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.
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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?
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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.
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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.
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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).
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Bets on Medvedev: We have held back on making a call on the 2012 Russian presidential elections given the uncertainty and the many months before the actual date. But Stefan Wagstyl at the Financial Times has taken the first leap, so we will too. Like Wagstyl, we expect President Dmitry Medvedev to stay on for another term; we do not foresee Prime Minister Vladimir Putin returning to power -- at least just yet. Stefan explains his thinking as simply that "the current division of labor has served the two men and the country reasonably well," and why mess with success? There could be more, such as that Putin grasps that Russia needs more -- much more -- than the old, tough ways. It needs to finally do what it takes to make Russia innovative. Whatever the case, the signals are there for a continued Medvedev presidency. It's been clear from the outset that the Putin-Medvedev, senior-junior partnership (in that order) is a genuinely collaborative one. There naturally are disagreements, but they are settled and life goes on. The methodical and cautious Medvedev does not throw public tantrums, nor does he bet short. Medvedev is demonstrating decisiveness -- in Libya, on the BP-Rosneft deal -- because he actually does expect to stay on. That Putin did not step in and rescue state-owned Rosneft -- and Igor Sechin, his right hand man -- shows that he, too, feels the right man is in the Kremlin. Putin will retain his overarching influence. But our bet is that there is no shift in the tandem.
... and more really risky oil deals: The immediate message of the apparent collapse of BP's attempted coup in Russia is that Kremlinology is alive and well -- we still puzzle over what is going on underneath Churchill's carpet. But the larger lesson is that BP was not actually acting hastily -- while embarrassing, CEO Bob Dudley was simply the most visible exhibition of a trend that we will watch play out for the coming two and more decades. That is a shift to riskier and riskier deals in riskier and riskier places, with the prize of the accustomed tens of billions of dollars in profit to the winners.
Russia, writes Matthew Hulbert at EurActiv, is actually "one of the few sensible bets" for a Big Oil company among a suite of opportunities around the world including east and west Africa, ultra-deep water and the various parts of the Arctic. "The 'Arab Spring' is a reminder that the wagers are getting higher and higher for upstream players," Hulbert says. At the Financial Times, Christopher Thompson writes that in fact the notion of risk has wholly changed, with a surge of investment in frontier plays including into badlands such as Somalia.
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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.
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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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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.
Working with NOCs: Where you find people cornered and trapped, you also encounter strange bedfellows. So it is in Russia. At Davos, Bloomberg conducted an interesting interview with Peter Voser, CEO of Shell (video above). Voser noted that BP and ExxonMobil are attracting much attention this week for their collaborative deals with Russia's Rosneft, but that Shell embraced Russia awhile back, last year for example signing a global deal to explore alongside Gazprom. The strange part of course is that all three Western oil majors have been stung by Russia, in BP's case numerous times. So why are they back for more? Because if you want access to gigantic oil and gas fields, there is almost nowhere else to go. In his interview, Voser also discusses the potential for China's energy appetite to be much lower than currently projected, thus shaking up current economic models.
A Russian leverage scheme: Speaking of Russia, the oligarchs behind TNK-BP have sued in London to halt BP's share swap with Rosneft. The oligarchs say they've been left out in the cold, but one might wonder at the risk of challenging Prime Minister Vladimir Putin - who blessed the deal - and his energy maven, Igor Sechin. Yet it seems to us that the strategy is clear - Mikhail Fridman, the lead oligarch in TNK, isn't trying to stop the deal, but position TNK for an ultra-big payday by selling out to BP and Rosneft.
Oil price nirvana: Are we getting the best of all worlds? Oil prices have been steadily falling, thus helping consumers at the gasoline pump. Yet the share prices of the major oil companies have been rising - both ExxonMobil and Chevron have been setting new 52-week highs - hence cheering the moods of Wall Street. The Financial Times pours a bit of cold water on the party, noting that Exxon is trading 16 percent off its May 2008 peak, and BP 24 percent off its own. As for oil prices, they have seemed pumped up with air by traders, who are not going away, and are bound to return and try to push up the per-barrel prices into the $90s again.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.