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10.07.08
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The Unwanted Investment
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By Sergei Balashov
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The Russian oil and gas industry has always been the most attractive for foreign investors, and it is no wonder that the biggest cash inflows Russia has ever seen have been recorded in this field. The second largest investment after the Sakhalin projects, BP’s joint venture with Tyumen Oil Company, TNK-BP, was set up during the period of transition in the government’s approach to handling foreign presence in the strategic fields of the economy and regulating the oil and gas industry.
TNK and BP merged their assets in 2003 to create what is now Russia’s third biggest oil producer and the world’s 10th largest private oil company. That was the same year when the owner of Russian oil major Yukos Mikhail Khodorkovsky was jailed for tax evasion and two years before Roman Abramovich sold Sibneft to state-owned Gazprom. The assets of the dismantled and bankrupted Yukos were auctioned off to Rosneft, another state owned business entity.
The point was clear: The Russian government became eager to regain control over the country’s strategic resources in view of the skyrocketing commodity prices. The unannounced campaign continued in 2006, when Royal Dutch Shell, Mitsubishi and Mitsui were pressured into selling half of their stakes to Gazprom, making it the holder of 50 percent plus one share in the project.
To lay down the law and save the state and the present and potential investors, further trouble legislation was passed permitting foreign investors to participate in oil and gas companies and projects only as minority shareholders.
“This law was propelled by the establishment of TNK-BP,” said Uralsib Chief Strategist Chris Weafer. “This was the last such deal before the government seriously looked into the energy industry.”
TNK-BP, which is half owned by British Petroleum with the other 50 percent controlled by Mikhail Fridman’s Alfa Group, Leonard Blavatnik’s Access Industries and Viktor Vekselberg’s Renova was seen as the next target.
The company was experiencing some tension with the government. In 2007, the company had to sell its stake in Kovykta gas field to Gazprom for over $700 million after receiving warnings of a possible license revocation due to the failure to meet the production demands outlined by the license. In early 2008, the government opened an investigation against a TNK-BP employee, raiding the head offices and clogging the company’s operations.
The heat is on
The real trouble for TNK-BP came in 2008. Yet, contrary to the expectations, it did not come from the Kremlin, but rather from within the company itself.
In late May, AlfaAccessRenova (AAR), the consortium of the Russian shareholders, unsuccessfully tried to ouster CEO Robert Dudley. The poor performance of TNK-BP was cited as the main premise for that while BP stated Dudley was staying for good.
“Analysts regard TNK-BP as one of the market leaders,” said Vladimir Buyanov, BP press secretary in Moscow. “Robert Dudley is portrayed as if he was some sort of a czar in the company, while I don’t see how a foreign manager could be in this position in Russia. Fridman and Khan are both members of the board of directors, so his [Dudley’s] influence has been exaggerated.”
TNK-BP’s profits in 2007 amounted to $5.3 billion, a 21 percent decline since 2006. Oil production remained at the same level last year, rising by just 0.04 percent.
“The board of directors in any other country would have fired their CEO a long time ago in this kind of situation,” chairman of the board of directors of TNK-BP Mikhail Fridman said at an Interfax press-conference.
BP states these numbers have nothing to do with Dudley. “The numbers have been presented by the Russian shareholders incorrectly,” said Buyanov. “I don’t know why they’re comparing them to 2006 when TNK-BP sold large assets Udmurtneft and Saratovneftegaz, which explains any declines that have occurred over the past two years.”
Without the proceeds from the sale of Udmurtneft in 2006, the net profit increased to 25 percent.
“Dudley has been a good manager, he was key in the reorganization of the company in 2004, which subsequently allowed minority shareholders to get their share of profits,” commented Buyanov.
An attempt to fire Dudley was made in July, however 3 of the 5 voting directors struck down the motion put forward by Vekselberg.
