By John Helmer in Moscow
In the old days, before artillery fire could be directed with precision, the only way an attacking force could breach a fortified gate or wall was to manually deliver a large package of gunpowder; fix it to the target; light the fuze; and run away. Our word for the modern mortar, and the French word for this medieval device, are related. But the French has a double-meaning, because it also refers to the breaking of human wind.
It was Shakespeare’s Hamlet, who appreciated both, when he dispatches two men he knows to be plotting to kill him with altered letters that will seal their doom, instead of his. As Hamlet expresses the famous thought: “tis sport to have the engineer/Hoist with his own petar.”
In all the meanings Hamlet meant can be found the predicament in which British Petroleum (BP:PZ, LSE; BP:US, NYSE) ) is now hoist in Moscow. What chief executive Tony Hayward and TNK-BP CEO, Robert Dudley, thought was the brilliant stroke of making an alliance with Gazprom, and President Dmitry Medvedev, to rid themselves of three Russian oligarchs, has turned into an embarrassment for Gazprom and the new men in the Kremlin; a boon for Prime Minister Vladimir Putin and Rosneft; and the one thing BP dislikes most about Mikhail Fridman – a boost to his ability to shake a second fortune out of the pockets of a mark he’s already scored once.
Five years ago, BP thought it had bought control of Fridman and his partners for $6 billion – half in cash payable out of Russian cashflow, and half in BP shares, which BP would not allow the Russians to sell or pledge. Today, and over the next six months, Fridman is teaching BP that the half-stake he didn’t sell in 2003 will have to be paid for in cash for at least five times the value BP assigned TNK’s assets before.
This is the dynamic that has persuaded the market to push TNK-BP’s share price (TNBP:RU) steadily upward, and in the opposite direction, BP’s share price steadily downwards.
On the surface, and in the columns of your favourite London newspapers, TNK-BP – a jointly owned company, not a subsidiary of BP – generated 2007 revenue of about $35 billion (up 10% year on year), and net income of about $5 billion (down 28%). Crude oil production in 2007 was about 70 million tonnes (1.4 million barrels per day), while refined volume was flat at about 22 million tonnes.
An independent audit by DeGolyer and MacNaughton confirms that at the end of last year, TNK-BP’s Total Proved Reserves were 8.225 billion barrels of oil equivalent, applying SEC methodology on a life of field (LOF) 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 current market capitalization of GBP107 billion ($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 should be valued at $27 billion.
But the current market cap of TNK-BP as a whole is just $35 billion; the half-share $17.5 billion. The fight, which BP and its supporters have portrayed in the London press as a defence of foreign investment rights in Russia against local predators, is 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.
Fridman and his Alfa group own 25% of the TNK-BP half-share; Victor Vekselberg and his Renova holding, 12.5%; and Len Blavatnik and his Access holding, 12.15%. By combining a first-letter abbreviation for each of the holdings, this group is known as AAR – Alfa, Access, Renova. Given the numbers, and the clout, it is natural that Fridman dominates.
He has also explained clearly this week what the conflict is about. He said that BP had been in negotiation with Gazprom to agree that, if BP pushed on AAR to sell out, Gazprom would buy in to replace them. According to Fridman, the talks had been held in secret, because it was a violation of the shareholder pact that neither BP nor AAR could arrange such a shareholding deal without notifying the other. Exactly what options, limits, and indemnities BP and ARR signed in 2003, when they made their sale-purchase agreement to create TNK-BP, is not known for certain. It has been reported in the Russian press that the constraints on both sides expired last year.
According to Fridman, “all these rumours [about the buy-out of the Russian co-owners] appeared mostly because of permanent discussions with the head of Gazprom, which by the way contradict our shareholding agreement. I got the whole information about these talks the next day after they had these discussions. This is Russia, it’s impossible to make a secret out of it. Of course for them [BP] Gazprom is much more sexy than AAR. Gazprom has an enormous amount of reserves.”
