Page 1 of 2 BP's Russian defeat a market victory
By John Helmer
MOSCOW - If anyone needed convincing, the paper that BP, formerly known as
British Petroleum, signed on Thursday with Mikhail Fridman and his Russian
shareholding partners proves that defying the law of gravity is unlikely to
succeed for long; even if the world's weakest prime minister, Gordon Brown, and
his disloyal foreign minister, David Miliband, have tried to stake their
short-term political careers on it; and even if the Financial Times of London
has tried to make the inevitable fall appear to be a masterly exercise in BP
negotiating skill.
In the middle of 17th century Paris, Savinien Cyrano de Bergerac (that's the
real one, not the 19th century stage character), wrote a fantasy about a voyage
to the moon. He described several
contrivances to get there, in addition to his own. One, which reportedly
delivered the biblical prophet Elijah, involved a large magnetic ball and an
iron chariot. To propel the latter into the sky, and thence to the orbit of the
moon, the prophet tossed the ball into the air so that the magnetic force would
draw the chariot after it. He was obliged to keep catching and tossing to
sustain the upward momentum. When it was within gravitational range of the
moon, the magnetic ball was tossed downward, and then upward again, to break
the speed of the chariot's fall.
Russia isn't the moon. But BP has been trying a variant of the
magnetic-ball-and-chariot to hang onto the 23% of its global oil reserves
located there, 25% of its current oil production, and a comparable amount of
its market capitalization. Rarely has so much value in global energy resource
depended on such a theory of motion. Robert Dudley, chief executive of TNK-BP -
the 50/50 joint venture BP has operated for five years with Fridman, Len
Blavatnik and Victor Vekselberg - has also been using several quaint
contrivances to defy the laws of gravity.
Dudley was found out, having tried to negotiate secretly with Russia's Gazprom
the sale and purchase of the 50% stake in TNK-BP owned by the Russian trio -
collectively known as AAR, reflecting the names of their holdings, Alfa, Access
and Renova.
Dudley, BP chairman Peter Sutherland and chief executive Tony Hayward may have
thought their proposed deal had the blessing of Gazprom's chairman at the time,
Dmitry Medvedev, and Gazprom's chief lawyer, Konstantin Chuichenko. By the time
the latter duo had moved into the Kremlin in May, Medvedev as president,
Chuichenko as head of the president's Main Control Department, Dudley and his
masters had also convinced their contacts in Downing Street and in the British
Secret Intelligence Service that their scheme was a test of strength between,
on the one side, Prime Minister Vladimir Putin and his deputy, Igor Sechin, who
are usually in charge of such matters, and on the other, the new Russian
president. Sechin is also chairman of the board of Russia's leading oil
company, Rosneft.
Fridman identified the folly of foreign companies playing Russian politics
against Russians, claiming publicly that Dudley's secret not only violated the
terms on which he worked as chief executive, that is he should report to both
sets of shareholders on the TNK-BP board. It also violated the elementary rules
of Russian politics - there are no secrets, and there are no one-sided deals.
According to the Financial Times, Russian media reports and public statements
by BP and AAR, the agreement between Hayward and Fridman - if it sticks -
requires Dudley to be ousted by December 1. This was the first and principal
demand of the Russians throughout the public conflict, since BP's hapless
Gazprom deal was uncovered at the start of the year, and Medvedev lined up with
Putin and Sechin to repudiate it.
Alastair Graham, head of BP Russian Investments, had told the FT six weeks ago
that the campaign against Dudley was "a smokescreen for [the Russian] attempts
to seize control of TNK-BP". In fact, BP had been trying to take control of
TNK-BP from AAR.
If you believe the British company, you can declare the reported new deal a
victory for BP. According to the FT, the agreement is BP's victory because it
preserves
its 50% stake in TNK-BP after a struggle with its local partners that focused
attention on the rights of foreign investors in Russia. The memorandum of
understanding (MoU), agreed this week by BP's board, follows a long-running
dispute over BP's most important international venture ... The outline
agreement, steered by Tony Hayward, BP's chief executive, and chairman Peter
Sutherland, was reached after fears that BP's interest in TNK-BP could be at
risk because of its fight with its Russian oligarch partners. BP's control of
TNK-BP had also come under pressure from multiple investigations by the Russian
authorities into its labor practices. Under the deal, the 50-50 equity split of
the partnership would remain unchanged.
