BP Just Can’t Win in Russia

by Aaron Levitt | July 10, 2012 12:59 pm

Russia’s vast oil and natural gas reserves[1] haven’t been lost on energy companies or investors. Its rich Arctic fields have been drawing in energy and production (E&P) firms like casinos beckon to gamblers as these companies seek to replace dwindling production from legacy fields. Exxon Mobil’s (NYSE:XOM[2]) recent partnership[3] with Rosneft (PINK:RNFTF[4]) is just one example.

However, not everything is coming up aces for those wishing to tap Russia’s vast petroleum reserves. Despite being part of an immensely profitable decade-long joint venture in the region, BP (NYSE:BP[5]) seems snake-bit in Russia.

After its bad breakup with Rosneft — which paved the way for Exxon’s deal — BP’s marriage to TNK may also finally be heading toward divorce. The integrated oil giant’s legal hassles resulting from the Deepwater Horizon oil spill have it still looking for ways to raise cash, but issues with the billionaire Russian oligarchs that control TNK have intensified over the last few months. These signs point to the beleaguered oil major perhaps selling its stake in the venture.

Despite its best attempts to move forward, BP keeps getting tripped up by its past and just can’t seem to win in Russia’s frozen frontier. Overall, dissolving the partnership or selling its stake isn’t a good situation for BP shareholders and could serve as another reason for everyone else to continue shunning the shares.

Arguments Intensify

TNK-BP seemed like a marriage made in heaven. For a mere $8 billion in initial investment back in August of 2003, BP gained unprecedented access to Russia’s vast natural gas and oil fields. Over time, the joint venture became one of the top oil companies in Russia[6], making up nearly 30% of BP’s oil and natural gas production and more than 20% of its reserves. TNK-BP contributed an average of 10% to BP’s profit over the last decade, and the oil major has received more than $19 billion in dividends since the venture formed.

The partnership has served as a lifeline. In the aftermath of the 2010 Gulf of Mexico disaster, which killed 11 rig workers and spilled an estimated 5 million barrels of oil into the sea, TNK-BP provided roughly $3.75 billion in dividends in 2011. These payments were a major contributor to BP’s various settlement plans and provided the bulk of its recent $4.1 billion dividend payment to shareholders.

Needless to say, anything that could cause such a huge portion of BP’s revenue stream and reserves to disappear is cause for concern.

The current battle — the latest in a long stream of disputes — could do just that. Both BP and the group of Russian oligarchs called the AAR consortium sit on the board of TNK-BP. Using the board structure, both parties exercise control over key decisions taken by the joint venture’s management. However, AAR dominates the TNK-BP management committee , with oligarch shareholder German Khan also serving as its executive director.

BP has argued that Khan and his colleagues make decisions without the support of the board[7] — a direct violation of the TNK-BP shareholder agreement.

This follows other fights between the two groups. Almost immediately, AAR accused BP of attempting to use the venture for its own ends. The oligarchs wanted TNK-BP to expand beyond Russia by buying oil properties in Europe. BP countered, saying that would conflict with other parts of its empire.

BP later angered its TNK partners by announcing plans for a $16 billion alliance with Russia’s state-owned oil company Rosneft. That deal eventually fizzled and paved the way for Exxon to move in.

The controlling oligarchs said of the deal and the recent issues that “It has become apparent that the parity ownership structure has become inoperable given fundamental differences over strategy and governance between A.A.R. and BP.”

Another Step Back

Analysts have estimated that BP’s stake in the joint venture could be worth as much as $30 billion with potential suitors like PetroChina (NYSE:PTR[8]) and others have shown interest. However, the Russian partners have the right of first refusal for any buyout offers.

That leaves BP and its shareholders caught between a rock and hard place. Losing the joint venture’s critical payments could mean more asset sales down the road for BP as it still feels effects[9] of the Deepwater Horizon disaster. If the venture collapses, the long-term implications to BP’s shareholders could be catastrophic.

Already, the oligarchs have pursued an arbitration case in London that, if successful, could enable them to sue BP for billions. Likewise, AAR has estimated that after litigation costs, BP’s stake in the venture would be worth only around $7 billion.

With the venture’s financial benefits in limbo and the its existence in question, the story for BP continues to get messy. Adding this current struggle to its ongoing Gulf disaster legal drama, and I’m not sure why anyone would want to own BP shares. Sure, they might have some value, but you can find plenty of other energy players without all these headaches. Personally, I’d rather own any of them first[10] before jumping into BP.

As of this writing, Aaron Levitt doesn’t own any securities mentioned here.

  1. Russia’s vast oil and natural gas reserves: http://investorplace.com/2012/02/russia-energy-stocks-to-buy-rsx-rusl-ogzpy-gzpfy/
  2. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  3. recent partnership: http://investorplace.com/2012/04/exxons-first-mover-edge-in-the-arctic/
  4. RNFTF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RNFTF
  5. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  6. top oil companies in Russia: http://www.bp.com/sectiongenericarticle.do?categoryId=9002155&contentId=7004030
  7. make decisions without the support of the board: http://www.reuters.com/article/2012/06/21/us-tnkbp-fridman-idUSBRE85K0WL20120621
  8. PTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PTR
  9. as it still feels effects: http://investorplace.com/2012/03/is-bp-back-only-partly/
  10. own any of them first: http://investorplace.com/2012/05/can-conocos-divide-and-conquer-plan-win/

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