March 29, 2024

Russia’s Rosneft Courts Investors in TNK-BP Deal

LONDON — When Rosneft completes its planned purchase of TNK-BP, it will become the world’s largest publicly traded oil company by output, producing about 4.4 million barrels of oil a day.

But that doesn’t necessarily mean the state-owned oil giant will get more respect from investors.

Rosneft is inefficiently managed and, as a government-controlled entity, subject to the vagaries of Kremlin policy. It lacks experience in attractive offshore and Arctic regions, which hold its best potential for future growth, and it has virtually no presence outside of Russia. As a result, investors are willing to pay far less for a share of Rosneft’s assets than they are for rival oil companies’.

President Vladimir V. Putin of Russia and his close associate Igor I. Sechin, now Rosneft’s president, want to fix these shortcomings and make the company a serious player in the global industry.

That motivation partly explains why they struck a complex $55 billion deal last month to acquire TNK-BP and forge an alliance with BP, letting the London-based company acquire nearly 20 percent of Rosneft, including some shares owned by the government. The Russian leaders want the expertise that BP and its Russian joint venture, TNK-BP, which is the country’s third-largest oil company, can bring to Rosneft’s hodgepodge of assets.

“There is a willingness on the part of the leadership of Rosneft to get expertise and people from BP to improve the capability of Rosneft,” said David Peattie, head of BP Russia, in an interview. “Rosneft welcomes the technology that BP is good at,” like enhanced oil recovery, managing mature fields, exploration and drilling.

BP figures that it, too, can profit from Mr. Sechin’s ambitions, much as it did from the TNK-BP venture, to which it brought Western expertise to wring more out of underperforming Russian energy assets. But it is taking a big risk. The company is in essence swapping its troubled relationship with its Russian oligarch partners for what could be an equally difficult alliance with the state.

BP gains a potentially bigger upside but “will have far less control,” said Jerry Kepes, a partner at the consulting firm PFC Energy in Washington.

Rosneft has tried to play down the negative associations that come with state ownership. But even its recent expansion owes as much to Russian politics as to business.

After elections last spring, Mr. Sechin, a former deputy prime minister, moved to the top position at Rosneft. Only after he took charge did Rosneft move ahead with its buyout of TNK-BP.

The expansion of the company reflected Mr. Sechin’s political clout as much as it did any industrial strategy by the Russian leadership to form a larger national oil company for the purpose of drilling in the Arctic Ocean, in remote East Siberia and in difficult shale oil fields.

A faction in the Russian government, including a deputy prime minister, Arkady Dvorkovich, had advocated a more diverse and competitive oil sector. If Mr. Sechin were to fall from favor, this other vision could be revived, leaving BP a part-owner of a national oil company that might be split up or sold off in a process BP would not control. (Rosneft itself grew quickly in 2007 after acquiring at rock-bottom prices many of the assets of Yukos, a company whose leaders fell out of favor with the Kremlin.)

For now, Mr. Sechin is focusing on the lofty goals he has set for Rosneft. According to a recent investor presentation, those goals include going offshore, where Rosneft controls the bulk of Russia’s leases but has little expertise, and expanding internationally.

He also wants to build up Rosneft’s small natural gas business, potentially putting pressure on his old rival, Alexei Miller, chairman of the management committee at Gazprom, the state-owned gas giant. Mr. Sechin recently snatched a plum from Mr. Miller when Rosneft signed a gas deal with UES, a big state utility.

Since taking over at Rosneft in May, Mr. Sechin has been busy trying to bolster the company’s executive team with outside hires. For instance, he brought in Zeljko Runje, a former Exxon executive, as vice president for offshore projects.

There is little question that Rosneft could benefit quickly and substantially from better management.

A recent study by Bernstein Research in London showed that TNK-BP was far more efficient than Rosneft at turning the money it earned from its oil fields into cash. In 2011, TNK-BP converted 56 percent, or $6.9 billion, of what it earned from operations into cash flow, compared with only 16 percent for Rosneft.

Part of the difference is that Rosneft is investing in refinery upgrades, but Bernstein said TNK-BP also benefited hugely from techniques, learned in part from BP, for managing the aging, waterlogged fields that are its core producers in the West Siberia oil heartland. BP worked out these technologies at Prudhoe Bay in Alaska.

Robert West, a Bernstein analyst, said that if Rosneft could narrow its efficiency gap with TNK-BP by just a third, that could be worth more than $2 billion annually.

“The best thing that BP can contribute to Rosneft is reservoir management technology,” Mr. West said. “That can really move the needle.”

Rosneft is also likely to benefit from tax changes being pushed by Pavel Fedorov, a former Rosneft chief financial officer and Morgan Stanley banker who is now Russia’s deputy minister of energy.

The changes, if Parliament passes them in January, would cut taxes sharply on some production and make more of Rosneft’s oil economically viable to produce. For that reason, the company estimates that it would be able to quickly add about five billion barrels of reserves to its books.

There is enormous potential to increase Rosneft’s stock market value. Mr. West said Rosneft’s reserves were valued at about $2 a barrel, compared with $7 a barrel for BP and $15 for Exxon Mobil.

Analysts say the disparity reflects investors’ lack of confidence that Rosneft can efficiently turn its oil into cash.

BP is betting that it can increase the value of its Rosneft holdings over time, as the British company helps the Russian one improve its operations.

Of course, how much influence BP can exert at Rosneft through a minority stake remains to be seen. BP is gaining two board seats and is considering putting a Russian on its own board.

“We’ll be reviewing, as members of the board, future investment plans, and will no doubt have an ability to comment and participate on investment decisions and annual work programs and budgets,” BP’s chief executive, Robert W. Dudley, said on Oct. 30, when BP reported quarterly earnings.

Stanley Reed reported from London and Andrew E. Kramer from Moscow.

Article source: http://www.nytimes.com/2012/11/10/business/global/rosneft-courts-investors-in-tnk-bp-deal.html?partner=rss&emc=rss