In a briefing on the
agreement he signed, Hayward claimed, "The outline deal announced today,
provided the details can be agreed in good faith, is an acceptable compromise."
Sechin announced: "We are pleased that the conflict has been settled and the
parties to the negotiations have reached an agreement on the shareholder level
without involving third parties, including the state. This sends the right
single to the entire market."
If you are the Russian shareholders, you see the outcome positively, but not in
the way the British side has reported. According to the press reports, the
replacement for Dudley, and new chief executive officer of TNK-BP, must be
independent of BP, and his powers will be substantially reduced from Dudley's
prior mandate - a big loss for the men who sit on St James Square, BP's
headquarters in London.
Other reported provisions indicate that the holding company for the joint
venture will now have three independent directors and four each for BP and
TNK-BP. But the affiliated and subsidiary companies will remain at parity
between the Russian shareholders and BP. BP thus loses operational control. In
addition to Dudley, its key financial and operational executives have already
resigned, and more than half of its secondees on the TNK-BP payroll have lost
their Russian visas and been reassigned.
The MoU between BP and AAR allows for an initial public offering (IPO) of up to
20% of shares in TNK-BP's assets, to be issued in a year or two. This allows
both sides to sell into the market, and it means two things - TNK-BP's share
price goes up in anticipation; Gazprom and Rosneft, the two state Russian
energy companies, will consider what they would like to do. The current
freefloat is only 5%. A larger freefloat ought to lift the market cap of TNK-BP
- another plus for the Russian shareholders, compared with the status quo ante.
Predictably, TNK-BP's share price jumped 8% in Thursday's trading.
AAR had been clear from the beginning that Dudley's plot had been to oust them
from their shareholding at a discount to the value BP placed on TNK-BP's assets
in its own capitalization. An independent audit by DeGolyer and MacNaughton
confirmed last year that TNK-BP's total proved reserves were 8.225 billion
barrels of oil equivalent, applying US methodology on a life of field basis. BP
says its reserve figure is 17.8 billion barrels, and includes in the count its
share of TNK-BP.
That makes TNK-BP's reserves 23% of the BP total. If you were imaginative, and
applied that proportion of BP's market capitalization (at the time the conflict
broke into the open) of 105 billion pounds sterling (US$213 billion) to value
TNK-BP, you might figure that TNK-BP should be worth $53 billion. And that
should indicate that a half share of TNK-BP, held by AAR, should be valued at
$27 billion.
But in June, the market cap of TNK-BP as a whole was just $35 billion; the half
share $17.5 billion. The fight, which BP and its supporters portrayed in the
London press as a defense of foreign investment rights in Russia against local
predators, was in reality about the $10 billion difference between the two
prices, and the much bigger difference BP has calculated that might accrue to
BP's reserve balance if Fridman and his associates were replaced as the TNK-BP
partner with Gazprom, and its enormous reserves.
Today's share prices reflect the fall of oil in global markets, a worldwide
contraction in economic growth prospects, a slowdown in Russian growth rates,
the dwindling of the pound, and the rise of the dollar. BP is currently worth
94.8 billion pounds. BP's share price fell 1% on the Russian agreement;
TNK-BP's rose 8% on the news, making the company's market cap currently $27.4
billion.
The trajectory of TNK-BP's share had been rising through much of the six-month
conflict - but not from Dudley's or BP's magnetic pull. So long as the Moscow
market judged that AAR stood the better chance of winning the contest for
operational control of the company, TNK-BP became more valuable, and BP less
so. A clever arbitrageur should have been betting on the widening spread
between the two share prices. That in turn has meant that no one in the market
believed what they were reading in the bulletins issued from St James Square to
the dutiful FT.
That is to say, the Russian investment community has believed that TNK-BP will
be worth more if BP loses its battle than if it wins.
And so it will be. By trying to fight Fridman behind the arras, Dudley, Hayward
and Sutherland, at their own expense, are going to enrich their adversaries. By
trying to play Medvedev and Chuichenko off against Putin and Sechin, they have
substantially increased the likelihood that the IPO price for a 20% stake in
TNK-BP will be considerably higher than Fridman's sale target, and that a
Russian state company may enter the shareholding to assure firm Russian control
of the oil reserves.
BP has been forced to give up the lucrative scheme in which it paid its
executives through TNK-BP revenues. But it preserves
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