BP Could Lose $20 Billion to Gazprom

Gazprom is moving to take control of BP's Russian oil fields.

Gazprom, Russia's government-owned energy company, already had plans to buy a stake in British Petroleum's Kovykta gas field. And now, with rumors circulating that BP (BP) is being bullied out of its Russian enterprise, Gazprom (OGZPY.PK) could be planning to buy a majority stake in TNK-BP, the joint venture between BP and four Russian billionaires.

The Russian government in general, and Gazprom in particular, has a history of forcing foreign oil and gas companies out of local fields through corporate and legal harassment and tax hikes. The government hasn't gone so far as to say, "leave Russia to the Russians," publicly, but you can imagine the sentiment being passed between cabinet ministers and police chiefs as they rifle through TNK-BP's Moscow offices (which they did a couple of weeks ago).

Government officials accused a TNK-BP employee of industrial espionage to gain access to its corporate headquarters, and the company is currently under investigation for tax evasion and environmental violations. TNK-BP could very well be guilty of all three accusations, but so is every other corporation in Russia, where corruption runs rampant and bribery is sometimes the only way to receive legal approval.

BP owns 51% of its Russian joint venture, and TNK-BP contributes about a quarter to the company's total yearly oil and natural gas production. Its stake is worth about $20 billion, as far as analysts can tell.

TNK-BP's other owners, Russian billionaires Viktor Vekselberg, Len Blavatnik, Mikhail Fridman and German Khan, agreed not to sell their combined 50% stake in the company before 2008… No wonder Russia's enforcement agencies just discovered an interest in TNK-BP's legal dealings.

Convincing the Russian owners to sell shouldn't be very hard for Gazprom. The company wields a lot of government clout (or maybe at this point I should say the government wields a lot of Gazprom clout), and any billionaire worth his Solikamsk salt (look it up) knows that staying on the good side of the Kremlin is more profitable than any minority stake in a foreign oil venture.

All that's left is for Gazprom to wrench away 1% of BP's portion of the company to gain majority control — that's if its willing to give BP nearly half the profits.

Gazprom's eventual goal could be to force BP out of the country altogether. But with global oil supplies growing scarce and harder to extract, the world's third largest energy company will fight tooth and nail (or possibly hammer and sickle) to keep its hands on a healthy supply of oil and natural gas, even if it is on the other team's home turf.

As I've said before, don't bet against Gazprom. Even with the noble British Empire behind BP, I'd still stay on the Russian side of this potential fight.

Disclosure: None

Comments

[Onlooker:]

Finding good opportunities in E&P has become harder as you need to factor in that the more successful the company becomes, the more the government is likely to expropriate the asset from that company. Even smaller companies such as Urals, Imperial, et al, have all faced the same situation. Perhaps this is what makes Gazprom a buy.

2008 Apr 09 07:48 AM

[Sanibel:]

I think it would be unethical to invest in Gazprom after BP is bullied out of Russia by the Russian government. Investors should not reward bad behavior by a government as corrupt as the Russian government.

2008 Apr 09 08:47 AM

[ViewFar:]

While that is all fine, investors ultimately go for potential valuation. If it means Gazprom gets +20Billion, this would ultimately reflect in the share price...

2008 Apr 09 09:21 AM

[John-Donovan:]

From all that I have read this looks very much like a repeat of the Russian goverment tactics used against Shell in relation to the Sakhalin-2 project. I refer to the use of Russian "Special Services", plus the involvement of the so-called "Kremlin attack dog" Oleg Mitvol alleging environmental violations and and course Gazprom waiting in the wings to take a controlling interest.

I played a key role in the Sakhalin2 affair as I supplied the Shell insider evidence to Mitvol which he used in support of a threatened $10 billion lawsuit for alleged environmental damage (later upped to $50 billion). As can be seen from the articles below which include an interview with Mitvol, it was the ONLY evidence quoted by him.

www.shellnews.net/imag...

www.shellnews.net/imag...
(see page 4)

For reasons that I will not disclose here, it became obvious to me that the Russian moves against Sakhalin Energy were disingenuous.

Shell has now acknowledged that the Gazprom takeover reduced its reserves by 405 million boe. If calculated at $100 per barrel, the evidence I supplied cost Shell over $40 billion in lost revenues.