A Gazprom source has conceded in private that he was surprised at the leak of intelligence on what had been in discussion. Officially, Gazprom’s chief executive, Alexei Miller, appears to deny the claims, but is careful in his choice of words. According to an interview published today: “Like any other company, we are constantly monitoring new growth possibilities that meet our development strategy. Gazprom has not offered and has never received an offer to buy TNK-BP’s shares. The company’s current problems are an entirely internal matter between existing shareholders, Gazprom has nothing to do with them.”
Legally, of course, there has been no offer on the table from BP to Gazprom – and when Miller was characterizing the position, that is all he meant. The legal framework for such talks is also politically important, for the chief legal counsel and board director of Gazprom, at the time the purported talks took place, was Konstantin Chuichenko. A former intelligence officer and law school classmate of Medvedev, Chuichenko was appointed head of the Kremlin’s Main Control Directorate in May.
If BP’s men were talking to Chuichenko, they thought they were talking to Medvedev too, for he was board chairman at Gazprom then, and president now. Medvedev was equally cautious in responding to what Fridman said he knew had been going on. In an interview this week, the President said: “when I was chairman of Gazprom’s board of directors I held no such talks. As far as I know, no proposals to sell the relevant share to either Gazprom or Rosneft have been made, and so there is nothing to discuss. If an offer is made it will be examined. But the state companies have no plans for buying a private stake at the moment. “
The first sentence is impeccably correct, and the adverbial phrases are all time-bound. What Medvedev means is — not yet. What Medvedev also meant by proposals is the same as Miller meant by offer, for BP and Dudley had not gotten so far, before Fridman moved to preempt them.
“BP’s mistake,” Fridman has said, “was that it anticipated it would really know what was going on in Russian political circles. Even we who live in this country all our life do not understand it very clearly. They misjudged if they thought that Gazprom would easily push us out of business. I said many times to Mr Hayward we are not selling and nobody will push us. It is not an intention of Putin or Medvedev, despite all these rumours”.
Putin had already gone public with a statement of his own in Paris on June 1. In a detailed interview with Le Monde, he said “TNK-BP hasn’t had any trouble so far. They do have some problems with their Russian partners. Several years ago, I warned them that they had it coming. It’s not because it’s TNK-BP. It’s because several years ago, they set up a joint venture with a 50-50 ownership. When they did it – and I was present when they signed the papers – told them, “You shouldn’t do it. You should decide between the two of you who will have a controlling stake. And we don’t mind if you want BP to have it. We would, of course, like to see the Russian side, TNK, as the main shareholder. But somebody has to be in charge. When you don’t have a clearly defined authority in such a business, it is very likely you’ll run into problems.” They told me, “No, we will always be able to work out an agreement.” I told them, “Fine, go ahead if you want.” Now they have problems. They constantly have frictions regarding this matter, which one of the two companies is in charge. That’s the main problem. These are commercial disputes within the company.”
Mineweb told the history of the 2003 transaction long ago – and how Putin hoped to protect the most indebted Russian oil company at a time when the US war against Iraq was threatening to reduce oil prices below $15 per barrel. Putin recovered quickly from that vulnerability. But now that BP is vulnerable, Putin’s reminder is hardly a case of his taking AAR’s side. But it was a warning to BP that it shouldn’t beg or bother him to intervene.
Putin’s advisory was followed by meetings between Hayward and Deputy Prime Minister Igor Sechin – overseer of the oil sector and chairman of the Rosneft board – and First Deputy Prime Minister Victor Zubkov, who is soon to be Medvedev’s replacement as chairman of Gazprom. Sechin has said publicly that the government does not want to involve itself in the shareholder fight.
At TNK-BP Dudley was asked if he has had discussions for Gazprom to buy into the company, and whether he has met Chuichenko. The front-office of TNK-BP is in great confusion,, following the departure of one spokesman. Another, Maria Dracheva, took the questions, and replied by saying: “We really have a hot time now. Your questions lie in the competence of the shareholders. The company has no comments.” Dudley was not otherwise available.
