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TNK-BP's confused future

BP and its Russian joint venture, TNK-BP, are feeling the heat again. It could herald the company's exit from Russia – or a new partnership with Gazprom or Rosneft. Derek Brower reports

IT STANDS out like a sore thumb. After the Yukos affair, the take-over of Sakhalin Energy and the rise of Russia's two dominant energy companies, TNK-BP's presence in the Russian oil and gas sector remains an anomaly. Increasingly, it looks like it might not last much longer.

There are three problems for TNK-BP. The first is that it is, after Lukoil, the largest privately owned oil and gas producer in Russia, but the only one half owned by a foreign firm. The second is the Kovykta gasfield. Despite an agreement last summer to sell control of the field to Gazprom, the deal has not been completed. The third problem is TNK-BP's share structure: BP owns 50%, but the other half is in the hands of three Russian tycoons, each with a different agenda for the firm. Depending on which theory you believe, one, or all, of these problems are behind TNK-BP's problems over the last two months.

Problems for BP

Those problems started in March when plain-clothes police arrived at the company's headquarters in Moscow to question executives at the firm. BP's nearby offices were also searched. The purpose of the raid, which triggered memories of tactics deployed by the authorities during the Yukos affair, was unclear, but may have related to an investigation into Sidanco. That company, BP's original partner in Russia, was eventually rolled into the TNK-BP joint venture when it was formed in 2003. The Russian tax authorities may be back for more data on the company.

Things became more serious when two brothers connected with TNK-BP were arrested on industrial-espionage charges (and amid accusations of CIA involvement). Visa difficulties for BP employees seconded to TNK-BP emerged soon after and the UK major recalled 148 of them to London.

Then there is Oleg Mitvol. The deputy head of Rosprirodnadzor, Russia's environmental agency, made his name last year when his investigation into Shell's operations at the liquefied natural gas development on Sakhalin Island led to almost $30bn of fines against the company and its partners on the project. The threat of the fines evaporated after the Sakhalin Energy consortium agreed to sell a controlling stake to Gazprom, Russia's state-owned gas company.

Since the Sakhalin affair, Mitvol has set his sights on TNK-BP. Last summer, he was part of an investigation into the failure of Rusia Petroleum, the company's subsidiary at Kovykta, to fulfil the terms of its development contract at the field. After threats to strip Rusia of its contract, TNK-BP agreed to sell its control of the field to Gazprom. Now Mitvol is to launch an investigation into TNK-BP's conduct at the Samotlor oilfield, in western Siberia. The "routine check" of the field, the company's largest, was due to happen this month, making uncomfortable timing for TNK-BP.

Whether the mounting pressure on the company is connected to Kovykta is a theory that could soon be tested: Gazprom's vice-president, Alexander Medvedev, said in March that the deal between the Russian gas monopoly and TNK-BP would be finalised by the end of April. Robert Dudley, head of the Anglo-Russian venture, says the company values its Kovykta stake at $1bn. Gazprom, it is understood, would like to pay between $0.6bn and $0.9bn.

However, analysts say it is more likely that the mounting pressure on TNK-BP is the result of the Kremlin's wish to see one of its energy champions capture control of the joint venture itself. In March, BP's chief executive, Tony Hayward, flew to Moscow, where he met both Gazprom and Sergei Bogdanchikov and Igor Sechin, chief executive and chairman, respectively, of Rosneft, the state-owned oil firm.

A good fit for Gazprom

Analysts suspect discussions centred on one of the two companies becoming BP's partner in TNK-BP. Indeed, one explanation for the delay in signing the Kovykta deal is the prospect that it could become unnecessary, should Gazprom buy a share of TNK-BP. In January, Medvedev said TNK's stake would "fit well with Gazprom's assets".

The emergence of Rosneft as a rival for the stake is a surprise. A report in the business paper RBC Daily claimed last month that negotiations with Rosneft could result in an even bigger surprise: an asset swap of BP's stake in TNK-BP for up to 15% in Rosneft. BP would be unwilling to sell its stake in TNK-BP – the Russian unit accounts for around 20% of the major's total reserves and 22% of its production. Nonetheless, Colin Smith, an analyst at Dresdner Kleinwort, points out that BP has already turned a profit on its original investment in TNK-BP, so would not leave Russia empty handed.

Renaissance Capital (Rencap), a bank, says three possible outcomes for TNK-BP have emerged: BP-Rosneft, BP-Gazprom and Gazprom-Rosneft. The possibility of the state-owned energy rivals collaborating might not be as strange as it seems. Rencap points out that Gazprom Neft (Gazprom's oil division) acquired a 50% stake in Tomskneft last year, despite Rosneft owning the remainder. Moreover, it might make sense if another theory – that Gazprom will eventually swallow Rosneft itself – becomes reality.

But the likeliest outcome remains Gazprom's purchase of the TNK side of the business. Valery Nesterov, an analyst at Troika Dialog, says Gazprom's interest could be sufficient to keep Rosneft out – although that will depend, he says, on who lobbies most successfully for the Kremlin's approval of any deal.

At the beginning of the year, an agreement between TNK-BP's Russian shareholders that none could sell its stake expired. With open season on the Russian half of the company, the latest negotiations may come down to price. TNK-BP's Dudley claimed last month that none of the Russian shareholders had plans to sell, but local reports say negotiations between Alfa, Access and Renova (AAR) and Gazprom have already taken place.

AAR values its 50% stake in TNK-BP at $30bn; Gazprom wants to pay $15bn, reflecting the market capitalisation of the company, which last month stood at $31bn. Troika values TNK-BP at $40bn, "so the starting price [for 50%] would be $20bn". Even within AAR, there is understood to be disagreement about the price, with Alfa's Mikhail Fridman trying to persuade Renova's Viktor Vekselberg, to lower his valuation to meet Gazprom's.

On the other hand ...

Another outcome is also possible. The Kremlin, says Nesterov, is increasingly unwilling to cause another showdown with a foreign company, so BP's future in Russia could be safe. Meanwhile, both Rosneft and Gazprom would find it difficult to finance a deal for a 50% stake in TNK-BP: Rosneft is carrying too much debt, and Gazprom is preoccupied with other large projects, even if the addition of TNK's equity production would help Gazprom Neft meet its strategic target of 2m barrels a day of oil production by 2020.

Deutsche Bank said in a research note last month: "We do not rule out an option under which TNK-BP continues to exist in its current format for the years to come."

In any event, financing could be the least relevant of the forces at play. If the Kremlin wants one of its companies to buy into TNK-BP, a deal will soon follow. "The role of politics is too big," says Nesterov. "It won't be shareholders who decide, it will be a political decision."

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