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Hip Hip "Realpolitik"!

Pat Davis Szymczak


Troubles in Iraq notwithstanding, the biggest news in February for the oil industry is undoubtedly BP's $6.75 bln investment in a venture with the owners of Russian major TNK that puts BP at the helm of both TNK and another Russian oil company, SIDANCO.

As a result of the buy-in - the biggest acquisition ever in Russia - BP becomes the third largest Russian oil company. That's right folks, BP is not the third largest company operating in Russia. BP is Russian. And BP's Russian production - 500,000 bpd - will equal 15 percent of its current oil and gas output world-wide.

That's big, though it is still not as big as Russia's largest producer, LUKoil, or No. 2 ranked YUKOS. Thanks to its new Russian production, BP will, as Moscow's English language daily, The Russia Journal, puts it, "overtake Royal Dutch/Shell Group in crude oil production (world wide) and rival Exxon Mobil Corp." The Russia Journal goes on to quote a principal in Hermitage Capital Management as saying that the purchase "validates investing in Russian oil companies."

"Validates?" What an understatement! When I reported from Moscow in the 1990s about BP's troubles in Russia - its legal battles with TNK, its tussles at Sidanco over the financial and management messes it needed to unravel, its hissy fits with the locals in Irkutsk (and TNK) over natural gas to China; I couldn't help but wonder who was kidding who?

At the "Ministry of Truth" back in London, BP's PR department, that "big bad media machine," was churning out press release after press release, telling newspapers world-wide (some of whose editors couldn't find Siberia or Sakhalin on a map) all about those nasty, crafty Russian oligarchs and assorted devils and demons. Looking back now, I'd call the campaign, the oil industry equivalent to George W. Bush's warning of the existence of an "Axis of Evil". Only with BP there wasn't an "axis," there was only "evil" - and that evil was Russian oil.

The headlines back home in the US and UK told everyone to beware of the Russian boogeyman. "BP Threatens to Pull Out of Russia" "TNK's Local Connections Spell Trouble for BP in Court" "BP was Tricked" "Russia Robs BP of Its Investment" etc., etc., etc., etc.

The atmosphere became so poisoned - not just because of BP but because of the general media hysteria of which the BP saga was a part - that the St. Thomas Episcopal Church boys choir from Manhattan cancelled a trip to St. Petersburg for fear of the mafia. Incidentally, these New Yorkers (yes, New Yorkers whose murder rate makes even Moscow look like a petting zoo) had been booked into a hotel directly across the street from the concert hall where they were to have performed, as I heard the story from a local conductor close to the negotiations.

TNK's application for export financing credits from US Exim Bank was held hostage by BP lobbying in the US Congress. TNK stopped managing PR from its Russian-speaking office in Moscow and hired its own US-based public relations and lobbying firm with clout in Washington, New York and London. As suddenly as the little "lovers' quarrel" had blown up, all became quiet again. Everyone kissed and made up, TNK got its credits, Halliburton (whose former CEO is today the US vice president) got its orders for equipment, technology and services to rehabilitate TNK's Samotlor oilfield, and all sides got down to the business of negotiating a serious consummation of the marriage.

Incidentally, much the same thing happened in the Caspian. From Baku, (via London to the world's media) BP huffed and puffed about how it was going to have to pull out of Azerbaijan because it didn't find oil where oil should have been. No, instead of oil, BP had found natural gas - in amazing quantities and within spitting distance of Turkey, the only nation between the Caspian Sea and the Atlantic Ocean that expects high growth in gas demand any time soon. The latter discovery, however, generated far fewer headlines than the former disappointment. Result: lots of businesses stayed home while BP kept maneuvering to lay on a knock-out punch.

BP Barnum & Bailey

Russia? Caspian? BP is pulling out? If a company that big can't make it, how can a little guy like me survive? Well folks, as America's great circus master and loveable con artist, P.T. Barnum, once put it, "There's a sucker born every minute." And the sad truth is that BP, the largest holder of US reserves, is as skilled in American "spin doctoring" as it is skilled in the "realpolitik" that built the British Empire. BP was never the "sucker", the "suckers" were those who believed all the hype and got scared.

"BP has blazed the trail, it should be easier for others to follow!" The Russia Journal quoted its portfolio investment analyst in mid February. We at Oil&Gas Eurasia would rather just give BP a slap on the back, "I say, 'ole chap, hip, hip hurrah for realpolitik! " BP faked us all out. Just a couple of years ago, we were made to feel sorry for this victim of Russian savagery (a gene my Muscovite friends tell me is inherited from the Medieval Mongol Tatar occupation.) Now, today BP is the 3rd largest Russian oil company in terms of upstream production. And with the help of its old nemesis, TNK, BP is also king of the Russian downstream destined to wield significant control over the Moscow retail gasoline market - one of the most lucrative "cash" producers in Russia. Exports, domestic market; seems like all the bases are covered.

Well, not quite. Let's say the jury is still out (and, heaven knows, there could still be more court cases in little Russian towns) on at least three issues I can think of at the moment.

  • How BP will, with the help of TNK and Sidanco - get things off the ground in Irkutsk and start developing Kovykta natural gas for export to China? I suspect things are on hold there because the Chinese aren't yet ready to buy. So don't believe any sob stories you might hear about nasty Russian tricks in Irkutsk. Things will move when the market is ready and BP will be in the driver's seat.
  • How will the TNK and Sibneft purchase of Slavneft affect BP? Keep in mind that Moscow gets lots of gasoline from TNK's refinery in Ryazan and it gets lots of gasoline from Slavneft's refinery in Yaroslavl. If TNK ends up controlling Yaroslavl, it will control the Moscow gasoline market. Can Sibneft afford to let this happen?
  • And what will become of BP on Sakhalin? Whatever happens, BP will eventually be eyeball to eyeball with its two international heavyweight rivals, Shell and ExxonMobil, which have already staked their claims and started oil production projects on the Sakhalin offshore. Right now, it isn't important. Sakhalin has only "something" to do with oil, and "everything" to do with natural gas. If I ran BP, I'd be letting Shell and ExxonMobil fight it out over whether natural gas will be "piped" to the Russian mainland and to Japan or whether an LNG facility will be built instead. Once the blood's been cleaned up over that - assuming BP has its reserves already booked - it can move in and start producing.

So again, we at OGE congratulate BP on its success and on a brilliant performance over the past several years in Russia and the Caspian. "Act One" is now finished and everyone can stretch their legs during the intermission. Just don't leave the theater. We're not sure yet, just how many more "acts" are going to follow.

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