Speculation Swirls Around TNK-BP with Gazprom, Rosneft Eyeing Stake in Russian-British JV

Rumours and Theories Abound

BP chief executive officer (CEO) Tony Hayward flew to the capital, Moscow, yesterday for talks with Russian gas giant Gazprom today, triggering yet another round of intense speculation about the future of the U.K. oil firm's Russian joint venture, TNK-BP (see "Related Articles" below). While a BP official downplayed suggestions that Hayward's visit was in response to the recent pressure by Russian authorities on TNK-BP, noting that the meeting was scheduled a long time ago, there is no denying that the CEO's visit comes at an auspicious time for BP's future in Russia. In the course of the past few weeks, TNK-BP, BP's main investment in Russia, has come under fire from various Russian authorities, with the firm's Moscow offices targeted in a raid, nearly 150 expatriate employees left in limbo over a visa dispute, and new tax and environmental investigations launched against the JV. The office raid led to the arrest of two brothers, one of whom worked for TNK-BP, on charges of industrial espionage.

Although BP released no agenda for Hayward's talks with Gazprom, in all likelihood his visit is focused on attempting to finalise the previously announced deal with Gazprom to sell the Russian gas giant control of TNK-BP's 2-tcm Kovykta gas field in Eastern Siberia. As part of that agreement, announced last June, BP and Gazprom said that they would form a wider partnership, including TNK-BP, leading many to speculate that Gazprom would take a direct stake in TNK-BP itself. Indeed, one view of the recent pressure campaign against TNK-BP is that Russian authorities are looking to pressure BP into completing the June 2007 Kovykta deal, offering better terms for Gazprom. Another (comparatively) less benign theory is that Russian officials are turning the screws on TNK-BP in order to force a change in the JV's ownership structure, with Gazprom acquiring a direct stake.

Increasingly, however, the question is, which of the TNK-BP shareholders this pressure is directed against? Both BP and the Russian shareholders in TNK-BP, Alfa Group and Access-Renova (AAR), led by tycoons Mikhail Fridman, Viktor Vekselberg, and Len Blavatnik, have reiterated that they have no interest in selling their stakes, despite the recent expiration of a "lock-up" agreement for shareholders in the JV dating to the formation of TNK-BP in 2003. With Russian-British relations deteriorating over a series of diplomatic disputes, including the poisoning of Russian dissident Alexander Litvinenko in London in 2006 and the forced closure of British Council offices in Russia earlier this year, one thread of speculation has it that Russian officials are seeking to force BP out of TNK-BP, with Gazprom—or potentially Rosneft—taking its place. On the other hand, just as Russian authorities did with Mikhail Khodorkovsky at Yukos and Roman Abramovich at Sibneft (and currently with Mikhail Gutseriev at Russneft), another view has it that the presidential administration (the Kremlin) is looking to oust Vekselberg, Blavatnik and Fridman at TNK-BP.

A New Twist with Rosneft

While most speculation has focused on Gazprom replacing either BP or AAR in TNK-BP (or perhaps shoehorning its way into the JV as a third shareholder), yet another possibility is being floated that would see state-owned Russian oil giant Rosneft become a shareholder in TNK-BP. Dow Jones reported yesterday that Rosneft is studying its own options in the uncertainty surrounding TNK-BP, including mulling the possibility of a share swap with BP. Under this scenario, Rosneft would swap BP's stake in TNK-BP for a stake in Rosneft itself. BP already holds approximately 1.25% in Rosneft, dating to the Russian oil giant's initial public offering in 2006, so a share swap in which BP gave Rosneft its 50% stake in TNK-BP would result in the supermajor taking an additional 14% in Rosneft, based on current market valuations putting Rosneft at US$94 billion and TNK-BP at US$26 billion.

BP and Rosneft already have a partnership for developing two Sakhalin Island projects, and a potential share swap would provide the U.K. firm with greater access to Russian oil reserves. How this would affect BP's partnership with Gazprom is uncertain, although it would appear to put a damper on BP's efforts to finalise the Kovykta deal, let alone develop a wider partnership with Gazprom. As such, the behind-the-scenes rivalry between Gazprom and Rosneft is clearly now putting BP in an awkward position, almost forcing BP to choose sides between the two Russian firms. With the rivalry between the state-owned energy companies now apparently heating up again, control of TNK-BP itself appears to be the main prize.

In fact, Reuters reported that security officers participating in the raids on the offices of BP and TNK-BP in Moscow last month were looking specifically for files with references to Gazprom, according to two industry sources. Gazprom management was reportedly concerned that TNK-BP had more information about Gazprom than would normally be expected, prompting speculation that confidential information about the company had been leaked, according to one source quoted by Reuters. On the other hand, another source quoted by Reuters said that the raid may not have come at the request of Gazprom but instead from a different camp in the Kremlin, eager to sabotage talks between the gas giant and BP. "The mere fact that the investigators said they were looking for files about Gazprom does not mean that the request for the raid came from Gazprom," said one source. "It may actually mean the opposite because you know well that corporate wars in Russia tend to be very complicated."

Outlook and Implications

The intrigue surrounding TNK-BP will only continue to build unless Hayward leaves Moscow with a deal in hand with Gazprom. If the Russian gas giant is indeed focused on securing a stake in TNK-BP, then either AAR or BP will have to be displaced, unless TNK-BP's shareholders themselves can agree to "make room" in the JV for Gazprom. Although there are few public signs of discontent between AAR and BP, the intense focus on TNK-BP's future, together with the none-too-subtle hints emanating from Rosneft and Gazprom, are surely putting a strain on the relationship between TNK-BP's shareholders. Taking that into consideration, it may well be the case that BP and AAR are themselves adding to the intrigue over the JV, perhaps by looking to strike a deal with Rosneft or Gazprom and thereby ensure their own future with TNK-BP by ousting the other shareholder.

BP, for its part, is between a rock and a hard place, increasingly being forced to choose between Rosneft and Gazprom while trying to secure its future in Russia. The fact that TNK-BP, Russia's third-largest oil producer, has managed to tread through these treacherous waters thus far but is also now showing signs of resumed oil output growth only makes the JV a more lucrative prize—for BP, Gazprom, Rosneft, and AAR alike. TNK-BP said yesterday that its total proven reserves at end-2007 rose to 8.225 billion barrels of oil equivalent, a 179% reserve replacement ratio, bolstered by reserves booked for the first time in the Uvat region and the Verkhnechonsk field in Eastern Siberia. These new projects are expected to propel TNK-BP's future production growth, but who the shareholders of the JV that will benefit from this growth remains to be determined.

Related Articles

Russia: 28 March 2008: Slavneft Reports Drop in 2007 Net Profits

Russia: 27 March 2008: New Tax Evasion Probe into TNK-BP Adds to BP's Woes in Russia

Russia: 26 March 2008: BP Recalls Employees from TNK-BP Following Visa Changes

Russia: 25 March 2008: Russian Environmental Agency Joins Campaign Against TNK-BP

Russia: 21 March 2008: Two Brothers Arrested on Industrial Espionage Charges Following Russian Police Raids on TNK-BP Offices

Russia: 20 March 2008: Police Raid Russian Offices of BP and TNK-BP in Connection to Sidanko Criminal Case Investigation

Russia: 22 February 2008: Police Conduct Raid on Slavneft Headquarters in Tax Evasion Probe

Russia: 24 January 2008: TNK-BP CEO Forecasts Flat Output Growth in 2008, Expects Kovykta Deal in Q1

Russia: 14 November 2007: Talk of Gazprom Deal with BP over TNK-BP Stake Heats Up Despite Denials

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