No Russian oligarch has had a longer career stretch than Mikhail Fridman -- enfant terrible, tormentor of foreign titans and, according to Forbes, the 43d richest man in the world. Now, this last pillar of no-holds-barred Russian capitalism is under threat, at least in the oil industry, where he has earned many of his billions -- challenged in the early stages of his latest unsentimental caper. Are we witnessing the final act in two decades of some of the world's rawest displays of capitalism? If so, it will be another sign of President Vladimir Putin's crusade to wring out the disorder that has always vexed him. Russia may become more boring with a tamer Fridman. But in Putin's view, that is a small price to pay for the predictability he cherishes.
The crisis for the 48-year-old Fridman, a pudgy man with an impish grin, has unfolded over the last few days. Last week, he unveiled a typically breathtaking resolution to a long-standing row with BP, his long-time partner on the Russian oil patch. If it worked, AAR, a financial group he leads, would end up with probably the largest single shareholding of the British oil company. And Fridman seemed sure it would -- people close to the Russian told me that Fridman enjoyed the Kremlin's blessing. Only, Fridman seems to have been misinformed: On Monday, his initiative was contested by Rosneft, Russia's powerful state oil company. Rosneft chairman Igor Sechin, Putin's chief oil advisor, announced that he would bid for BP's share of TNK-BP, the nation's third-largest oil producer, in which AAR and the British company are 50-50 partners. Sechin released a bland statement calling acquisition of BP's stake "an attractive commercial proposition" that will "complement [Rosneft's] existing portfolio and create value for all stakeholders." But for those who speak business Russian, the message was clear -- "bid," when it comes to a Putin-linked company, means "buy."
Playing on the Russian oil patch is a definitively courageous act - Putin regards it as a state preserve, and Fridman's 50-50 partnership with BP always crossed the line. The Rosneft move appears to be a signal of game over, according to close observers of the Russian industry with whom I've spoken -- the Fridman group's share of TNK-BP seems likely to be swallowed up by Rosneft along with BP's, with terms to be determined, and he subsequently will be pushed entirely out of the oil sector.
Should this scenario play out, it would not be your standard oligarch hanging, the string of untimely departures witnessed in the early years of Putin's first turn at leadership -- the 2000 flights of media tycoon Vladimir Gusinsky and industrialist Boris Berezovsky, and of course the 2003 imprisoning of oilman Mikhail Khodorkovsky. Fridman would retain the bulk of his fortune, his financial and telecoms empire, and most important his freedom and right to move unencumbered in and out of Russia. The same would go for Fridman's three partners in the AAR consortium -- Russian-American industrialist Len Blavatnik, German Khan and Viktor Vekselberg. Yet, by circumscribing Fridman's activities, Putin would arguably draw a final line under the age of the iconic post-Soviet oligarch, the hard-bitten, ultra-opportunistic, and ruthless men who came to symbolize Russia's chaotic 1990s, and were demonized once Putin took power in 1999. Putin is "totally fed up with [Fridman's] behavior," said a Moscow-based banker who did not want to be quoted by name. He went on in an email exchange: "Fridman has miscalculated Putin's reaction here. Putin does not like nor trust the belligerent and (his mind) unreliable oligarchs. He wants them out of the oil business."
In most annals of the era, Khodorkovsky's arrest -- after Putin decided he had been double-crossed -- marks the start of the post-oligarch era. In their place are approved oligarchs -- gas magnate Gennady Timchenko, metals titans Oleg Deripaska and Mikhail Prokhorov, among others -- who either serve specific purposes for Putin, or whose latitude is confined. Then there is Fridman, who traveled with the 1990s outcasts but managed to survive and keep up his devil-may-care ways, even in the most strategic sector of all -- oil -- always careful to assure Putin that he was only conducting tough business.
Natalia Kolesnikova AFP/Getty Images
Oligarchs in the Kremlin: For the last dozen years, we have seen ample evidence of Vladimir Putin's policy on Russia's oil and gas industry -- a paramount strategic asset, it is to be jealously held, only begrudgingly ladled out to foreigners, and always, always to remain in firm Russian hands. That being the history, what are we to make of the assertion of a group of Russian magnates that Putin has changed his spots -- that he is now prepared to allow BP to assume 100 percent ownership of Russia's third-largest oil producer?
We are speaking of course of TNK-BP, the star-crossed, nine-year oil marriage between BP and AAR, a consortium led by a take-no-prisoners Russian financial titan, Mikhail Fridman. Over the years, the two companies have gone to war numerous times, only to regroup again and earn outsized mutual dividends. But this time, both sides seem prepared to call it quits. A few days ago, AAR announced that it will enter negotiations with BP to either rebalance or -- in the more optimal alternative -- dissolve the marriage. In AAR's preferred scenario, it will be bought out in a cash-and-share deal that gives it 10-12 percent of BP's shares, possibly the largest single stake in the British company. No one can say how the end game turns out, but as a mind exercise what say we kick the tires of AAR's strategy?
Alexei Nikolsky AFP/GettyImages
BP and the Russian squeeze: BP may be moving toward yet another comeuppance in Russia. This chapter in the company's nine long years of Russian misery goes back to January 2011, when it announced a coup -- it was bouncing back from the devastating 2010 Gulf of Mexico oil spill, and forming a turbo-partnership with the Russian state oil company Rosneft to drill for oil and gas super-giants in the Arctic Circle. But then things went horribly wrong: BP's regular Russian oligarch partners accused the Britons of violating their rights of first-refusal for any BP deal in Russia. The oligarchs, collectively known as AAR, sued and scuttled the BP-Rosneft deal, and sought billions of dollars in alleged damages. Early this month, BP finally threw in the towel, and said it is assessing offers to buy its half of TNK-BP. Here is where the fresh trouble starts. BP has suggested that there are at least two bidders -- AAR and an unidentified state-run Russian company. Among stock analysts, the general thinking is that, whoever buys the 50 percent, BP could walk away with some $25 billion. But now it appears that that sort of payday will arrive only if AAR fails to have its way. Sadly for BP, the record supports the opposite outcome. In a note to clients on Wednesday, Citigroup's Alastair Syme said that, given the oligarchs' aggressively pursued, $13 billion lawsuit against BP, the Britons are unlikely to achieve the $25 billion figure. How much are they likely to receive? AAR (which believes that BP is bluffing about there being another suitor) is thinking more like $7 billion, right around the figure that BP paid for its share of TNK-BP in 2003 (the Financial Times' Guy Chazan first reported the $7 billion figure, which we have confirmed). In the Russians' apparent view, that would allow BP to save face by leaving with all the money it originally gambled on TNK-BP.
But that may not be the end of BP's latest shellacking. The company is thought to be seeking to leverage its exit from TNK-BP into a position on the resource-rich Arctic, similar to deals struck by ExxonMobil, Italy's ENI and Norway's Statoil, as I write at EnergyWire. But it should not expect kid-gloves treatment by the Russian government. The reason is that President Vladimir Putin and his oil lieutenant, Igor Sechin (pictured above, right and left, respectively), will have closely monitored the latest TNK-BP deal. They will see that BP can be shellacked with impunity. If indeed BP proceeds with the sale of its TNK-BP share, expect this sequence of events: BP sells out for a firesale price to AAR; AAR resells that share or more to a state-run company such as Rosneft at a markup, but less than the $25 billion market price; and BP gets a place on the Arctic, but on far more advantageous terms for the Russian side than achieved with the other western companies.
Go to the Jump for the rest of the Wrap.
