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Russia’s Rosneft Courts Investors in TNK-BP Deal

November 10, 2012 by Leave a Comment

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

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DealBook: BP’s Chief Meets With Russian Leaders on Joint Venture

September 19, 2012 by Leave a Comment

Clockwise from left,  Russian President Vladimir Putin; an unidentified interpreter; Carl-Henric Svanberg, the chairman of BP;  Robert  Dudley, BP's chief executive; and  Igor Sechin, the Rosneft chairman. The officials met on Tuesday at the Black Sea resort of Sochi.Alexei Druzhinin/RIA Novosti Kremlin, via Associated PressClockwise from left,  Russian President Vladimir Putin; an unidentified interpreter; Carl-Henric Svanberg, the chairman of BP;  Robert  Dudley, BP’s chief executive; and  Igor Sechin, the Rosneft chairman. The officials met on Tuesday at the Black Sea resort of Sochi.

MOSCOW — BP may finally be close to resolving a long-running business dispute over its joint venture in Russia.

Although the government provided few details of their discussion, the chief executive of BP, Robert W. Dudley, met with President Vladimir V. Putin of Russia on Tuesday as BP tries to extricate itself from a nine-year-old partnership called TNK-BP.

The joint venture is vital for the British oil company, providing about a quarter of its total global oil production – about the same as the United States, where its business is overshadowed by lawsuits stemming from the oil spill.

But BP and its partners in the business, a trio of Russian billionaires, have been fighting for years. The billionaires are also suing BP for billions of dollars in damages for what they say was the oil company’s violation of the shareholder agreement underlying TNK-BP.

Igor I. Sechin, the chief executive of Rosneft, the state-owned Russian oil company, was also at the meeting, which was held at the presidential resort in Sochi. Rosneft reportedly has asked banks for $10 billion to $12 billion in financing for the purchase of BP’s stake in TNK-BP.

“During the meeting, BP reiterated its long-term commitment to Russia and provided assurances that while the company is looking to exit its investment in TNK-BP it is not exiting Russia,” BP said Wednesday.

In its own statement, the Kremlin said Mr. Putin discussed “the continuation and expansion” of BP’s business in Russia.

Meetings between chief executives and Mr. Putin, who personally oversees major deals in the oil sector, often telegraph coming agreements. Mr. Dudley appeared in a photograph with Mr. Putin in 2010, a few months before BP and Rosneft announced a deal to explore for oil in the Russian sector of the Arctic Ocean. That agreement was scrapped when BP’s partners in the Russian joint venture filed their lawsuit.

TNK-BP manages oil fields in Siberia that are aging but still profitable. If BP exits the joint venture, it would be free to join the race to explore for oil in the Russia’s area of the Arctic Ocean, a venture that could eventually be much more lucrative.

Exxon Mobil, the largest American oil company, Eni of Italy and Statoil of Norway already have agreements to explore for oil off the northern coast of Russia.

Any sale of BP’s stake in the joint venture to a third party like Rosneft would have to wait at least until mid-October. That is when a three-month period expires during which BP is obliged to negotiate the sale of its stake in TNK-BP to its Russian partners.

Rosneft and BP’s partners in TNK-BP declined to comment.

Selling the stake would also help shore up BP’s finances, which are being stretched by settlements of the lawsuits related to the Gulf of Mexico disaster. It would also fit the “shrink to grow” strategy BP has announced. Earlier this month, BP sold oil fields under the Gulf of Mexico to Plains Exploration and Production for $5.5 billion. The British oil giant is also negotiating to sell a refinery in Texas City, Texas, to Marathon Petroleum, The Financial Times reported Wednesday.

But is it not certain that BP will sell its stake in TNK-BP. Even after the spill in the Gulf of Mexico, BP has negotiated both to buy out its billionaire partners and to sell its own interest to them.

Debtwire, a trade publication covering distressed debt and leveraged finance, reported that Rosneft has approached banks for loan offers to buy a stake in TNK-BP. Bloomberg reported it is for BP’s share.

Stanley Reed contributed reporting from London.

Article source: http://dealbook.nytimes.com/2012/09/19/bps-chief-meets-with-russian-leaders-on-joint-venture/?partner=rss&emc=rss

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BP Tells Shareholders of Efforts to End Rosneft Rift

April 14, 2011 by Leave a Comment

BP has been in a three-month legal battle with its Russian billionaire partners in its joint venture TNK-BP, who had blocked a potentially lucrative share-swap agreement with Rosneft, the state-controlled oil giant in Russia. BP won a last-minute respite Thursday in its efforts to salvage the Rosneft agreement when the two companies agreed to extend by another month the deadline to complete the deal.

The BP chief executive, Robert W. Dudley, played down the severity of the dispute, saying the company’s relationship with its TNK-BP partners was “noisy” but not “dysfunctional.”

“It’s not personal,” he said. “It’s business.”

“We’ve offered participation in the Arctic, we’ve offered cash, we’ve offered participation in international ventures,” Mr. Dudley told investors at BP’s annual shareholder meeting in London. “But we won’t offer a large amount or significant stake in BP because it’s not in the interest of shareholders.”

BP’s partners in TNK-BP rejected Mr. Dudley’s claims and said “BP has never made a constructive proposal to turn the Rosneft deal over to TNK-BP.”

