by Marin Katusa
Exxon Mobil is no longer the world's
number-one oil producer. As of yesterday, that title belongs to
Putin Oil Corp – oh, whoops. I mean the title belongs to Rosneft, Russia's
state-controlled oil company.
Rosneft is buying
TNK-BP, which is a vertically integrated oil company co-owned by British oil
firm BP and a group of Russian billionaires known as AAR. One of the top-ten
privately owned oil producers in the world, in 2010 TNK-BP churned out 1.74
million barrels of oil equivalent per day from its assets in Russia and Ukraine
and processed almost half that amount through its refineries.
With
TNK-BP in its hands, Rosneft will be in charge of more than 4 million barrels
of oil production a day. And who is in charge of Rosneft? None other than
Vladimir Putin, Russia's resource-full president.
TNK-BP has been an
economic dream, producing many billions in dividend payments for its owners –
but it has been a relations nightmare. The partners have fought repeatedly. In
2008 Russian authorities arrested two British TNK-BP managers amid a dispute
over strategy that forced then-CEO Bob Dudley (who now heads BP) to flee Russia
– and that is just one of many partnership scandals.
The writing has
been on the wall for TNK-BP since this time last year, when one of the AAR
billionaires quit his role as CEO of the venture and declared that the
relationship with BP had run its course. Since then speculation has raged over
who might buy into the highly profitable venture.
Now we know: Rosneft
is buying the whole thing, in a two-part deal. In the first part, Rosneft is
acquiring BP's 50% stake of the joint venture in exchange for cash and Rosneft
stock worth $27 billion. The deal will give BP a 19.75% stake in Rosneft. In
stage two, AAR would get $28 billion in cash for its half, though this deal is
not yet finalized.
Finalized it will
be, however, because the billionaires of AAR are now eager to
sell, rather than remain in a joint venture with the powerful Russian oil
company. Rosneft gained much of its current heft at the expense
of another Russian oligarch whom Putin threw under the bus, and the
billionaires of AAR know they could easily meet the same fate if they try to
partner with Rosneft as equals.
If it all comes to
pass, Rosneft's daily production will jump
to some 4.5 million barrels per day – enough to put the Russian firm neck and
neck with Exxon in the race to be the world's top oil producer. And the deal that seals it will be
worth something like $56 billion – for comparison, Nike is worth $34 billion
and Kraft only $27 billion. If the TNK-BP deal goes through, it will be the
largest in the industry since Exxon bought Mobil in 1999.
Numbers
like that deserve a little contemplation. Russia
is spending a heck of a lot to buy its own oil production – smells like
nationalization to me. And with Vlad Putin – the most resource-driven leader in
the world today – behind the controls, I dare say we're witnessing the
"Saudi Aramco-ing" of Russian oil.
Putting
Putin in a position of even greater resource power can only lead one place: to high oil prices and an amazing bull market in energy.
What's
In It For BP
Russia has been a pretty profitable place for BP, and while BP is tired of dealing with the drama within TNK-BP, the British firm definitely wants to stay in Russia to participate in developing the country's vast northern oil and gas potential.
A cash and shares deal gives BP a nice ownership stake in Rosneft, which is the best way to profit from Russia's immense untapped oil potential – because Putin will ensure Rosneft gets first dibs at prime opportunities. Depending on the size of BP's slice, the company would likely also get a seat or two on Rosneft's board. That is as important as anything else, because it would put BP personnel in regular, direct contact with Igor Sechin, the CEO of Rosneft, who has a significant say in Russian energy policy.
In general, a role in Rosneft would also allow BP to pursue closer ties with a Kremlin that exerts a much tighter hold on the oil industry than it did in the 1990s, when BP first invested in Russia. And anyone who wants to operate in Mother Russia has to have an inside track to the Kremlin – or you are likely to find yourself unexpectedly kicked to the curb.