Mikhail Klimentyev AFP/Getty Images
This is the first stage in what could be a very lengthy process to sell our share in TNK-BP. It is far too early to say what we will do with the money. All we have done today is announce an intention to look further at expressions of interest in purchasing some or all of our stake in TNK-BP. It is not about Arctic or other businesses in Russia, current or future.
Natalia Kolesnikova AFP/Getty Images
How do you spell risk? (Hint: start with the letters b and p): Former senior executives of BP are the gift that keeps giving. That is, in terms of insight into what's behind the long, downward spiral of a company that until recently was one of the most valuable on the planet. Just two weeks ago, former BP CEO Tony Hayward surfaced with a highly risky oil-patch acquisition in Kurdistan, the oil-rich northern region of Iraq whose right to sign such deals has been challenged by the national government in Baghdad. This week the news is from the United Kingdom, where a company backed by John Browne (Hayward's predecessor in the BP CEO shot) announced an enormous discovery of shale gas near England's seaside resort of Blackpool. Matthew Hulbert, of the Clingendael International Energy Program, told me that the prospect of new jobs will ultimately bring public support of the drilling, yet as of now protests have broken out in an effort to halt the operation, which uses hydraulic fracturing, or fracking, over concerns that it could contaminate local drinking water. Whatever happens, Hayward and Browne help us understand how it is that BP has repeatedly found itself in trouble in recent years (for example by letting safety problems linger at its Texas City refinery; cutting corners in a problematic Gulf of Mexico oilfield called Macondo; and flagrantly violating a covenant with its crucially important Russian partners): A bugger-the-risks, full-speed-ahead attitude may be bred into the DNA of BP's senior executives. The question is how far down in the ranks one finds this trait.
Murder in Kabul: The last time I saw Ibrahim Haqqani -- brother of the Saudi-backed Afghan militia leader Jalaluddin Haqqani -- it was 1991, and he was concealed under a bridge outside the eastern Afghan city of Gardez. Haqqani was leading a futile rebel assault against the superior forces of then-President Najibullah, and to reach the underpass, we had to dodge targeted artillery. It was a frightening dash, and Haqqani seemed no less rattled than we; a few weeks later, he and his men finally abandoned the effort to capture Gardez. Flash forward a decade, Associated Press correspondent Kathy Gannon reports that Haqqani has met with U.S. officials working to find a settlement with his brother Jalaluddin, who since a few years after that encounter under the bridge has been a leading Taliban general.
Chasing the runaway anti-fracking train: An industry-led group suggests that shale gas drillers be required to disclose the chemical composition of their drilling fluid, which critics say can contaminate drinking water. This assessment (located half-way through a new report issued by the National Petroleum Council, and led by two big shale-gas drillers -- Anadarko's Jim Hackett and Chesapeake's Aubrey McClendon -- plus Daniel Yergin, the oil historian) isn't surprising in content: The industry has been under enormous pressure to do so, because as it stands these drillers may be jeopardizing the potentially enormous economic and geopolitical benefit of shale gas. There is that much of a perception problem about the drilling method called hydraulic fracturing, or fracking.
Yet is one fully persuaded by this high-profile attitudinal turnaround? More than half of the 46-page report -- the entire first half -- is a paean to the shale gas bonanza. When it finally gets to the doubts surrounding the industry, it does so by first again praising its environmental performance. Even when it suggests that the Interior Department require all frackers to join Frac Focus, a Web-based chemical registry, the report limits that suggestion to federal lands. As for these federal lands, there too the report writers hedge -- they do not recommend a mandate for full disclosure, meaning all chemical content, but only to "participate" in Frac Focus, a very different thing. In fact, very little about the report suggests an embrace of oversight. And what's wrong with that? I think it will not quell the storm of doubts (consider this latest investigative piece by ProPublica's Abrahm Lustgarten and Nicholas Kusnetz, describing the impact of wastewater stored in open pits near fracking sites). The industry must go demonstrably overboard in its zeal for transparency if it wants not to stunt production.
I talked on the topic of fracking over beers with Peter Robertson, the former vice chairman of Chevron, who was in Washington to present a new report by Deloitte about fracking in North America. Robertson seemed flabbergasted by the magnitude of the shale gas reserves, sufficient, he said, to produce the equivalent of 6 million barrels a day of oil. Yet he was also worried about the public relations problem. For purposes of illustration, Robinson compared the U.S. shale gas industry with Saudi Arabia, where one company produces some 10 million barrels a day of oil from a few hundred wells. Shale gas is produced by some 2,000 companies "from hundreds of thousands of wells," he said. "You're only as good as the weakest link," Robertson said. "We have to win the public over on this one. We are not doing this in some corner, but in towns, villages and cities. They could progressively shut them down."
We have to set high standards, and we have to find a way to police, to self-police, this industry so that we do this right.
On chemical disclosure, Robertson wondered why "we don't just do it."
Why don't we don't just say ‘Of course we're going to tell you' [what is in the fracking fluid]. Because we are, actually. It's almost like we're just fighting it till the end. Because we're going to lose this one.
Former BP CEO Tony Hayward is receiving hearty handshakes for the $2.1 billion deal he has organized for fields holding a reasonably rich 356 million barrels of oil in Kurdistan. The agreed merger of Hayward's Vallares with Turkey's Genel Energy is his "continuing professional rehabilitation," Forbes says in one on-line piece, and "Tony Hayward's Revenge" in another. "Tony Hayward Makes a Comeback," says the Wall Street Journal. "Turkish Delight for Hayward" says Upstream magazine.
Are these assessments correct -- has Hayward (pictured above in less-happy times), 17 months after the devastating BP oil spill in the Gulf of Mexico, demonstrated again that he has the right stuff? Mmmm ... no. What he has demonstrated anew is his taste for living on the edge, cutting corners and risk-the-company deals.
Those are not necessarily deadly attributes in the highly risky oil business. What makes them so hazardous is that Hayward does not appear to know his deals could jeopardize the company he happens to be running. He just stands on the ledge whistling. It is the same attitude -- one still apparent in his former company, BP (more on this below) -- that helped cause the Gulf spill of 5 million barrels of oil.
Chris Kleponis AFP/Getty Images
Medvedev stays, according to O&G readers: The betting stage of the Kremlin Contest is concluded, and the results are - 53 percent for Dmitry Medvedev to 47 percent for Vladimir Putin. That is, there is greater than a 50 percent chance that Putin -- the sole maker of big decisions in Russia -- will decide to keep Medvedev (pictured above today at a Tajik reception in Moscow) in place as president when his term expires in March, according to O&G contestants. That goes against the conventional wisdom, which is that Putin will opt to return to the Kremlin for another six-year term.
Some political junkies favor general public opinion surveys; others prefer barroom trash talk (and bloggery). I see significant merit in what is said by folks having sufficient conviction to back it up with a wager, in this case a small non-cash bet. But O&G bettors are outliers even among this group. U.K. bookmaker Paddy Power, for example, gives odds of Putin winning -- 2/7 for Putin and 9/4 for Medvedev, meaning that for a 100-pound bet on Putin winning you'd receive just 28 pounds back, while the same bet for Medvedev would get you 175 pounds (h/t Anatoly Karlin). (For those with a taste for betting who believe Medvedev will get the nod, it appears shrewdest to take the other side of the 2/7 Putin bet at Paddy Power, which if I am reading correctly appears to pay 350 pounds.)
