Tuesday, 23 October 2012

BP partners with Russian dictator Vladimir Putin

The London-based oil and gas company BP has just made the probably biggest mistake in its entire history, when it announced its partnership with Russian dictator Vladimir Putin to oversee the Russian oil industry. BP's chairman was bullish about the deal (according to which BP first sells its 50% shareholding in TNK-BP to Putin's new favourite Rosneft, after which BP intends to use part of the cash to acquire a further stake in Rosneft):

BP's chairman Carl-Henric Svanberg said: "This is an important day for BP. Russia is vital to world energy security and will be increasingly significant in years to come. Russia has also been an important country for us over the past 20 years. Our involvement has moved with the times. TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia.
"Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns. We consider that this is a deal which will deliver both cash and long term value for BP and its shareholders. It provides us with a sustainable stake in Russia’s energy future and is consistent with our Group strategy.

"Over the coming months we will work hard to complete the transaction and we look forward to the next step of deepening our already strong relationship with Russia.” 

Before sending congratulations to BP's Swedish chairman, it maybe useful to look at what the deal between BP and Putin actually means:

“By signing this deal, the highest levels of the Russian government, up to and including Vladimir Putin, are endorsing BP as the principal western partner of the Russian oil and gas industry,” Molchanov said. “This is a big, big seal of approval for BP by Moscow and it means no other company is going to have access to the corridors of power like BP does.”
Since 2004, Putin has been tightening the government’s grip on the Russian oil sector, moves that made it increasingly difficult for foreign producers to establish or maintain footholds in the country, said William J. Andrews, a fund manager at C.S. McKee & Co. in Pittsburgh. Buying TNK-BP from the London-based producer and the Russian billionaires who own the other half will transfer to Rosneft fields that accounted for about 25 percent of BP’s annual output worldwide.

“The Russians are nationalistic and are going to keep the oil reserves for themselves,” said Andrews, who helps manage $14 billion. “They don’t really have a legal system or a political system. It’s a dictatorship.”

Read the entire article here

The big danger for BP and its shareholders is that deals done with dictators (like Putin) are an extremely risky business. For some strange reason, Svanberg and his cronies appear to want to forget what happened just a year ago:

"Black-clad special forces raided BP's Moscow offices on Wednesday, deepening the British company's problems in Russia after its attempts to salvage an oil exploration agreement in the Russian Arctic collapsed.

The raid, a day after ExxonMobil signed a deal giving it access to fields BP had hoped to develop, was ordered to let bailiffs search for documents in a legal battle over BP's failed bid to partner Russia in the Arctic, a spokeswoman said.

But BP, which has a long history of problems in Russia, denounced the raid and said it feared the search could continue for the rest of this week.

"It is our opinion that the court order under which ... court bailiffs are now in our office has no legal grounds. The office's work has been paralyzed," BP Russia President Jeremy Huck was quoted as saying by Interfax news agency.

"We see these actions as pressure on BP's operations in Russia," he said."
No, instead of congratulating Svanberg and BP, we should send our best wishes to the other major oil companies, which now are without access to the corridors of Putin's power. That lack of access to a dictator will in the end be a blessing to these companies, who will be able to profit when the dictator is gone. And besides, in the age of the shale gas revolution, Russian oil is less interesting than most people thought just a couple of years ago. 

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