On Friday, a Swedish arbitration court ruled to keep in place the
injunction blocking BP's deal with Rosneft. Igor Sechin, Russia's deputy prime
minister in charge of energy policy, responded by giving both parties a
deadline of Apr. 14 to resolve the issue or risk sanctions. Sechin also happens
to be the chairman of Rosneft and, since last week, is one of the officials
under pressure to either leave government or leave the board of the company.
In addition to this new deadline from the Russian government, BP is in a hurry to resolve the issue as it is affecting the company's share price. Some media have already mentioned the prospect of BP becoming a takeover target if the valuation stays low.
So, what happens now? In the words of former U.S. Secretary of Defense Donald
Rumsfeld, we are in the territory of the “known knowns,” “known unknowns” and “unknown
unknowns.”
The known knowns
We know that this deal is too important for Russia's long-term strategic
interests to be allowed fail. Russia wants to remain the world's biggest energy
producer. That is the country's principal competitive advantage in geo-politics
and as it looks to increase trade and investment access. Russia wants to keep
oil production as close to 10 million barrels per day as possible and, given
the likely decline in West Siberia over the next 10 years, it can only ensure
this by opening up new exploration territory such as the Arctic.
Russia also wants to be at the forefront of Arctic exploration, as it sees this
region as being mainly in its backyard. Realistically, the Russian producers do
not have the technology or experiences to go it alone in new environments such
as the Arctic and, therefore need the partnership of international majors such
as BP.
Russia also wants to conclude the deal with BP because, along with Shell, the
company's previous deals in Russia are regularly cited by critics as an example
of bad investment experience and justification for the high-risk premium. For
BP to make such a large new commitment to Russia allows the government to show
that the rules of the game have improved.
We also know that BP wants, if not needs, this deal. Life will be increasingly
difficult for BP in the United States, and Russia is one of the very few
locations where the company can go to access new production growth. Otherwise,
it risks a permanent downgrade of its valuation and a more serious threat of
takeover hanging over it.
Finally, a clear "known" is that the AAR shareholders do not want to
be left on the sidelines with an investment that is going nowhere. If the
original deal were to proceed as announced, then TNK-BP would be parked into a
cul-de-sac in the Russian oil industry: good production and cash flows but zero
growth potential. AAR wants to be either brought into the deal, so it can
access future growth, or to have an exit route opened for them. AAR's position
has been greatly strengthened by the Arbitration Court ruling.
The known unknowns
We know that by far the most likely outcome is that a deal will be worked out.
The alternative is that the state/Rosneft dump the deal and try to work with
another international oil major, but there are many obvious reasons why that
would not work. What we are almost certainly looking at is a BP-Rosneft deal
with a TNK-BP accommodation, either in or outside the formal deal.
There are several possible scenarios:
BP may agree to drop out of the original deal with Rosneft and allow TNK-BP to
take its place. That is unlikely, as the reason why the government wants an
international oil major, such as BP, is so that they can use their technology
and expertise. TNK-BP does not have deep-water experience and would have to
"contract" BP to actually do the work.
The original deal could be re-worked so that TNK-BP, as an independent entity, may be admitted as a third partner to the joint venture. That's possible, but that it would be an obvious political rather than business solution.
The third possibility is that Thursday's deadline passes and we then start
looking at an exit route for the AAR shareholders from TNK-BP. AAR has clearly
stated that it is not looking for an exit, but this is an obvious possibility
if they cannot get into the BP-Rosneft deal. The main shareholders in TNK have
significant, and growing, business interests elsewhere and the oil industry is
now dominated by the state. There are several sub-scenarios as to how an exit
route could be opened for AAR, including either an outright sale or a share
swap that would allow for a longer-term exit strategy. This would most likely
with a Russian state buyer/partner rather than with BP.
The unknown unknowns
What we don't know is why the issue ended up in arbitration and why it is on
the brink of either falling apart of being subject to a major revision. BP will
have done its due diligence and understood the risk. But, for reasons we are
not aware of, BP management assumed that AAR would not take the action it has
or would have been persuaded against it. There are many conspiracy theories as
to what happened and what alternative game may be now playing out in the
background. How those "other" issues affect the final outcome is pure
guesswork at this stage.
Chris Weafer is chief strategist at Uralsib.
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