As you recall, I started off the betting by wagering that the tandem would stay untouched, and that Putin would announce his choice on Dec. 9. But O&G's bettors made me a bit ashamed about my wager of a glass of Rioja. Other bets included Secret Aardvark hot sauce of Portland, Oregon; black and white photos of Moscow taken from the same spot -- one dated 1965 and the other 2011; an African warrior mask from Malabo; and aviator sunglasses. Therefore, I am adding a signed copy of The Oil and the Glory (the book).
Divvying up the Libyan booty: When it comes to war, it is said, the victor gets the spoils. The unstated second part of that phrase is that these spoils are transferred in a very public manner. So it is with the unseemly matter of Libyan oil. Led by the influence of fleet-footed writer Bernard-Henry Levy, France leaped into the Libyan fray on the side of the rebels last March and did not let up. Therefore, says French Foreign Minister Allain Juppe, it is "quite logical and fair" that French oil companies have preferential treatment in the divvying up of post-war reconstruction and other oil contracts. Presumably the sentiment is shared by other NATO members such as the United States who bombed Col. Muamar Qaddafi's troops for months. At the Wall Street Journal, David Gauthier-Villars writes that Russia -- which like Brazil and China maintained a comparative arm's length from the rebels -- is miffed by NATO's sense of entitlement. Moscow wants the United Nations to lead the reconstruction. The catfight is similar to one that followed the 2003 fall of Saddam Hussain, when China and Russia initially lost their favorable oil contracts negotiated with the deposed dictator, only to win serious chunks of the oil patch in subsequent deals with the current Iraqi government. A similar outcome is likely in Libya.
Dmitry Astakhov AFP/Getty Images
What do a big oil deal and the arrest of an alleged murderer suggest about presidential politics? In Russia, where just one man will determine who rules for the next six years, they are among the only bits of evidence that political junkies can cobble together for insight into the country's next election.
In the case of the first, Reuters' Doug Busvine writes that ExxonMobil's coup in the Russian Arctic this week suggests that Prime Minister Vladimir Putin will return to the Kremlin in March. A raid by masked police on BP's premises does imply that Russia still favors Putin's tough-guy approach to dispute settlement.
But can't this simply mean what we all know -- that if you want to talk to the guy in charge, that would be Putin?
After all, we also have Russia's arrest of a ringleader in the 2006 murder of crusading Russian writer Anna Politkovskaya. If Russia's dark side were truly ascendant, we are similarly seeing adherence to the views of President Dmitry Medvedev, who has publicly advocated the rule of law. Does Medvedev look unhappy in the photo above, taken a few days ago?
Putin will rule regardless of where he sits, even if it is Moscow mayor. But we are accustomed to such figures keeping their cards close to their chest until the last moment -- it does not behoove them to tip their hand. What do you think -- will Putin return, or will Medvedev remain in place?
It is not a requirement to be a Russia expert to make your guess in the Kremlin Contest. Today is the last day to vote. Send an email, using the link above my postage-stamp-size photo to the right on this blog. Name Russia's next president, prime minister, and the date that Putin makes the announcement. Identify your small non-cash wager (current bets are a t-shirt, a mug, a book and glasses of wine).
Montana's governor says he's going to ride ExxonMobil "like smell on a skunk," not to mention mete out more conventional unpleasantries like going to court. In case the oil giant has any funny ideas while being subject to these measures, "There ain't nobody gonna blow smoke up the south side of this north-facing governor." Gov. Brian Schweitzer, who is a soil scientist, has been driven to this display of trash-talking by the July 1 spill of some 1,000 barrels of crude oil into the pristine Yellowstone River, about 100 miles downriver from Yellowstone National Park.
Does Exxon deserve this scale of rudeness? After all, when BP suffered this treatment last year, it had spilled 5,000 times that volume into the Gulf of Mexico. Unlike the 56 minutes it took Exxon to sever the flow of oil, BP took five days short of three months to shut off the Macondo oil well. In addition, as far as I know, nobody at Exxon has asked to get his life back, the innocently delivered but unfortunately received remark that then-BP CEO Tony Hayward will rue for the rest of his days.
The answer is yes. The main reason is that Exxon has all but danced on BP's grave since the Macondo spill. For example, back in March, BP's new CEO, Bob Dudley, delivered his first full-blown speech since the spill, sort of a coming-out address at Dan Yergin's annual oil show in Houston. Dudley's main message was that what happened to BP could happen to anyone and that all oil companies would have to change their procedures. It is "unrealistic" to dismiss Macondo as a "'black swan', a one-in-a-million occurrence that carries no wider application for our industry as a whole," Dudley said.
Ben Stansall AFP/Getty Images
A friendly wager -- the Kremlin Contest: Among friends, I'm regarded as a bit of an outsider for my call on next year's Russian presidential elections -- a forecast here and elaboration here that strongman Prime Minister Vladimir Putin will opt not to return to the slot he held for eight years, and instead will select his friend, President Dmitry Medvedev (pictured above), to run again next March. Over at the Washington Post, my former colleague Fred Hiatt is upset with the Kremlin's approach to electoral politics, but that's beside the point. The prevailing opinion is that Putin will return to the Kremlin, but I bet a glass of Rioja on Medvedev with the husband of a senior FP editor who sides with the conventional wisdom (she herself declined to reply to the challenge). None of this sways my colleagues. The other day, one fellow in the office called my prediction "implausible."
So I am throwing out a public wager -- an election pool of a sort. Here are the rules: The winner must correctly name who is Russia's next president and prime minister, plus the date when Putin makes the announcement. To be eligible, contestants must toss a small non-cash item into the pot (you will be wise to carefully observe this rule, because unless you yourself prevail, you'll be mailing your contribution to the winner or otherwise arranging for its receipt; I'm throwing in another glass of Rioja, and if necessary will figure out how to deliver it.). The contest is winner take all, to be divided up on my judgment alone in the event of a tie. If the correct date isn't guessed, the winner will be closest to the actual date without going over. The deadline for entry is Sept. 1 since Putin probably won't make his choice clear before then.
This may not be as easy as it sounds. A ringer in the mix for example is metals-and-basketball tycoon Mikhail Prokhorov, who under certain circumstances could be prime minister.
Here are my guesses: President -- Medvedev. Prime Minister -- Putin. Date -- Dec. 9, 2011. Send your own to me, using the email link just above my photograph, in the About This Blog box on the right side of the blog.
The casino moves faster than expected: We knew that oil traders wouldn't stand by and allow the United States and other oil consuming states to think they could bring some order to volatile prices, as the U.S. suggested a week ago. But we didn't suppose that traders could or would move this fast. On June 22, the price of oil closed at $95.41 a barrel. The following day, it plunged to around $90 a barrel when the U.S. along with other members of the International Energy Agency pledged to sell 60 million barrels of oil into the global oil market from their strategic petroleum reserves; it appeared as though consuming states were drawing a line in the sand, and saying they would pay no more for oil. They would drive the price down by making the market more uncertain for traders. But, as we discussed that day and Monday, traders were bound to perceive a dare, and to engage in some brinksmanship. They would make clear that the oil-consuming states were not prepared to keep intervening in the market. And that's precisely what happened. As if to make a point, the price closed at $95.42 yesterday, or a penny above the level just before the intervention.
