BP Over a Barrel in Russia: The Sakhalin Rerun


Today the media is reporting that BP’s Lord Browne and his chosen successor Tony Hayward are heading off to Moscow to prepare a massive charm offensive in an attempt to save one of the company’s largest investments from what seems to be an aggressive interventionist streak by the state in Russia (see post on Premature Gasification). Their begging message: “Please, Mr. President, don’t force us to give up majority control of the Kovykta field to Gazprom under clearly fabricated license violations.” The likely response from Vladimir Putin: “We shall do whatever we please with your property despite law, contracts, rules, and procedures protecting your rights. And you shall accept it without complaint if you ever want to do business here again.” The most likely result: Because Lord Browne and Tony Hayward are so far behaving nicely, the private Russian firms will be the likely losers, forced out or have their shares reduced (Alfa Group consortium, Access Industries and Renova Group), and BP will likely see its stake diminish, but not nearly as much as Shell lost during the Sakhalin heist. However, in deals with Russian state owned energy firms, you never really know what will happen. With the theatrics of legalism put on by environmental watchdog Oleg “The Hammer” Mitvol, the Kremlin has really developed a well practiced method of stealing energy assets in broad daylight. The Kovykta affair is really just the Sakhalin rerun with a new, tragic protagonist. All this makes Yukos look like a clumsy practice routine – who knows, maybe by the time that Total gets its starring role, the shareholders will begin waking up! This RIA Novosti translation of a Vedomosti editorial really captures the Russian outlook on the matter: if Gazprom wants something, it will get it. “Pragmatic” companies will submit to this reality, and, like Shell, BP will likely exhibit pliability, rather than the temerity of defending its rights to its property. Notice the reference to Krasnokamensk in the article – those that dare to raise their voice against these state thefts will be put on a show trial and sent to the gulag like Mikhail Khodorkovsky.

Am I the only person who finds it extremely sad and disheartening that to be “pragmatic” in Russia is now equated with the tolerance of theivery and corruption? When did it become irrational to stand up for rule of law in Russia?


Russian gas giant Gazprom, which has started developing its oil business, has shown interest in TNK-BP, a successful private company. TNK-BP’s present owners do not want to sell it (it is a profitable business for Russian shareholders and an opportunity to consolidate its subsidiary’s reserves for BP). Life shows that when a big state corporation (be it Gazprom or any other company) sets its eyes on an asset, it will get it. It depends on the owner’s pliability how it happens. Those who do not want to part with their assets may go to Krasnokamensk (in Siberia) or some other place far away. However, there are more cautious and pragmatic investors. They believe it is better to lose a part than everything. The Anglo-Dutch Shell concern had no desire to cede control over the Sakhalin II oil and gas project to Gazprom. The company has a low reproduction rate, that is, the new reserves/production ratio (it was 78% in 2005 against Exxon Mobil’s 112%). It needs new assets, but it had to give up the old ones. The company’s pliability was rewarded. All Sakhalin II shareholders halved their shares and received $7.45 billion for them from Gazprom. The project was immediately dropped by inspectors, who only a week prior to the announcement of the transaction had given it up for lost. Farkhad Akhmedov, formerly the sole owner of the Nortgas private gas company, has given half of Nortgas to Gazprom. BP is a pragmatic investor, like Shell. In the opinion of a BP manager, conditions in Russia are fine. People work even in Nigeria, where they may be killed at any time, he said. That means that BP is likely to agree to the deal with Gazprom if it has no other way out. The question is whether there is anything that could frighten one of the world’s largest corporations.