For foreign oil companies, the political climate in Russia is as inhospitable as the weather. UK’s BP Plc. is the latest to find itself locked in a mounting battle with its Russian partners, this time over control of its 50:50 TNK joint venture.
BP is at the centre of the latest Kremlin offensive to bring oil assets back under state control. Russian shareholders of TNK-BP, the joint venture, are demanding the ouster of the company’s BP-appointed boss Robert Dudley, as the Russian government is muscling in on the company.
The Kremlin is piling on the pressure with accusations of tax evasion and espionage by BP’s employees. Investors are starting to fear the worst, and have marked BP’s shares down by 10%, or about £11 billion(about Rs92,378 crore), in the last two weeks.
This looks overdone. True, Russia accounts for nearly a quarter of BP’s current oil production, and around 19% of proved reserves. But it’s a much smaller portion of BP’s overall value.
TNK contributed just 5% to the company’s cashflow last year. Russian barrels are worth less to BP because the Kremlin rakes in most of the profits when the oil price trades above $40 (Rs1,706) a barrel.
As a result, BP’s Russian stake is only worth about £6.1 billion, according to JPMorgan estimates, or far less than the drop in the share price.
Even if BP were to shut up shop in Russia tomorrow, the investment can hardly be considered a disaster. It paid $8 billion in a combination of cash, shares and assets to invest five years ago. It hasn’t had to put in a single cent more, since all the capital expenditure of the venture has been paid for from TNK´s cash flow. In the meantime, BP has taken out about $9 billion in dividends.
But total expropriation is an unlikely scenario. The Kremlin hasn’t kicked out foreign oil companies out of Russia altogether, but has instead muscled its way into majority control.
For BP, taking a back seat in the Russian venture might not be such a bad deal.
Shell got a good price last year when it was forced to sell control of the Giant Sakhalin-2 gas project to state-owned Gazprom. Plus, it would stop distracting investors from more important assets in warmer climates, such as the promising Thunderhorse in the Gulf of Mexico.