An official from the U.S. Energy Department says that traders have snapped up the 30 million barrels that the United States offered up for sale, Reuters reports. One reason is that it's light, sweet oil, the type that Libya producers and has been in short supply on the global market. Yet Bloomberg's Paul Burkhardt writes that some of these barrels are destined not for U.S. vehicles, but for U.S. storage tanks. In another gaming move, traders will hope to sell the volumes on again at a profit. (Update: In this document forwarded by an alert reader, Barclays Bank is attempting to snap up 200,000 barrels from yesterday's SPR sale at $104.97 a barrel. If successful, Barclays at today's prices would be able in this case to flip the volumes for an immediate profit since the curent premium for light, sweet crude is about $14 a barrel above the price of U.S. benchmark West Texas Intermediate.)
The takeaway is that oil prices will not moderate through sleight of hand, such as the injection of strategic reserves onto the market, or even Saudi Arabia's planned addition of a half-million barrels a day or more to the global mix. The reason is that traders will always look to demand, and spare production capacity to meet it in a fix. That is, should there be a devastating hurricane, a new Arab Spring uprising, or a well-placed war, is there sufficient unused production capacity to make up for lost volumes? So we are talking a need for a continued rise in Brazil's reserves; more production from the U.S. Baaken and Eagle Ford shales; and so on.
The Gulf of Mexico blame game: Was BP entirely at fault for the blowout of the well it operated in the Gulf of Mexico until April of last year? Pretty much, at least according to the court of public opinion and, thus far, the actions of authorities. But at Bloomberg BusinessWeek, Paul Barrett has a cover story next week laying out the case that Transocean, BP's rig contractor, is ducking what should be shared responsibility. Of the 126 workers aboard the Deepwater Horizon when it blew up, 79 were on Transocean's payroll, Barrett reports. These Transocean workers were carrying out the drilling operation. BP was ultimately in charge -- it called the shots and made the big decisions -- but it was Transocean's practices and expertise that made the rig go. The undertone of piece is the appearance of unseemliness in Transocean's rejection of any responsibility for the blowout, which killed 9 of its employees; a week ago Transocean issued a report laying blame squarely on BP's shoulders. Barrett draws a portrait of a company whose strategy in this case is driven by the bottom line -- if it isn't found absolutely inculpable, it could be driven out of business by the cost of the billions in payouts owed to victims. Therefore, it is shedding all blame onto BP's shoulders.
Dmitry Astakhov AFP/Getty Images
When it comes to Russia, BP stands out for its untiring
use of the end-run as an operative corporate strategy, regardless of how often
it is tackled on the way to the end zone. On Monday, BP floated its latest sure-fire
attempt to bypass its rapscallion Russian oligarch partners, and win prize Arctic
acreage in partnership with state-run Rosneft. By yesterday, though, the
company had thought better of the play -- CEO Bob Dudley got in front of reporters
effectively, "Never mind." Back to the huddle.
Before long, it will be a year since BP stopped the spewing of oil from its Macondo rig in the Gulf of Mexico. The company has been unmoored since, a condition that BP itself hopes to correct with a dashing combination of panache, legal reasoning and negotiating skill. It may do so yet -- I hear compellingly from a few smart thinkers who argue in emails and conversation that Prime Minister Vladimir Putin himself ultimately will intervene in order to advance the best interests of Rosneft. But on the way to resurrection, there is much self-inflicted suffering.
Recall that in January, BP unveiled a bold plan to drill for Arctic oil with Rosneft; as part of the deal, the two companies would become blood brothers, swapping some $8 billion in shares, sufficient to earn mutual board seats, though that part was left for discussion later. Meanwhile though, BP's existing Russian spouse -- the four oligarchs known collectively as AAR -- screamed foul, and stopped the agreement in European court decisions. BP was violating a long-standing exclusivity agreement with AAR for Russian ventures -- that was the main attempted end-run -- and the oligarchs would not be appeased. Since then, BP has tried to commit bigamy peacefully, and to buy out AAR for $32 billion, but miscues on both sides have stood in the way. (Pictured above: happier days, from left Mikhail Fridman, the leader of the oligarch group; then-British Prime Minister Tony Blair, Putin; and then-BP CEO John Browne.)
This week came the latest BP play. The story was broken by both the Wall Street Journal and the Financial Times, which published anonymously sourced articles on a devilish new BP strategy for untethering itself from the oligarchs -- its lawyers somehow determined that if the company sold out any part of its TNK holding, the exclusivity agreement was null and void. Even if "one share of [BP's] 50 per cent stake" were sold, the FT reported, BP would be released from its misery. I myself do not grasp at this point why that would be the case. But I am told that this was the gist -- or threat -- of two separate conversations held Monday between AAR and extremely senior BP executives (according to the terms of the interviews, I cannot identify the participants by name; suffice it to say, however, that they hold decision-making positions).
John Stilwell AFP/Getty Images
Are we to believe President Dmitry Medvedev, who says that the collapse of BP's blockbuster oil deal in Russia is all a simple matter of the rule of law -- that CEO Bob Dudley was violating a contract, and that isn't done in Russia? One might reply, Since when? But this is what is baffling about the latest turn in BP's long saga of suffering -- one does not know whether Russia has suddenly gone legal, or whether we are watching a dimension of the run-up to the country's 2012 presidential election.
For BP, this was all about recovering its mettle from last year's disastrous Gulf of Mexico oil spill. Earning street cred in Big Oil isn't the same as a lot of other businesses -- there is comparatively little in the way of razzamatazz, branding, or product breakthroughs. Instead, it's all about being quick off the mark in acquiring property and finding hydrocarbons. Yet even there, as BP has learned, the going isn't what it used to be: Dudley was plenty fast pivoting off the spill, and obtaining a superlatively rich new deal to help develop Russia's Arctic. The details were tantalizing -- already the most active Big Oil company on the Russia patch, BP would double-down by forming a marriage-type arrangement with state-owned Rosneft. The two companies would swap a significant number of shares, and then explore the extravagantly rich oil fields of the Arctic. Tens of billions of barrels of oil were at stake, and at once BP seemed to be back in the game.
Only, BP already had a Russian spouse -- four oligarchs collectively known as AAR -- with which it had an exclusive, first-right-of refusal agreement for any dealings on Russian soil. AAR obtained European injunctions against the deal, so Dudley had to scrape and grovel in order to try to persuade AAR to be bought out, and Rosneft to help provide the funds (one reason being that Prime Minister Vladimir Putin -- superior in rank to Medvedev -- would never allow a foreigner to own 100 percent of a Russian oil company; the other reason being that, even if Putin would, BP didn't have $30 billion in cash at its disposal, apart from the $30 billion and more that it's collecting to pay off victims of the spill).
As of Monday night, BP and AAR had agreed on a $32 billion buyout (Sylvia Pfeifer and Catherine Belton of the Financial Times have assembled a good chronology). But in the end, the deal was upended by deep-seated mistrust between the Russians -- those at Rosneft, and the four oligarchs. In terms of the sequence of events, AAR wanted its cash first, before BP and Rosneft proceeded with their tie-up; Rosneft rejected that idea, and wanted the oligarchs to be paid only after the rest of the deal went through. They failed to bridge the gap, and the deal died.
Dmitry Astakhov AFP/Getty Images
BP, faced with Shakespearean-scale woes from Louisiana to Moscow, went to extra-legal lengths to avoid exploring Russia's oil-rich Arctic alongside its four oligarch partners. Now that it's been told it must if it wishes the benefits of the potential bonanza, does BP truly intend now to accept just half the upside that buttressed the Arctic venture's original logic? The answer is yes and no -- BP will proceed with the venture, but with a reasonable possibility of another attempt to buy out the oligarchs, according to a person involved in the process, though the latest news much increases the pricetag.