When explaining the missed opportunities that have occurred under Dudley’s leadership, Fridman drew a comparison to another Russian oil major Lukoil. The capitalization of the two companies was roughly the same in 2003. Now Lukoil’s market price is about $90 billion while that of TNK-BP is more than half less at $38 billion. BP has been accused of running TNK-BP as an affiliate rather than letting it develop as an independent company. Lack of foreign expansion was cited as one of the reasons for that.
“We don’t have any projects abroad except in Ukraine,” commented Fridman. “If we were operating as an independent company we’d be developing like Lukoil,” he said.
“Lukoil has a free float of 70 percent, while for TNK-BP it’s just 5 percent, which in part explains the difference in capitalization,” said Valery Nesterov, analyst at Troika-Dialog. “Boosting capitalization could be a hidden purpose of this row, as both sides are interested in it. The Russian shareholders would be more interested in it [boosting the market price]; if they really do have to sell their stake, they’ll get more money. There is a huge difference between, say, $5 and $10 billion.”
“While it wouldn’t be correct to compare Yukos and Sibneft to TNK-BP, these two companies aimed at raising capitalization to increase their market value and selling price,” commented Nesterov. “The notion that the company’s performance has been poor is quite dubious. Both sides aren’t saying much about what’s been going on and the truth, as always, is somewhere in the middle.”
Changing ownership structure is considered to be one of the factors that sparked the conflict.
“The two sides clearly cannot work together and this situation has been overdue for quite some time,” said Weafer. “This partnership lived on borrowed time and poor performance is just an excuse for what has been inevitable for the past few years – a restructuring of the company’s shareholders.”
Both of these trends point at a possible sale to a third party, which seems impending at this point. The only question is when and how it will be conducted. That is also how the state could come into play for the first time.
“Introducing a third party shareholder is a possible solution,” said Weafer. “It could be a state owned company, most likely Gazpromneft.”
“This is the general opinion in the market,” agreed Nesterov.
Investment outlook
Another question that has so far been under the radar is the possible impact this ordeal is going to have on Russia’s investment climate. Opinions here differ, as some say that it might discourage investment, but others think it will not as long as the government keeps sitting on the fence.
“It’s hard to tell, but I don’t see how it could have a positive impact,” said Buyanov. “From what I can read in the media now, it’s having a negative influence on investment.”
“While the conflict doesn’t go beyond TNK-BP, there won’t be any kind of an impact,” said Nesterov. “The government is not siding with either party, which is good.” The market itself isn’t flexible enough to suffer from any damage on investment ratings that might be inflicted. “There isn’t much of a choice for investors as to where to go,” said Nesterov. “They might get upset at first, but they always end up coming back. If we take countries like Venezuela, where the oil industry got nationalized, they just had to adjust to the new environment and the new legislation. They took the new risks into account and got used to it. That’s how it goes.”
“After all, Russia is a sovereign country,” he added.
“The story had produced lots of negative headlines, and the American and British decision makers are looking at them, and it impacts the investment decisions they make,” said Weafer. The timing here remains crucial. “It will become a big deal if it drags along for too long, but the timing for the government is perfect, for if this story happened in two years, the consequences would be much worse.”
Mikhail Fridman has openly stated that he wants it to be over as soon as possible, which would be good for both sides. Yet, as of now, no end is in sight. That’s where an alternative solution comes into consideration.
“If the negotiations approach a dead end, they [the shareholders] might try to calm it down by filing for arbitration, which will most likely happen in the end of July,” commented Weafer. “This could go on for months, and the result of it would most likely be the same: the companies would be advised to introduce a third party shareholder. This temporary solution is the other possibility.”
Should the analysts be right and Gazpromneft gets a major stake in the company, it will signal the lesson of foreign capital’s influence on the Russian oil and gas sector, bringing the state back in control of the country’s assets. This time, however, it will happen naturally without any direct involvement.
“The government did not start it, but it will most likely show up for the final act,” said Weafer. |
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