to end but it will be fun watching the denouement.

  • rate this
    +2

    Comment number 11.

    There is no honor among thieves. Why doesn't BP pull out first? Take the money and run? One day all of the assets of the USSR were owned by 290 million people. Suddenly it was in the hands of a few privileged people just the way England once was. What about stealing and owning the assets of a nation by a corrupt aristocricy in an utterly corrupt society doesn't the British understand?

  • rate this
    +1

    Comment number 10.

    There is little difference between the middle east oil reserves in the 1970s and the Russian oil reserves today, Eventually the country in whose territory the reserves lie, will eventually own and control the assets. Aramco is now Saudi owned and controlled, TNK will eventually, like Rosneft be Russian owned and controlled. Hopefully BP will move on to find and develop fields elsewhere.

  • rate this
    +2

    Comment number 9.

    I know oil exploration and development has political risks - even the UK government can drop you in it - but have majors like BP lost all sense of risk management.
    Russia is a country run by a corrupt oligarchy, with no independent judiciary, paranoid about it's status and security:therefore,no place to invest your biggest eggs.
    The Falkland North and South basins look a much safer bet.

  • rate this
    0

    Comment number 8.

    If BP are not careful they could end up paying a very high price for this mess !!!

 

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