Recall that, after opting to scale back his ambitions in the U.S., BP CEO Bob Dudley (pictured above) announced a blockbuster deal for an ownership tie-up with Russia's state-owned Rosneft, with which BP would explore the Arctic together. Only, BP already had a long-standing exclusive Russian partner -- the oligarchs, who collectively call themselves AAR -- and they objected. Two European tribunals took AAR's side, thus embarrassing Dudley and, more important, jeopardizing his big return to the big leagues. On Friday, a London arbitration panel said the deal can proceed after all -- if Dudley does it through BP's partnership with AAR.
With a deadline looming next Monday, perhaps Dudley is calculating that swallowing the bitter pill of much-lesser profit in the Arctic is a necessary step in reviving BP's and his own credibility after last year's Gulf of Mexico oil spill and the mystifying continued incompetence of its Russian affairs. Dudley may also reckon that even half the Arctic's potential riches is sufficient to exchange 5 percent of BP's shares for around 10 percent of Rosneft's, which is the entry fee for access to the Arctic.
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What do you do with an outlaw company? With Enron, the market acted, and destroyed it. Then Broadway put on a play (pictured above), and that didn't work out so well either. With Arthur Andersen, management surrendered after an indictment on criminal obstruction charges, and broke up the accounting firm pre-emptively. But what about BP -- six years of catastrophic accidents, 26 deaths, a case of market manipulation and now a fundamental contract violation make it a serial bad actor.
Does such recidivism signal essential untrustworthiness? And if so, is there anything to do if both the market and management fail to act and establish more responsible stewardship?
In the case of nations, this is an irreproachable question. In Egypt and Tunisia, long years of irresponsible leadership have led to ousters embraced by the West and much of the remainder of the world. In the case of Iraq, though controversial, the Bush Administration -- agitated over Saddam Hussain -- invaded. These are examples just of our current era, but the practice goes back to the beginning of the historical record. Read on to the jump.
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A year after the BP Gulf of Mexico oil spill, Rex Tillerson is aggravated. What is upsetting the CEO of ExxonMobil, the biggest oil supermajor? His company is being mentioned in the same breath as BP and its lesser drillers, men who required 87 days to cap the runaway Macondo oil well, while Tillerson's own team knew that the British company was frittering away precious time with faulty ideas for ending the crisis,Tillerson tells the Financial Times. Meanwhile, the whole industry's reputation was going down the drain. Oh the injustice. Oh the calumny.
As a point of fact, Tillerson has a case. The procedure to which he is referring -- the early attempt to contain the April 20, 2010, spill underneath a dome -- was an utter failure. Hydrates formed in the containment dome, thus blocking a tube meant to siphon oil to the surface, and buoying the structure back toward the ocean surface.
What vexes Tillerson is that at this time -- meaning in early May of last year -- an Exxon man on the spot suggested that the only way to stop the spill was to install what's called a "stacking cap" on top of the blowout preventer. Indeed BP itself hadn't believed that the dome stood much of a chance to succeed, but said it was worth a try, and on its own had considered a stacking cap for a time, but then put it on the back burner for fear of a second, underwater blowout.
But here is what really galls Tillerson -- in the end, BP did install such a cap, and that is what worked. Tillerson thinks that BP should have weighed the chances of success and risks of failure of each possible resolution, skipped the containment dome and gone straight to the stacking cap. That's what Exxon would have done, he suggests, and obviously it would have worked much earlier than 87 days. Read on for more of the Tillerson-BP spat.
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A year after the Gulf of Mexico oil spill, there is a stampede to get on with it. Oil majors and independents, the governors of Louisiana and Mississippi, among others gripe about the Obama administration's pace of permitting drilling to return to the Gulf. The dozen companies whose deep-water operations have been suspended note that a joint spill response mechanism -- a gigantic piece of equipment called a Containment Response System, plus teams to operate it -- has been put in place, as Sheily McNulty describes today in the Financial Times. Meanwhile, they say they should not all be tarred with the same brush -- BP was slipshod, they argue, but everyone else observes ultra-safe practices. For the governors, the assertion is that it's time to put thousands of people relying on the industry back to work at a tough economic juncture. All argue that the administration is turning an environmental accident to unjustifiable political and ideological advantage.
But is the industry truly ready to go back to work? A couple of points make one uncertain. For starters, assurances that BP was the only bad actor aren't good enough, and verge on the naïve -- all actors in the Gulf knew or should have known that any accident by anyone would affect all.
What about the spill containment equipment? As described, this is an impressive bit of work. Yet it also has a distinct political quality -- in order to get working again in the United States, the industry was forced to take such action; otherwise no one would be convinced it is serious about the environment. But we see no word of such equipment being deployed elsewhere in the deepwater world, such as in Angola, Brazil, Canada, Nigeria and Norway. Are we to believe that the Gulf of Mexico is the only place at risk of a big spill? For more on the future of the Gulf, read on to the jump.
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TNK-BP: Clutch play by Dudley puts momentum back with BP? Counter-intuitively, the momentum may have shifted back to BP in its latest high-wire negotiations in Russia. BP's Bob Dudley (pictured above), attempting to turn around the company's fortunes after the costly Gulf of Mexico oil spill a year ago, in January dived into a highly tenuous tie-up with Russia's state-owned Rosneft, with whom it hoped to explore the oil-rich Arctic Sea. The tenuous part came because BP's long-time Russian partners, the grouping of four oligarchs known as AAR, blocked the partnership through tribunal rulings in Europe. As late as yesterday, BP and Dudley seemed to be in deep trouble -- BP had offered to buy out AAR's 50 percent of their Russia-based partnership for $27 billion; AAR apparently counter-offered with an ask of $35 billion, part of which would be paid through 10 percent share holdings of both BP and Rosneft. Dudley balked at the shareholding part, and possibly the money too. But just when hope seemed lost, Dudley got Rosneft to extend what had been a drop-dead deadline yesterday for completing their tie-up. Now BP has until this time next month.
Now a curious thing has happened. In a statement issued today, AAR CEO Stan Polovets advises BP to find a way to honor their partnership agreement faithfully. "We trust that BP will use the extension it has got from Rosneft to ensure that both the Arctic opportunity and the share swap are pursued through a structure consistent with BP's obligations under the TNK-BP shareholder agreement," he said. It's curious because Polovets said almost the identical thing yesterday.
If one is in the catbird seat, one generally remains sphinx-like. Hence, the signal that AAR is a bit uncertain. BP now has time to turn the tables. Chris Weafer, an analyst at UralSib, thinks that the long time extension suggests that the Kremlin intervened at the last minute to keep the deal alive.
Even if he was miserly with the cash -- $35 billion does not seem like too much money for the unlisted company -- Dudley was right to refuse AAR's share demands. He would be a fool to hand over 10 percent of BP -- and hence a board seat -- to the litigious and shark-like AAR, who have shown over the last 15 years a zest for a bloody brawl. Nothing personal, of course.
Should the shale gas tent be folded up? If Cornell Professor Robert Howarth and a couple of his colleagues are correct, there is precious little hope -- very close to none -- of getting greenhouse gas emissions under control and preventing some of the less-pleasant repercussions of climate change. This week, the Howarth team published a paper disputing one of the main assumptions accompanying the U.S. boom in shale gas drilling -- that it is a positive development because natural gas emits half the greenhouse gases of coal, and a third less than oil. Gas, it has been said here and elsewhere, is a "bridge fuel" until an as-yet undetermined non-fossil fuel technology is scaled up to propel the global economy along with the world's private vehicles. But Howarth says that, when one takes into account the methane released during shale gas production, coal in fact comes out cleaner. Given the hoopla surrounding shale gas, Howarth's paper has attracted much attention, including prominent display in the New York Times. But is he right?
