BP May Open Britain to Russian Gas

Additional ramifications of the BP-Rosneft deal are now coming to light.  With the purchase of TNK-BP by Rosneft, BP's Russian partners have agreed to end their legal battles with British Petroleum.  Sources claim that the two sides agreed to settle all their disputes after BP  made a $325 million payment to the Russian consortium AAR.  Supposedly, this move has been taken to give BP the freedom to pursue the development of Arctic oil.  "BP is not taking an equity position in Rosneft as a portfolio investor," said chief strategist at Sberbank CIB Chris Weafer.  "they are looking at a future relationship through which they can grow production and reserves in Russia."

It appears, however, that this deal has also cleared the boards for BP to work with Gazprom to bring Russian natural gas to Great Britain.  AAR had previously taken the position that their partnership with BP mandated all BP business opportunities in Russia be run through TNK-BP.  With all claims settled, sources report that the consortium has relinquished all claims on BP's future Russian activities.  That could include moving into the natural gas market.  Gazprom's  Chief Executive Alexi Miller reported in June that BP was interested in participating in an expanded Nord Stream pipeline, one that would carry product to Britain.

Such a move is a  questionable investment decision by the British company, given the plummeting price natural gas is commanding, and the large quantities of liquified natural gas (LNG) coming on the market to compete with pipeline gas.

Battle of the Billionaires

The BP-Rosneft share swap that opens up a large swath of the Artic for oil exploration is under judicial challenge. BP's non-Rosneft partner in Russia is the joint enterprise TNK-BP. Major shareholders in the latter company are in a consortium, known as AAR, and they include Alpha Group's Mikhail Fridman as well as fellow oligarchs German Khan, Viktor Vekselberg and Leonard Blavatnik. These shareholders claim that the BP-Rosneft deal is in violation of the TNK-BP agreement that gives the partnership the right of first offer for any BP projects in Russia. AAR has filed a lawsuit in the High Court of Justice in London, who issued an injunction against the deal until March while the court examines the facts of the case.

Analysts do not believe that the oligarchs want to halt the Rosneft deal, especially since it has the blessing of the highest levels of Kremlin leadership. Instead, the legal challenge is designed to obtain concessions from the company or the government. Chris Weafer, chief strategist at UralSib, said either TNK-BP wants access to the new production, or AAR wants the government to buy their shares of TNK-BP. http://www.themoscowtimes.com/business/article/billionaires-take-bp-deal-to-court/429896.html

TNK-BP's legal counsel has notified David Peattie, one of BP's representatives on the TNK-BP board, that he was in breach of his duties because he had participated in the negotiations with Rosneft. TNK-BP said if Mr. Peattie did not refrain from future talks, that TNK-BP would begin legal action against him. In the meantime, the partners have announced that they will block the final dividend payment to BP if the controversy is not resolved. http://www.theaustralian.com.au/business/news/aars-russian-billionaires-consider-stopping-18bn-dividend-payout/story-e6frg90o-1225997210246

The stakes involved in the controversy are huge. Russian Deputy Prime Minister and Chairman of Rosneft, Igor Sechin, estimates that the initial blocs Rosneft-BP will explore may hold 35 billion barrels of oil and 10 trillion cubic meters of gas (equivalent to 63 billion barrels of gas). http://www.europeanenergyreview.eu/index.php?id=2731 If these estimates are correct, the field holds roughly one third more oil and gas than the North Sea, and would increase Russian gas reserves by 25%.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.