BP Puts in a Slick Political Performance in Russia – Extends Lead There

RelevanceBP has shown exemplary political skills in setting up business in Russia. The original TNK-BP deal had the blessing of both Putin and Blair, as declared at summit held in Moscow just before the deal was consummated. 

We now know that Rosneft has won the auction for the Yukos assets, but either way BP was sure to be a winner by entering the contest. If BP had won, it would have deepened an already useful relationship with Russia’s biggest oil firm by market capitalization. In failing, it has won significant political clout in a Russia’s highly politicized oil and gas industry, by legitimizing the controversial sale of the Yukos assets. Such political capital will be useful, given that TNK-BP is such a big company, with a significant foreign ownership and no state involvement.

Russia already accounts for the largest part of BP’s oil production, which is much greater than production from the US. It is also becoming an important source of reserves replacement. So it’s important that BP avoids, as far as possible, events such as the fate of Shell in Sakhalin.

BP’s recent moves will take the pressure off the exploitation of its Kovykta gas field in Siberia, and help to protect its leadership position in Russia.

Analysis: If you want to be a major player in the oil and gas business then you must hold assets in Russia and/or the Middle East. After all, that is where most of the world’s hydrocarbon resources are located. Neither location is a particularly easy nut to crack. The resource owners of the Middle East have locked out western investors (e.g. Saudi Arabia); or are off limits due to home country politics (e.g. Iran); or are politically unstable and dangerous (e.g. Iraq). That leaves Russia, with its own internal problems.

BP had stolen a march on its western competitors in gaining access to Russia through its investment in TNK-BP several years ago. It was the first of the majors to identify and act on the vast potential held by Russia, and it has been the most successful in playing the Moscow political game.

BP was under threat of licence revocation for its huge Kovykta gas field and had claimed that end May 2007 (the date given by the state for completion of remedial action) was not achievable. BP’s participation in the recent Rosneft auction means that the threat of state intervention has receded.

In the mean time, BP’s association with Rosneft has been drawing closer, including a $700M agreement signed at the end of 2006 to expand their joint venture to explore off Sakhalin Island.

27 March 2007

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