Over at the Council on Foreign Relations, Michael Levi isn't so sure. There is no dispute regarding the hazards of methane -- this gas is pernicious. But Levi takes Howarth to task for relying on "isolated cases reported in industry magazines" along with the performance of notoriously bad Russian pipelines for his conclusions regarding how much methane escapes into the atmosphere during hydraulic fracturing, the method by which shale gas is extracted. Levi is at his most brutal in an apparent scientific gaffe -- Howarth used comparative gigajoules in order to measure the methane emissions of shale gas against those of coal. The problem is that gas produces a lot more electricity than coal gigajoule-by-gigajoule, something that Howarth doesn't take account of. For that reason, Levi favors kilowatt-hours for comparison purposes, and regards Howarth's failure to do so as "an unforgivable methodological flaw; correcting for it strongly tilts Howarth's calculations back toward gas, even if you accept everything else he says." Ouch.
Howarth explicitly states his data are thin and that more research is necessary -- methane is under-examined. Levi agrees with him there.
Here is where we return to one of the industry's own big failures to get out in front, figure out its weak points before critics do, and fix them. We have previously suggested that the error-prone shale gas industry ought to police itself, put peer pressure on its own bad actors to straighten up, and openly disclose the content of its fracking fluid. Now a new front has opened up. It could be too late to recover entirely -- the industry is headed for serious federal regulation, the very thing it has sought to avert.Read on for more of the Wrap
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Why at this point does it look like Bob Dudley's 11th-hour effort to resurrect BP's global image has failed? Because he and his Russian oligarch partners could not bridge more or less a $10 billion difference in their respective valuations of their joint Russian oil company, according to people in the deal: BP offered $27 billion to buy out their Russian partners, who wanted about $35 billion.
For Dudley (pictured above) and BP, the stakes seem higher than the few billions it would have required them to accomplish the shouting, pounding and haggling that are the normal fare of Russian negotiations. BP has largely drifted since last year's Gulf of Mexico oil spill, which robbed the company of decades of good will and oil properties built in the United States, the source of a quarter of its worldwide production. The 54-year-old Dudley, who took over as CEO last year, saw a blockbuster tie-up with Russia's state-owned Rosneft as just the thing to pull BP out of its doldrums. BP would buy 10 percent of Rosneft, Rosneft would buy 5 percent of BP, and both would go explore and produce oil in the virgin oilfields of the embarrassingly oil-rich Arctic Sea.
Alas, BP's longstanding partners in Russia -- four oligarchs who call themselves AAR -- objected, sued in Europe, and won, blocking the deal. BP has a standing deadline tomorrow to complete the tie-up. Though the oligarchs stand to gain much, the heat is mostly on BP and Dudley. Over the last few days, he has tried to buy out AAR's 50 percent share.
Today they came down to the hard bargaining. BP "offered to buy AAR out at an insultingly low price," said one actor on the Russians' side. In recent weeks, the generally accepted estimate of the value of TNK-BP has been about $60 billion. So BP's offer was just under half. The oligarchs themselves saw the value a bit higher -- at about $70 billion.
Since deals usually are struck somewhere in the middle, one would imagine that if BP had raised the offer to $30 billion or perhaps a bit more, there would have been a deal.
There is still time. Both sides are declaring the talks over, which often can signal that the serious stage is only beginning. If Dudley fails, it will be a difficult setback to recover from -- where else can he take the company with such rich oilfields? Some talk is that, depending on how badly BP's shares are pummeled in the market, BP could end up the target of a hostile takeover. Dudley's job too could be on the line.
As for what the Russians will do, AAR CEO Stan Polovets said, "AAR is a long-term strategic investor in TNK-BP and has no plans to exit. TNK-BP is a great company with excellent management and great growth prospects." A BP spokesman did not respond to an email.
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The upside of BP's latest brawl in Russia is how much we are learning about how the place works.
As you recall, in January BP CEO Bob Dudley trotted out a bodacious deal in which BP and Russia's state-owned Rosneft would swap shares -- thus owning $8 billion in each other's company -- and go on to develop the completely untapped motherlode of oil underneath the Arctic Sea. Only, this aggravated BP's Russian partners -- four oligarchs collectively calling themselves AAR -- who said BP had violated a monogamy covenant, and persuaded two European tribunals to halt the deal. One immediate victim was Igor Sechin, Putin's right-hand man and the holder of dual posts as deputy prime minister and Rosneft CEO. When the deal went south, Russian President Dmitry Medvedev kicked the corpse (pictured above, neither looks thrilled to be in the other's company) with an order prohibiting Sechin or anyone else from holding a simultaneous position in government and a state-owned company.
Though Medvedev's was a wholly reasonable directive, inRussia conflicts of interest can be a novel and even controversial idea, especially when it regards members of Putin's entourage. So it is that one prominent narrative out there right now is that the whole affair demonstrates not ethics, but Medvedev's political strength -- the rug, Reuters suggests, has been partly pulled out from under Putin. Medvedev's purge of Putin's allies at state-owned enterprises, it is said, is all part and parcel of Medvedev and his own allies preparing him for a run at re-election next year.
We have two things going on at once. One is that BP's Dudley wholly misunderstood Russia's apportionment of power (That's not a categorical black mark, because so did Sechin.). In this video, the Financial Times' perspicacious John Authers and Vincent Boland say that the Rosneft fiasco is as bad for BP as was last year's Gulf of Mexico oil spill. Dudley had perceived a company saver, but instead derived yet another symbol of BP's executive mismanagement. Now, not only does BP seem unlikely to capture prize Arctic acreage, but Dudley has seriously annoyed his Russian partners in the TNK-BP partnership, which comprises a full quarter of BP's total global reserves.
BP cannot afford to jeopardize the partnership. It is very simple. Unless Dudley gets his Russian affairs under control by a Thursday deadline, both BP and he -- emphasis on the latter -- are in real trouble. Chris Weafer, the uber-analyst at UralSib Bank, expects a deal to be cut, if not voluntarily by the principals in the deal, then by force -- that's how important the stakes are."There will be a lot more pressure applied this week," Weafer wrote in a briefing he emailed me, "and if no agreement is reached by Thursday, then [there will be] direct intervention by the state." But if these steps still don't work, among the dangers, some say, is that again BP risks a hostile takeover. This piece from the Daily Telegraph in London suggests that former BP CEO Tony Hayward may lose his current position as a board member at TNK-BP. But the biggest news right now is that Dudley could lose his job. So poor has his judgment and execution been. Read on for the Russian political angle.
No sheriff in oil town: The latest Reuters poll of oil traders forecasts oil prices to pass $130 a barrel by the end of the year, which seems a fairly safe bet given that the widely traded U.K. blend went past $124 today. In terms of the whys, it's geopolitics, argues the usually sober-thinking Ed Morse -- the existence of autocratic, sclerotic and unresponsive Middle East governments is old, but not the local reaction to it. Morse writes in the Financial Times:
The prospect of the largest oil-producing countries confronting challenges, such as those seen largely in north Africa so far, is more probable now than a year ago, telescoping the potential day of reckoning and raising the probability of an apocalyptic oil supply disruption.
