How Much Is Saudi Aramco Worth? It Depends On The Country's Institutions

Capital markets are harsh judges. They lay bare the immense social costs of the poorly-run and corrupt energy companies of the world, such as Gazprom, Petrobas, and Rosneft. We now await its judgement on Saudi Aramco.

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Confused Survey Says Two Russian Energy Giants Top Google And Apple In Corporate Transparency

Transparency International ranks Russia’s two state-owned energy giants in the middle of the top 124 world companies for “transparency” because both have adopted detailed anti-corruption rules. The rankings do not ask whether these companies actually comply with their rules. Stock market valuations show the nonsensical nature of the Transparency International rankings. Investors are not willing to bet on the Russian energy giants because they are non-transparent on the most important risks, and they operate as instruments of Kremlin domestic and foreign policy. As such, they must pay the price for Putin’s adventurism in Ukraine and elsewhere.

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Putin’s Reaction To Sanctions Is Destroying The Economy And China Won’t Help

Things are not going well for Vladimir Putin. The price of oil and the ruble continue to fall. Top Russian officials admit that the economy is in big trouble, despite Putin’s denials. Likely presidential candidate, Hillary Clinton, has declared that Putin must be contained. Putin’s counter sanctions are making things worse. The most ominous sign, however, is that Putin is weakening the foundations on which his power is based. He is cutting off foreign investment by bailing out his friends, and he is breaking the social compact on which his KGB-Mafia state is founded.

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Two Major Events in International Oil: Argentina's Nationalization of YPF and Exxon's "Hostage" Deal With Russia

One of the greatest Latin American success stories was the privatization of Argentina's YPF in July of 1993 against enormous political and labor opposition. The Kirchner government reversed  this hard-won success yesterday with its nationalization of YPF. The nationalized YPF will again become a bloated political rent-seeking machine to pay off Kirchner's supporters. YPF's expropriated partners (mainly Repsol of Spain) will get little.

At about the same time, ExxonMobil signed the only possible deal with Russia's national oil company Rosneft to jointly develop Siberia's energy reserves. The key section of the deal gives Rosneft properties of equivalent value in the United States. This time when Putin decides to expropriate ExxonMobil's investment in Russia, they can take back Rosneft's U.S. holdings. Putin has forced Western energy companies into such "hostage" deals. Let's see if they work.

I was Right All Along: BP ¼, Russia ¾

In my March 4 posting, I wrote that BP was about to be rolled by Russia again. On Friday, the debacle took place.

BP’s share swap deal with Russia’s national oil company Rosneft was supposed to give it a half interest in the development of rich Arctic offshore reserves. BP’s billionaire partners in its ongoing TNK-BP venture objected. BP had signed an exclusive agreement with them, and an arbitration court agreed. To go along, the billionaire partners demanded half of BP’s half. BP vetoed that offer at a TNK-BP board meeting in early March. BP had expected Putin to take care of the billionaires’ objections. He did not. Putting Khodorkovsky in jail was one thing, but the TNK billionaires are his friends.

BP now understands that what they were offered in early March is the best deal they will get.

My March 4 prediction was that BP would end up with a quarter of the deal (instead of a half) and Russia (Putin and the billionaires) would get the three quarters they wanted.

Low and behold, BP announced on Friday, May 6, that it would hand the deal over to TNK-BP (thereby reducing its share to ¼) with the hope that its Russian partner, Rossneft, would agree. Rossneft greeted BP’s offering with grumbling. Maybe BP will get ¼, but they will have to make further concessions to get even that.

This outcome will not endear Robert Dudley to his shareholders, who accuse him rightly of misreading Russian politics. It is also another cautionary tale about doing business in Russia.

More on BP in Russia: Predicted Final Score: Russia ¾, BP ¼

Friday and Saturday’s papers brought more news of BP’s travails in Russia and, I think, a great deal of misinterpretation. Whatever the case, BP’s chances do not look good.

Background: BP signed a stock-swap deal with Rosnet (Russia’s largest state owned oil company) to jointly develop arctic reserves, splitting the proceeds fifty-fifty. BP’s other Russian partnership (TNK, for short), of which BP owns half (but lost management control to its Russian partners’ strong-arm tactics), sued to stop the BP-Rosneft deal as violating the BP-TNK shareholder agreement. A Stockholm arbitration court has placed an injunction on the BP-Rosneft deal. While the injunction is in effect, BP cannot proceed with the Rosneft deal, and more than a billion dollars of dividends from TNK operations are held up as well. TNK offered to substitute TNK for BP in the Rosneft deal, but BP vetoed this proposal (casting the sole negative vote). Confusing to say the least! If the TNK proposal had been adopted, the Russian side would end up with ¾ of the BP-Rosneft deal and BP with ¼.

