BP Caving to Kremlin Pressure Over Joint Venture

By Jason Simpkins
Associate Editor

BP PLC (BP) has found itself under pressure from the Kremlin to cede control of its joint venture in Russia, TNK-BP Holding OAO, to a state-owned oil monopoly such as Rosneft NK OAO or Gazprom OAO - the latest attempt by the Russian government to expand its energy monopoly and drive out international oil majors.

Last month, 78 Federal Security Service (FSB) officers raided the Moscow offices of BP and TNK-BP. The raid resulted in the arrest of one TNK-BP employee and his brother, who will both face charges of industrial espionage. Soon after the raid, the Natural Resources ministry said it would check TNK-BP's largest oil field for environmental violations and the Interior Ministry accused the company of breaking visa rules.

Sources close to the situation, including TNK-BP Chief Executive Robert Dudley, said the raids and subsequent arrest were a "one-off" incident. But many analysts see a more sinister motive behind the crackdown.

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Tax claims, corporate malfeasance and government investigations could be just the kind of pressure the Kremlin needs to exert for one of its state-owned oil monopolies - some of which are the most heavily indebted companies in Russia - to acquire a stake in the venture for a relatively cheap price.

TNK-BP is currently co-owned by BP and a group of Russian billionaires. The Russian investors agreed not to sell their combined 50% stake in the company until 2008. But as the agreement nears its end, Gazprom is reportedly encouraging BP's Russian partners to sell out.

Gazprom, whose chairman, Dmitry Medvedev, will be sworn in as Russian president on May 7, has frequently found itself the beneficiary of government interference in the energy sector.

Two years ago, OAO Yukos Oil Co., formerly one of the world's largest private oil companies, went out of business after Russia's Federal Tax Service demanded the payment of $30 billion in back taxes.

Soon after, Royal Dutch Shell PLC (RDS.A) was forced to relinquish control of its Sakhalin-2 oil and gas project to Gazprom for $7.45 billion when the Russian government threatened to block investment plans by canceling building permits on environmental grounds.

And just last year, TNK-BP was talked into selling its 62.8% stake in one of the world's largest gas fields, the Kovytkta field, to Gazprom, after Russian authorities threatened to revoke the company's license to develop it. 

So it's perfectly reasonable to believe that TNK-BP, which produces close to a quarter of BP's total oil and natural gas production, could be Gazprom's next takeover target. It's also reasonable to expect that Gazprom may want more than to simply replace the Russian oligarchs as junior partners in the venture.

"We think there is a possibility that BP ends up as a minority shareholder in TNK-BP," analysts at JP Morgan Chase & Co. (JPM) wrote in a research note.

Just two weeks after the Moscow raid, BP chief Tony Hayward began making a suspicious set of rounds. He met with Gazprom CEO Alexei Miller last Thursday. That meeting was followed by a meeting with Rosneft chairman Igor Sechin, and then another meeting with shareholder Viktor Vekselberg. Vekselberg, along with Mikhail Fridman and Len Blavatnik, is one of TNK-BP's largest shareholders.

RBK Daily reported earlier this week that Gazprom is seeking a 1% stake in the joint venture from BP, while at the same time buying out TNK-BP's three Russian shareholders, thereby giving the state monopoly a controlling stake in TNK-BP.

Sources cited by the paper, also said any deal would likely take place after President-elect Medvedev's inauguration.

"We are all worried there is going to be some political maneuvering in order to relieve BP of the stake," Colin Morton, a fund manager at Rensburg Fund Management who owns BP shares, recently told Reuters

News and Related Story Links:

  • The Guardian:
    BP may have to give up control of Russia venture