Leah McGrath Goodman notes the role of the casino -- traders betting on the news out of the Middle East. But, in an overnight note to clients, hedge fund analyst Peter Beutel at Cameron Hanover laments the entire cycle of higher prices -- the "spiral in motion" that we are witnessing. Beutel writes:
It goes like this: A stronger economy helps boost oil prices as investors anticipate stronger future demand. Higher prices (for refined products) hurt consumers and lead to demand destruction. Higher oil prices hurt consumers and their ability to spend money elsewhere. As a result, in order to keep the economy going, the Fed needs to keep rates low or money inexpensive, and that hurts the dollar, which boosts oil prices. A weaker dollar helps exports, and that helps the economy, boosting oil prices, hurting the dollar as well as consumer discretionary spending. It gets absolutely dizzying. It has elements that want to halt the cycle and other elements that keep it in motion. The latter factors are dominant here.
... but investors hedge with clean tech, too: Right alongside the runup in oil prices we are seeing a big rise in investment in green technology, according to the Cleantech Group. Investors poured $2.5 billion into the sector in the first three months of this year, mostly in mature solar and electric-car companies. That was 30 percent higher than the same period a year ago, and the largest sum since the third quarter of 2008. It does not mean that investors are turning back to clean energy -- hardly any money went into startups or companies not yet in the market. Instead, it looks like a hedging strategy -- investors see oil demand destruction ahead given the direction of prices (in 2008, U.S. motorists -- the biggest oil gluttons on the planet -- began to buy a lot less gasoline when prices at the pump reached $4 a gallon), and so are pouring money into already-existing clean-tech products. As for the rest, in the Wall Street Journal, Guy Chazan writes that money is pulling back in biofuels, since it looks like many, many years before any will be competitive with gasoline. Read on for more of the Wrap.
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The uprising tax: Continue to look for Saudi Arabia to dutifully police the price of oil, but the arm of the law will come down a little more leniently -- when oil is at $100 a barrel and above. Call it the Uprising Tax. Because of all the trouble stretching from the Magreb across to Oman, Saudi King Abdullah and the rest of the ruling family are worried about potential trouble at home. To avert that, they have bestowed $130 billion in largesse on the populace in the form of various giveaways. But how to pay for all this generosity, you might ask. The answer is oil revenue. But the price has to be higher than the $68 a barrel that previously resulted in a balanced Saudi budget, according to the Financial Times' Michael Peel and Javier Blas. Now, oil must be at $88 a barrel, plus a margin for error, hence justifying the $107.94 a barrel price at which oil closed today. And four years from now, oil must cost at least $110 a barrel.
Challenging times for Darth Vader: Is Igor Sechin -- aka Darth Vader, the right-hand man to Vladimir Putin -- truly in trouble? The news out of the Kremlin would have us believe so. President Dmitry Medvedev has issued an order stripping Sechin (pictured above with Putin) of his post as chairman of Rosneft, the Russian state oil company. Skeptics suggest that the jury is out whether the dismissal takes effect, or even if it does, whether Sechin can be held back from continuing to exercise effective control, given his relationship with Putin, Russia's most-powerful political figure. Whatever the case, we are specifically interested at the moment because of how Sechin's fate is interwoven with BP's.
As you recall, the geopolitical impact of last summer's Gulf of Mexico oil spill was that BP -- on the outs in the United States -- got into bed with Russia in a big way. In January, BP CEO Bob Dudley did a deal with Sechin in which Rosneft would own 5 percent of BP's shares, BP would own 10 percent of Rosneft's, and the two companies together would explore the granddaddy of Russia's remaining oil mother lode -- the Arctic Sea bed. This narrative has fallen apart as two European tribunals have ruled that BP violated a pre-existing marriage -- a partnership called TNK-BP, which holds rights of first refusal for any deals on Russian soil involving BP. How did Dudley -- who had a previous bad experience with the very same Russian oligarchs behind TNK-BP -- commit such a blunder? And why wasn't Sechin himself able to head off any number of indignant Russian oligarchs? Read on for more about BP, Sechin, and the Wrap.
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To keep power, give it away: The autocrats of the petro-driven Middle East are discovering that ushering in democracy is not an altruistic act, but desperation politics -- if they want to stay in office, there is a good chance they must dispense with the strongman act and accept truly elected representation. For Ali Abdullah Saleh, the president of Yemen, that realization came far too late; he has at most days to go in office, and possibly just hours. What about Syrian President Bashar al-Assad? Possibly next to Saudi Arabia and Iran, Syria is the unlikeliest place in the Middle East for regime change. Today, his troops fired on protesters after Assad attempted to assuage public unhappiness by promising to end 48 years of martial law. Yet more unrest there seems probable as thousands poured into the streets regardless, and reports are of some protesters grabbing away guns from authorities. Libya is the conspicuous outlier -- short of a palace coup, Col. Moammar Qaddafi looks likely to hang on.
My colleague David Rothkopf took President Obama to task this week for a supposedly fuzzy approach toward Libya, but I don't grasp his mystification. The best U.S. course is to allow Middle East events to take their course and not put an American imprint on them, even when they reach nail-biting stage. In the case of Libya, the U.S. rightly held back as long as possible with the idea that perhaps, perhaps the rebels might yet turn back the Qaddafi tide, but when Benghazi was about to be overrun, stepped in to create a level playing field (there is a preference for another Libyan leader, but the policy is not to explicitly overthrow Qaddafi, but to make it as much a fair fight as possible.). The U.S. rightly is not going to install the opposition, but take away the regime's air, armor and artillery advantage. Equally incomprehensible, also here on the pages of Foreign Policy, Bruce Ackerman has declared Obama an imperial president. On the other side, the chest-beaters would like Obama to be more "decisive." Guys -- take a little course in the exercise of influence and power; better yet, take a look at the nature of what's going on in the Middle East. This era is not the time to kick down the door, guns blazing.
The rare earth blues: The Chinese are clamping down ever harder with market hindrances against exports of rare earth elements from the country, this time by raising tariffs on the 17 types of minerals. This has been an issue since last September, when Japan's arrest of a Chinese trawler captain revealed Beijing's ultimate soft spot (which we had thought was Tibet, followed closely by Taiwan) by triggering China's rare earths embargo on the entire global market. But is there a crisis for the high-tech industries and armaments manufacturers who rely on them? This week, I participated in a panel discussion at the Heritage Foundation on the subject. The consensus was that, while there is a current squeeze and prices have almost doubled since last year, a combination of recycling and the fast development of new supplies will resolve it within three or so years. Australia, India, Kazakhstan, Mongolia, not to mention Alaska and California, are all acting in concert to develop new supplies.
Read on for more on this week's news.
BP's new tie-up with state-owned Russian oil company Rosneft tracks back to a tension-filled 2008 power struggle in which Rosneft Chairman Igor Sechin (pictured above with Vladimir Putin) engineered the scuttling of a similar arrangement with rival Russian gas giant Gazprom, according to new WikiLeaks cables.
The backdrop to the cables is a long-standing management spat between BP and four Russian oligarch partners in a company called TNK-BP. Essentially, BP sought to build up TNK-BP as a largely or solely Russia oil company, while the Russian partners wished to branch out abroad including to countries to which BP objected such as Cuba, Burma, and Sudan, according to a cable filed June 20, 2008, by the U.S. Embassy in Moscow. All of this was accompanied by the usual Russian orchestra of government inspectors of all sorts, the cancellation of visas, vague personal threats and bad press.
How were the Russian oligarchs able to carry all of this off given that none of them was a government figure? The suggestion in the cables is with the connivance of Sechin, the third most-powerful man in Russia, who seriously objected to BP's dalliances with Gazprom, another power center in the country.