Press reports picture this as a power struggle between two Russian sides – Rosneft as represented by its chairman (and Russian deputy prime minister), Igor Shechin, and BP’s Russian oligarch partners in TNK, led by banking mogul, Mikhail Fridman. The delay in the BP-Rosneft deal is pictured as a defeat for the Kremlin and a victory for the private oligarchs. If there were such a power struggle, it would be lopsided. If Putin really wanted to end the controversy, he need only remind his oligarch friends what happened to Mikhail Khodorkovsky.

The outcome of this “power struggle” seems clear to me. BP will have to back down and accept a ¼ interest. The “Kremlin” gets one half and the “rogue” Russian oligarchs get ¼, while bringing little to the table other than their ability to scuttle the deal. This is by no means a defeat for the Kremlin: BP will give in voluntarily, and Russia will only have to give up one quarter of its “national treasures” to foreign interests.

BP should have learned its lesson last time. It should know by now that only foreign companies obey Russian shareholders agreements and international law. If a Stockholm court rules against a Russian partner, the ruling will be ignored or a way will be found around it. BP, however, must abide by the law.

BP should also have learned that there is no one on the Russian side really concerned about the Russian national interest. With this debacle, Russia’s reputation as an international partner will suffer again, but no one really cares.

The lure of its reserves are such that another BP will step forward. The deal will make Russia’s oligarchs richer and more powerful and the Kremlin insiders will get their rewards. Moreover, the turmoil in the Middle East has driven up oil prices again; so the Russian budget is in better shape. Who really needs foreign money?

BP’s New Russian Nightmare? Imagined Conversations

A meeting in the Senate Building of the Kremlin between Igor Sechin (Vladimir Putin’s Deputy Prime Minister and Chairman of the state oil company Rosneft) and Mikhail Fridman (Chairman of Alfa Group and President of the TNK-BP joint venture). Both are ultimate Kremlin insiders. They know each other inside out.

Sechin (to Fridman): We can understand that you and your associates want in on Rosneft’s deal with BP. Maybe you do have some kind of shareholder’s agreement with them that raises questions about our new deal with them. Exactly what do you suggest?

Fridman: Well, we propose to substitute TNK-BP in place of BP as Rosneft’s partner. This means that this “national Champion” project will be owned 75 percent by Russians and only one quarter by foreigners. BP really should not get half anyway. These reserves are Russian national treasures. If this is done, we’ll withdraw our objections to the deal, and everyone will be happy except BP.

Sechin: But we need BP’s capital and arctic drilling technology. What is to prevent them from withdrawing from the deal entirely?

Fridman: BP desperately needs this deal to replace the reserves it lost in paying for the Gulf spill disaster. Getting a quarter of the deal for them is better than nothing. We already know that BP caves in when we play hardball. They gave us the management of TNK-BP when we refused to grant their Robert Dudley (then President of TNK-BP) a visa and harassed their lawyers. They’ll cave again in this case.

Sechin: What if they don’t cave this time? Is there anything else we can do to be sure they will go along?

Fridman: It’s very simple. You can threaten to sue TNK-BP for damages to Rosneft if the deal does not go through. You know better than anyone how to get a huge fine out of our courts. As fifty percent owner of TNK-BP, BP is liable for half of this fine. That should scare them to death. Their liability could be as great as the Gulf coast spill. We can work out among ourselves the “damages” that we pay.

Sechin: But will not this be bad for our image among international investors? We need them now. Medvedev was already getting a lot of flak in Davos over the Khodorkovsky case. And the Hermitage Capital guy was mouthing off against Russia again.

Fridman: You should present this as a Kremlin split. After all we are private investors looking after our own interests. You can publicly warn us not to do this in the name of the Russian government. We’ll just ignore what you say, and the international press will play this as a real split between the Russian state and Alfa Group. We already have prepared as press statement for you. Here it is:

“I hope all the misunderstandings will be eliminated, but, if the deal fails, Rosneft will calculate its losses from the failed deal and will ask for compensation from those who would have inflicted the losses.”