The Russian partners are “not interested in the selective parts of the deal that BP feels it can give up,” Stan Polovets, a spokesman for the group, said in an e-mailed statement. “Now is the time for sensible proposals from BP to resolve the problems that have been created.”

Mr. Dudley said BP would be “working to bring about a resolution,” adding that “Russia is one of the world’s most important sources of oil and gas as well as a massive market. BP needs to be there. It is part of our strategy.”

BP now has until May 16 to persuade an arbitration tribunal to lift the block or settle with its partners in TNK-BP to allow the Rosneft deal to go ahead. The TNK-BP shareholders oppose the deal because they say it violates their shareholder agreement. BP’s shares fell 0.9 percent on Thursday in London.

BP made clear that it remained committed to TNK-BP and its business in Russia despite recent difficulties there. “Whilst life has not always been easy, TNK-BP has been a successful venture with superior returns,” BP’s chairman, Carl-Henric Svanberg, said.

Some analysts said previously that BP’s options to salvage its Rosneft deal, which is valued at about $7.8 billion, include buying the stake in TNK-BP it does not already own. It could also let TNK-BP strike the agreement with Rosneft instead or sell the stake in TNK-BP, though that is less likely because the Russian venture accounts for about a third of BP’s oil production.

Apart from questions about Russia, BP’s management also faced angry comments from shareholders about how it handled the cleanup of the oil spill in the Gulf of Mexico.

Julie Tanner, assistant director for social responsibility at Christian Brothers Investment Services, criticized BP’s board for not disclosing enough details about the spill. At one point, a handful of activists protesting BP’s tar sands activities approached the stage and were carried out of the room by security staff.

Outside the Excel convention center in the east of London, about 30 people, including fishermen from the United States, gathered to protest BP’s role in the oil spill. They banged drums and held up banners. Some shareholders were refused entry to the meeting, Mr. Svanberg said, because they appeared to have a plan to disrupt the meeting.

David Jolly contributed reporting from Paris.

Article source: http://www.nytimes.com/2011/04/15/business/global/15bp.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

BP Scrambles to Salvage Rosneft Deal as Deadline Nears

April 13, 2011 by Leave a Comment

To keep the deal from collapsing, BP had either to convince Rosneft to extend the deadline, or to find a compromise with the billionaire shareholders in its existing Russian joint venture, TNK-BP, who have opposed the Rosneft deal.

BP’s partners in TNK-BP took legal steps to block the Rosneft agreement, valued at about $7.8 billion, because they said it violated terms of their own venture with BP in Russia.

BP’s options to rescue the deal have diminished over the last month after the quarrel with TNK-BP shareholders reached an arbitration court, which has delayed the Rosneft agreement indefinitely.

The TNK-BP partners rejected an earlier attempt by BP to reach a compromise, and Rosneft said on Wednesday that the April 14 deadline would stay in place. BP said it continued to consider its options.

Adding to the pressure on BP, its chief executive, Robert W. Dudley, is expected to face some angry investors at the company’s annual shareholder meeting in London on Thursday. Some investors, including the California Public Employees’ Retirement System, have already said they would voice their disapproval of how BP handled the oil spill in the Gulf of Mexico last year. Now, Mr. Dudley is also likely to face criticism for failing to anticipate serious opposition in Russia to the Rosneft deal.

“I want a quick resolution,” said George Godber, a fund manager at the investment firm Matterley in London and a BP investor.

Mr. Godber said that he had welcomed the initial agreement with Rosneft but that the subsequent problems had damaged BP’s and Mr. Dudley’s reputations. “It’s a millstone and it’s hung poorly,” he said.

Mr. Dudley was betting that the Rosneft deal, which the companies agreed to in January, would give BP a new growth opportunity after the rig explosion in the Gulf of Mexico made business more difficult in the United States.

Instead, BP’s legal battle with its Russian partners raised larger questions about the British oil company’s future in Russia, the world’s biggest oil producing country. One option to rescue the deal with Rosneft could be for BP to allow TNK-BP to take its place in the share swap and exploration agreement. That would reduce BP’s potential profits but would still give the company access to the sought-after arctic exploration licenses through its joint venture.

Or, perhaps, BP could simply walk away from a linkup with Rosneft. But competition for access to Russia’s offshore oil reserves is fierce, analysts say, and it would not be long before Rosneft could find a new partner in Royal Dutch Shell, Total or other BP rivals.

BP could also try ending its dispute in Russia by buying the stake in TNK-BP it does not already own. But the half of that joint venture is estimated to be worth more than $25 billion, a large sum for BP at a time when it is still paying for costs related to the oil spill in the gulf.

Another option would be for BP to sell its stake in TNK-BP. But that is seen as less likely by investors because TNK-BP contributes about a third of production to BP, and its dividends have been an important source of income.

Some analysts said that there might be more at stake with the Rosneft deal than BP’s Russian operation. A 29 percent drop in BP’s share price since the Gulf of Mexico accident and a smaller but more lucrative asset portfolio following some recent disposals could leave BP vulnerable to takeover offers from larger rivals, they said.

BP’s shares rose 0.6 percent in London on Wednesday. They have been little changed since the beginning of this year, compared to shares in Shell, which have gained 5 percent during that period.

Article source: http://www.nytimes.com/2011/04/14/business/global/14bp.html?partner=rss&emc=rss

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