As we've discussed, one of the items brushed under the carpet in the BP-Rosneft share swap has been whether the state-owned Russian company -- and hence the Kremlin -- will get a seat on BP's board of directors. The subject is important because it would be precedent-setting for a muscular petrostate such as Russia, with its own ideas of what's legal and acceptable, to be in the policy-setting body of one of the West's most strategic and key corporate institutions. So I asked the opinion of Chris Weafer, chief strategist at Moscow-based Uralsib Bank. His reply follows.
I believe that Rosneft will take a board seat but not yet. BP has run into a lot of (expected) criticism from U.S. regulators, and investors are still digesting the implications of the move. I assume that both sides have wisely decided not to add anything further incendiary to the flame with a board seat for now. It is also wise not to swap directors until the Court of Human Rights rules on the $98 billion claim against Russian by the Menatep shareholders group, expected this spring. If that goes against Russia, then BP will take some PR flak also. I think that they will wait for these issues to calm down, and then I am 100 percent sure that we will see a Rosneft director on the BP board. This is a long-term game for both BP and Rosneft, and they don't need to hurry.
But bear in mind that it was specifically stated that the joint-venture to explore the Arctic is only the first step in the envisaged cooperation. Rosneft harbors an ambition -- shared by the government (it was so much easier when Putin was in the Kremlin as then we only had to use "Kremlin" instead of "government") -- to be a global oil major. It does not want just to be a big oil producer like Aramco. Rosneft wants to be a new "Sister," like Exxon, Chevron, BP, etc. That means global projects with a presence upstream and downstream. That's where the link with BP also comes in. Indeed, a very long-term ambition but, for sure, Rosneft will want board representation to further those ambitions.
It is only a question of how long to wait and who [the precise board member] will be. There is no reason at all why it cannot be Igor Sechin. But I would be very surprised if the first Rosneft director is Mr. Sechin. He is notoriously shy of publicity, especially in the Yukos-obsessed western press (Russian White House viewpoint), and he can just as easily get his point across via a proxy.
Why is BP getting grief in the United States and Great Britain over its $7.8 billion share swap with Rosneft? Because 1) Since Winston Churchill, BP has been a strong, sometimes pivotal influence on British foreign policy; 2) For much of 1990s, BP was something of a lapdog for Russian oil policy - that was before it switched horses in order to gain U.S. approval of its 2000 purchase of Arco; and 3) It could revert.
That said, one of the most surprising aspects of the deal is not that BP could again argue Russia's debating points and say they are Western, but the inattention paid to another fairly material outcome of the deal, which is the likelihood that Deputy Prime Minister Igor Sechin will join BP's board.
BP CEO Bob Dudley said the two sides never discussed board representation in their deal discussions, but Rosneft CEO Eduard Khudaintatov says they will, according to Interfax. And there is almost no possibility that state-owned Rosneft has bought 5 percent of a western oil major without the intention of backing up its investment with a seat on the board; there is about the same probability that the person who sits in that seat will be Sechin, Rosneft's chairman and Prime Minister Vladimir Putin's hand-picked chief energy hand.
If this happens, what will it mean to have Sechin on one's board?
For one thing, it means the Kremlin is on your board, according to an excellent Sechin profile in June by the Financial Times' Charles Clover, David Gardner and Catherine Belton. They call Sechin "the third man," because he is the third most-powerful individual in Russia, just under Putin and President Dmitry Medvedev. A 2009 profile of him by Forbes' Heidi Brown started out this way: "He's been depicted as Darth Vader in the Russian press and described as "'the scariest person on Earth.'"
But the FT's Clover and gang argue that Sechin may have changed. As the global financial crisis again demonstrated the fragility of Russia's economy, Sechin is being a lot friendlier and accommodating, according to these FT writers. That is the Sechin whom BP executives describe when they talk about this deal. As the FT wrote:
For men such as Mr. Sechin, who came to power with Mr. Putin and -- driven by an obsession with security and jealous of national status -- oversaw Russia's resurgence from the prostration of the 1990s, the situation has changed. The battle now is the rebranding of Russia, as both an assertive international player and a reliable partner for the west.
Yet, on the side of caution, we've seen this movie before. Russia became much more prickly as oil prices rose from 2006 to 2008, and often Sechin was the face of that prickliness. Sechin's signature action was overseeing the 2006 state seizure and dismantlement of Yukos, which at the time was regarded as perhaps the top oil company in Russia, and providing its best oilfields to Rosneft, where he then became chairman. Those choice morsels are what made Rosneft attractive to BP (which like the British Museum does not pay much attention to the provenance of its riches). From a company worth perhaps $8 billion, Rosneft became an $80 billion behemoth after the Yukos affair.
In terms of turning over a new leaf, just in October, Sechin accompanied Medvedev to Ashgabad, and proceeded to drive a final stake into the heart of the Turkmen-Russia relationship with his thuggish manner of speaking, as we discussed last week.
Sechin is said to recognize that he has to be nicer. But when he sits on BP's board, he will be looking out for Russia's interests. The question is whether they will coincide with BP's.
The market is taking comfort in a 48-page partial report issued today by a presidential investigative commission into last summer's BP oil spill in the Gulf of Mexico. But should it be? The answer is no -- BP isn't out of the woods yet.
Where investors and analysts are taking heart is that the report does not single out BP, nor say that BP or any of its partners deliberately cut corners or took excessive risks in order to save money while drilling the Macondo well prior to the April 20 accident. Best of all, the dreaded, single word -- negligence -- is absent from the findings, as Oswald Clint of Bernstein Research wrote in a note to clients this morning. In a nutshell, as we've discussed previously, if BP were convicted of gross negligence in a U.S. court, it could face a quadrupling of its estimated $20 billion bill stemming from the spill. At least in part because there is no mention of negligence, BP share price is up more than 2 percent in early trading today.
BP itself sounds relieved: "Today's release largely adopts the preliminary findings of the commission's chief counsel, and like several other inquiries, including BP's internal investigation, concludes that the accident was the result of multiple causes, involving multiple companies," BP said in a statement.
But this is a false calm, as I discuss on CTV's morning show in Canada. As it turns out, the commission was specifically barred from delving into BP's legal culpability, Dave Cohen, a commission spokesman, told me in an email. "We are under explicit order by the executive order establishing us not to do anything that might interfere with the [Department of Justice] investigation. They will decide legal matters," Cohen said.
The report walks right up to that line without actually using the words. It accuses BP of a "failure of management," and says the accident was "avoidable" and "preventable." It accuses BP and its partners of taking numerous risks that, when added together, were "both unreasonably large and avoidable," and resulted in the blowout. The commission does not accuse the companies directly of taking such risks in order to economize, but does connect the two -- money was saved because of the risks. From the report:
Whether purposeful or not, many of the decisions that BP, Halliburton, and Transocean made that increased the risk of the Macondo blowout clearly saved those companies significant time (and money)
The report -- the full version of which is due to be released next Tuesday -- contains much grist should the U.S. Department of Justice decide to level the gross negligence charge:
The well blew out because a number of separate risk factors, oversights, and outright mistakes combined to overwhelm the safeguards meant to prevent just such an event from happening. But most of the mistakes and oversights at Macondo can be traced back to a single overarching failure-a failure of management. Better management by BP, Halliburton, and Transocean would almost certainly have prevented the blowout by improving the ability of individuals involved to identify the risks they faced, and to properly evaluate, communicate, and address them.
Update: The market appears to have grasped that its optimism was premature -- BP's share price closed down today by a penny.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.