Putin's
Plan Is Working
Rosneft has grown
dramatically in the last ten years – not by chance, but because Rosneft
is Vladimir Putin's vehicle to reassert state ownership over a fair chunk of
Russia's oil fields. The most famous example happened in 2003,
when Putin charged privately held producer Yukos Oil with a $27-billion tax
bill that bankrupted the company. The Russian president then handed Yukos' oil
fields over to Rosneft, immediately boosting Rosneft's daily production from
400,000 barrels to 1.7 million barrels.
It was
blatant nationalization. Yukos' chairman and founder, Russian
billionaire Mikhail Khodorkovsky, was convicted of fraud and sent to prison.
Overnight, Rosneft ballooned from a small producer to Russia's biggest oil
company.
With a
snap of his fingers, Putin had created a national oil giant, a
vehicle through which he could pursue his plan to reassert Russian influence in
the world by controlling other countries' energy needs. The pending TNK-BP deal
is simply the next step in this plan. If Rosneft does buy TNK-BP, the state oil
giant will pump almost half of the barrels of oil produced in Russia.
That is
a massive amount of oil. Remember, only Saudi Arabia produces more
oil than Russia; and no country in the world exports more oil than Russia. The
country is an energy superpower – and by gradually nationalizing Russia's
energy resources, Putin is tightening his grip on Europe's energy needs.
However,
Putin knows he can't quite do it alone – his country doesn't have enough oil
and gas expertise. Without the right expertise, production
will tank, and Putin's whole plan will be derailed.
History proves that
point. When Saudi Arabia nationalized its
oil industry in 1980, the country was producing more than 10 million barrels of
oil per day. Within five years, production had fallen by more than 60%.
For Putin, that's
not an option. That's why he is encouraging BP to stick around – Rosneft needs BP's technical
expertise in order to tap into Russia's huge reserves of unconventional tight
oil and shale gas. Having BP as a significant shareholder also lets Putin
continue the pretense that Rosneft is not simply an arm of the government.
But an arm of Putin's
government it is, and as Rosneft gradually takes control of more and more of
Russia's oil wealth, Putin's leverage on the international stage will increase.
Saudi Arabia may have struggled in its early years as an oil-producing giant,
but today the country hosts incredible clout on the world stage because of its
ability to open or close oil spigots and thereby influence global oil prices.
Europe
is reliant on Russia for oil and gas. To
be in control of other nations' necessary energy resources is to be in a very
powerful position – one that Putin has been working toward for more than a
decade.
He has
built pipelines that bypass troublesome countries and feed into needy markets. He
is cornering the uranium market by owning a large amount of primary production
and controlling 40% of global uranium-enrichment capacity, while leaving the
United States in need of a new nuclear-fuel supplier. He has increased Russia's
oil and gas production and encouraged unconventional exploration.
Gazprom,
the Russian state gas company, already has Europe wrapped around its little
finger. Russia supplies 34% of Europe's gas needs,
and when the under-construction South Stream pipeline starts operating, that
percentage will increase. As if those developments weren't enough, yesterday
Gazprom offered the highest bid to obtain a stake in the massive Leviathan gas
field off Israel's coast.
Gazprom
in control of Europe's gas, Rosneft in control of its oil. A
red hand stretching out from Russia to strangle the supremacy of the West and
pave the way for a new world order– one with Russia at the helm.
It is not as
far-fetched as it might seem – or as you might want it to be. If
Rosneft does buy both halves of TNK-BP, it will become a true goliath within
the global oil sector. All
the little Davids who rely on its oil will be at Putin's mercy. Same goes for
Gazprom as a Goliath in the continent's gas scene.
In this scenario, Russia
could choke off supply to raise prices. Putin could play oil- and gas-needy
nations off one another, forcing European nations to commit to long-term,
high-priced contracts if they want secure supplies.
Or
imagine this: Russia could join OPEC. Suddenly the oil cartel would control more than half of global oil
production and most of its spare capacity. With that kind of clout, the nations
of OPEC could essentially name their price for oil – and the rest of the world
would simply have to pay.
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