BP’s deep involvement in Russia, home to the world’s largest reserves of oil and gas, was once considered a key competitive advantage in an industry craving access to petroleum resources.
But the east-west stand-off over Ukraine has called BP’s strategy into question. Some now wonder whether what was once a strength could turn into a weakness, and a big source of geopolitical risk.
It was a point that emerged forcefully at BP’s annual meeting in London on Thursday, where shareholders peppered the company’s board with questions about its Russian investments.
Might Russia expropriate BP’s 20 per cent stake in Rosneft, the Kremlin-controlled oil company, if relations between Russia and the west continued to worsen? Might BP be affected if the US and EU tightened their sanctions on Moscow?
The tone was set by Robert Barrett, a private shareholder. He noted how much of BP’s production and profits were concentrated in Russia and asked about the risk of its Rosneft stake being nationalised – a move that he said would have a "huge financial impact”.
Bob Dudley, BP’s chief executive, acknowledged that the situation in Ukraine was currently the "focus of world attention”. But he defended BP’s involvement in Russia, saying its interest in Rosneft "gives us nearly a fifth of the world’s largest publicly traded oil company operating in a country with massive reserves and massive potential”.
He added that BP could act as a "bridge” between Russia and Europe, which were connected by a strong mutual dependence.
BP has so far been unaffected by the visa bans and asset freezes imposed by the west after Moscow annexed Crimea. But it could be exposed if the US and EU launch a new round of sanctions hitting strategic sectors of the Russian economy such as energy.
Russia accounts for nearly a third of BP’s global oil production and more than a third of its reserves, while Rosneft contributed about 16 per cent of BP’s annual profit last year and 2 per cent of its net cash flow from operations.
The emergence of a "Russia problem” will feel like deja-vu for BP, and in particular Mr Dudley. In the 2000s, the company was hit by a steady drumbeat of negative headlines about its tussles with AAR, the consortium of oligarchs who were its partners in its Russian joint venture TNK-BP. In 2008 Mr Dudley himself, at the time the boss of TNK-BP, fled Russia after coming under intense pressure from regulators.
After a string of vicious shareholder disputes between the two, BP last year sold its 50 per cent stake in TNK-BP to Rosneft, in a deal that left it with $12.5bn in cash and a 19.75 per cent stake in Rosneft.
Igor Sechin, Rosneft’s chief executive, said at the time that BP would help steer the Russian company’s "future strategic direction”. But some have wondered how much say BP really has in the day-to-day running of one of Russia’s most powerful companies.
Mike Everett, a governance and stewardship director at Standard Life, one of BP’s top-10 investors, said at Thursday’s meeting that BP claimed to have "significant influence” over Rosneft, which allowed it to account for its stake in the company on an equity basis. Yet this assessment was "obviously difficult”, because BP’s auditor Ernst & Young had to visit Moscow on three occasions, he said.
"Other than Mr Dudley’s position on the board of Rosneft, could you give some concrete examples of the ‘significant influence’ you have over its operations?” he asked the board.
Mr Dudley said BP’s auditor had made three trips to Moscow "to make sure that Rosneft’s and BP’s processes matched up”, noting that Rosneft closed the books on its quarterly earnings much more quickly than TNK-BP had. He said BP and Rosneft were engaged in discussions on "people and engineering”.
Louise Rouse from shareholder lobby group ShareAction noted that any more punitive measures by the west against Moscow would "severely impact BP’s operations in Russia including Mr Dudley’s position on the Rosneft board” and asked whether BP had made any representations to UK Foreign Office to stave off further sanctions.
Carl-Henric Svanberg, BP’s chairman, responded to shareholder concern by playing down the company’s involvement in Russia. He said the $15bn it has invested there was equal to its commitment to Azerbaijan, and on the same scale as a recently launched offshore project in Angola, PSVM.
Meanwhile, Mr Dudley stressed that BP’s investment horizon was so long that it could ride out temporary crises, including the current east-west dispute over Ukraine. He pointed to Egypt, where BP has been present for 50 years and where it stayed put despite the violent turmoil of the Arab Spring.
Deals underscore attraction
BP is not the only western oil major with a presence in Russia. In the past few years, Rosneft has signed big exploration deals with other companies that underscored the huge fascination Russia still retains for Big Oil, writes Guy Chazan.
Rosneft has set up joint ventures with ExxonMobil, Statoil of Norway and ENI of Italy to drill for oil offshore, with the foreign groups in each case footing the bill for exploration. Exxon’s deal is the most ambitious, covering 773,000 square kilometres in the Arctic and the Black Sea. Statoil has been granted acreage in the Sea of Okhotsk and the Barents Sea, while ENI is in the Barents and Black Seas.
Total, the French major, has a 20 per cent stake in Yamal LNG, a liquefied natural gas project in the far north of Russia where it is partnering with Novatek, Russia’s largest independent gas producer.
Royal Dutch Shell, too, has a big footprint in Russia. The company is a partner with Gazprom in the huge Sakhalin 2 LNG venture in Russia’s far east and with Gazpromneft in Salym, a big oilfield in western Siberia.
In an interview late last month, Ben van Beurden, Shell’s chief executive, said he was monitoring the Ukraine crisis "very closely”, but said there was little he could do to influence geopolitical events. Worrying too much about Crimea "would not improve the quality of our decision-making”. Anyway, he said, "it’s in the nature of our industry to live through periods of uncertainty”.
by Guy Chazan
(Financial Times, April 10, 2014)