At the Kremlin, Chuichenko was asked, through the press office, if he had met with Dudley or BP executives, and if there had been any discussion of Gazprom and TNK-BP. There was no answer.
In public and private, AAR’s pitch to foreign investors is a little different from Fridman’s emphasis. BP has tried to subordinate TNK-BP, the argument runs, blocking TNK-BP’s plans to expand into oil exploration and related assets outside Russia. Since Fridman and his associates in Alfa are better placed than BP in some corners of the world, they have reason to resent the attempted veto. BP’s response, passed along in the London papers, is that the founding shareholder agreement in 2003 was confined to Russia and the Ukraine. According to AAR, one of BP’s vetoes involved a bid by the Russians to establish a position in northern Iraq, which is under Kurdish control.
AAR has also charged that BP has used its operational control of TNK-BP to second a substantial number of BP employees to work at TNK-BP’s expense. The number is excessive, and a drain on costs, AAR has claimed.
BP’s counter-attack has charged Fridman and AAR with politicizing the conflict, employing police, tax men, prosecutors, and other state officials to harass and threaten Dudley and BP’s expatriates. A headline in the Sunday Times last week claimed “BP Partner set off probe by Kremlin.” There was no evidence of Kremlin involvement in the body of the story. But The Times was following too doggedly behind BP’s PR lead. “This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s,” announced BP chairman Peter Sutherland. He then politicized the conflict with an appeal to Putin. “Prime Minister Putin has referred to these tactics as relics of the 1990s but unfortunately our partners continue to use them and the leaders of the country seem unwilling or unable to step in and stop them.”
Sutherland may be unable to read French, and so missed what Putin had earlier told Le Monde. But this was an extraordinary statement to make, if BP continued to hold private confidence that Medvedev might be inclined to back BP’s idea of replacing AAR with Gazprom. For Sutherland all but accused Putin of complicity, and Medvedev of impotence. “This is bad for us,” Sutherland intoned, “bad for the company, and of course very bad for Russia.” He was right on at least one score.
Fridman understood that Sutherland had exposed the only asset BP might have had for the deal and price they originally contemplated. His remarks had been “frankly insulting to the Russian leadership”, Fridman said – note the collective noun. He warned Sutherland against “lecturing the Russian government” – note that, in Russian, the government is where the prime minister sits. If perfidious Albion had been attempting to divide Medvedev from Putin, Fridman’s homily was that the game was up.
There is also a hint that in the trouble BP has made for Gazprom and Medvedev, there is an opportunity for Putin, Sechin, and Rosneft. But Fridman has asked everyone for time to consider their options. “I’m prepared to make a bet,” Fridman announced this week. “Gazprom
will not buy and Rosneft will not buy these shares within let’s say two years.” Time enough for everyone to count money, including BP.
The last time an international oil company hoist itself so noisily and fatally on its own petard in Moscow, it was ExxonMobil, which believed in 2003 — at the same time as the TNK-BP deal was done — that it could accept a sale offer for the Yukos oil company from its then proprietor, Mikhail Khodorkovsky. ExxonMobil was persuaded to believe Khodokovsky’s proposal, because he told them to ask the Prime Minister Mikhail Kasyanov, if he endorsed the deal. They did; and so did he. But Khodorkovsky is now in jail, and Kasyanov in limbo. Yukos belongs to Rosneft.
This isn’t a story about investment, disinvestment, tax minimization, asset raids, and foreign hedging in energy resources, although the Fridman group has skillfully pointed their attack on BP in that direction. Nor is it about the protection of foreign investment. Rather, it is about personal foolishness and political folly. A strategem of resource politics by a British company and its advisors has gone so colossally pear-shaped, it should drive BP’s share price in the same trajectory. And that is exactly what is happening.