John Donovan
royaldutchshellplc.com

2008 Apr 09 09:33 AM

[USER 118677:]

As Russia does with their takeovers, watch China kick out investors after they set up businesses for them. They use our money, expertise, etc. then when they are making a profit, they will take the companies for themselves. Very risky investments.

2008 Apr 09 09:35 AM

[Patient:]

Stephanie,

First of all to get credibility an analyst should check the facts before jumping to conclusions. I am both BP and Gazprom shareholder I tend to read the documents and study history of the deals.
1) BP had never owned 51% as stated in the article
2) BP investment was 50% that is a big difference:
• invested $7bln 5 years ago
• received more than $10bln in dividends ca, 28% yields
• sold Kovykta gas field (still undeveloped for $800-1000 mm vs. cumulative investment of ca. $400mm) – not exactly a robbery
• rumors says Gazprom offeres $15-20 bln for 50% stake - that would mean 6 times increase on the initial investment (5 year IRR – 44%) – the best investment BP ever made.
3) Sidanko did use questionable tax optimization schemes and had a ‘reserve” for exactly that purposes.

I understand that is much easier to copy and paste WSJ with catchy title than to perform a real analysis.

BTW how did you come up with $20bln loss?


Sanibel:

It would be nice to know your criteria of corruption.

I am somewhat familiar with Russian goverments and by any standard corruption decreased significantly over last ten years.

As an ethical investor you should have divested Shell in 90’s when they were quite happy to deal with corrupt incompetent Yeltsin government officials rushing to sell the country piecemeal. Shell had a history of relying on corrupt regimes to get cheap access to resources (Shakh in Iran) and totally knew the risk it was taking. And as in the case of BP it didn’t have a loss from the sale of 50% just legal double digit return instead of illegal triple digit.

2008 Apr 09 12:58 PM

[Gandalf:]

Anyone who thinks that Gazprom shareholders will get a benefit from the take-over from BP is kidding themselves.

Gazprom is not operated for the benefit of shareholders, it is a creature of the Russian Gov't which will find a way to reap the benefits before the shareholders do. Buy Gazprom at your peril!

2008 Apr 09 01:57 PM

[Onlooker:]

User 164820, agreed, most NOCs, if not all, are not run for the benefit of shareholders. But that does not mean as a shareholder you can not benefit from being one. You need to make educated guesses as to whether such an investment is better than one in an IOC.

2008 Apr 09 02:03 PM

[Patient:]

Some of my colleagues (who make their investment decision based on articles in Economist shorting oil $7) made fun of me after I bought Gazprom at high mark of $1.9 following 100% run.

I still keep smiling and remain a shareholder of the company that instead of paying millions in bonuses to incompetent CEOs and cooking their books pays dividends to millions of shareholders. I guess you prefer privately run Enrons, Bear Sterns etc 

2008 Apr 09 02:17 PM

[dparkins3:]

As Patient has pointed out all these Western leaches have had a profitable return in Russia. Buying assets on the cheap in a country in dissarray. No longer. Russia is back on all those who took advantage of her weakness will be paying the piper.

2008 Apr 09 03:40 PM

[adamnb:]

Dear Patient:
Good points. I too bought Gazprom in '98 after the Russian ruble collapse, when a friend who worked for Cargill in Russia, told me that Russia would never see business come back again and it was all over. I immediately went on a search for how I could buy Russia's mineral assets, and believe me in those day, it wasn't easy. My Merrill Lynch broker laughed at and actually suggested I buy WorldCom, a company that he believed belonged in everyone's portfolio. My belief then as now is that no matter whether the Kremlin falls into the sea, the world will still have to buy Russian oil and gas. Proven reserves are all that matter in the marketplace. I also bought in below a dollar, also the same for Lukoil.

2008 Apr 09 06:30 PM

[SVB:]

Len Blavatnik does business in Russia, but he is NOT Russian. He WAS born in the Soviet Union, but left when he was young and has been a US citizen longer than he was a Soviet citizen (anyone leaving the USSR in those days had to give up his/hers Soviet cisitzenship). Calling him Russian is like calling Kissinger German.

2008 Apr 10 11:20 AM