Sechin: I think I can convince the Boss to go along with this. I assume there will be the usual financial arrangements.

Fridman: Yes, of course.

Sechin: One final word: This scheme may not work out as planned. BP may hold a wild card in its deck. If we conclude that you have to retreat, you will follow our orders. We need not remind you of what happened to your former colleague Khodorkovsky.

An imagined conversation in BP headquarters (London)

Dudley: It looks like the Russians have us backed into a corner. Our TNK partners have called a meeting in Berlin to approve the substitution of TNK-BP for BP in the BP-Rosneft deal. They want it in Berlin so their “independent” director Gerhard Schroeder (former German Chancellor) can give it the cover of respectability

BP lawyer: If there are fines, BP will have to pay as a law abiding company. There will really be no way to determine whether our TNK partners will also pay up.

Dudley: So what do you suggest?

BP lawyer: The only thing we can do now is not attend the Berlin meeting to avoid a quorum. Maybe we can think of something.

Both conversations are fictional. They may seem far fetched but anyone doing business in Russia encounters such things routinely. Even if these conversations never took place, they will be imagined by Western parties who know that the worst can happen to them in Russia.

BP, Putin, and Russian Oil: Will They Never Learn?

Robert Dudley, CEO of British Petroleum, and Igor Sechin, Russian Deputy Prime Minister and board chairman of Rosneft, announced a new mega-deal between BP and the state owned Russian oil company. Through a stock swap, BP acquires 10 percent of Rosneft in exchange for giving Rosneft 5 percent of BP. Together, the two companies will explore offshore tracts in Russia’s South Kara Sea. As a ten percent owner of Rosneft, BP, in theory, acquires over two billion barrels of oil reserves – enough to replace the reserves BP sold to help pay for its Gulf oil spill. The deal makes the Russian “national champion” oil company BP’s largest single shareholder. BP becomes one of Rosneft’s largest private shareholders (the state owns three quarters) along with Oligarchs Roman Abramovich and Oleg Deripaska. Deripaska, a survivor of Russian gang warfare over aluminum and nickel, has been banned from travel to the US due to his suspected ties with organized crime – an unlikely partner for the staid British company.

The BP-Rosneft deal reminds me of the Charlie Brown cartoon in which Lucy pulls the football away from Charlie Brown for the umpteenth time as he approaches to kick after solemnly promising that she will never do this again. Is this not the same Robert Dudley, the CEO of the TNK venture with Russian oligarchs, who was expelled from the country, was accused of violating Russian laws, whose employees were charged with espionage, and who saw a Russian oligarch appointed to his position – while Vladimir Putin looked on from the sidelines?

One news account of the deal points out understatedly that BP was able to acquire its ten percent share in Rosneft so cheaply due to the “political risk of investing in Russia,” reminding readers that Dudley himself had been expelled from Russia, that Shell was forced to cede its majority stake in its Sakhalin project, and that other foreign investors had been harassed out of Russia by the tax police or by threats from the prosecutor’s office.

What assurances does BP have that Russia will not again use its time-tested Lucy-Pulling-Away-the-Football trick? The BP announcement stresses that the deal was approved by Vladimir Putin himself. And none other than his trusted deputy, Igor Sechin (also board chairman of Rosneft), signed off. What greater guarantees could there be?

In Putin’s Russia, it makes little difference who signs and who approves! In the absence of a rule of law, a contract is what those in power say it is. Moreover, deals can always be scuttled in ways that leave those at the top who signed off blameless. Shell, which had a legal contract to produce in Sakhalin without a local partner, was deemed in violation of environmental regulations and was under immediate threat of losing its drilling rights. These same serious environmental violations disappeared overnight when Shell ceded majority interest in the project to Gazprom. Poor Putin, of course, was helpless. He could, not interfere in the legitimate work of his environmental protection agency. Similarly, Russian regulators used technicalities to abrogate ExxonMobil’s contractual right to market gas from its Sakhalin project outside of Gazprom’s export monopoly – another agreement approved at the highest levels of the Russian government.

The West has lectured Russia since 1991 on the importance of the rule of law. Actions, such as BP’s, tend to render these lectures hot air. No matter how badly Western energy concerns are treated, they (like the hapless Charlie Brown) will take another kick at the disappearing football.