7 June 2012
John Lough

John Lough

Associate Fellow, Russia and Eurasia Programme


BP's announcement that it intends to sell its 50 per cent stake in TNK-BP, its troubled yet strongly performing joint venture in Russia, seals the end of the biggest anomaly in the Russian oil and gas industry of the past nine years. It also raises important questions about the future shape of the sector as a whole in Russia.

BP's decision in 2003 to form an $8bn joint venture with the Russian owners of TNK (Alfa Group, Access Industries and Renova, known as AAR), was as audacious as it was well-timed. BP had already been through a bruising experience in Russia in the late 1990s when it bought a 10% stake in the oil and gas producer, Sidanco, only to find itself caught up in a conflict between investment company Interros and TNK that saw Sidanco's main producing asset put into artificial bankruptcy.  

Hailed as a bellwether investment that signalled the openness of a strategic sector of the Russian economy to foreign capital, TNK-BP quickly came to be seen as a one-off opportunity that would not be repeated. Within months of its creation, the structure of the Russian oil industry changed spectacularly with the arrest of Mikhail Khodorkovsky and subsequent dismemberment of his oil company Yukos, its key assets acquired by the state oil company, Rosneft. Under the guidance of Igor Sechin, Rosneft's chairman and a key associate of President Putin, Rosneft quickly became Russia's largest oil company. 

Early Warnings

Amid the excitement about the 2003 TNK-BP deal, one man offered a word of caution: then President Vladimir Putin correctly pointed out that running a 50:50 joint venture would not be easy. His words were prophetic. Despite considerable early successes at TNK-BP, tensions between the two sets of shareholders continued to simmer. Relations became increasingly acrimonious, resulting in open warfare in mid-2008 when TNK-BP's CEO, Bob Dudley, had to flee Russia after a campaign of harassment. The root of the conflict was ostensibly about how TNK-BP should invest for its future development. Ultimately and not unusually for a 50:50 joint venture, it was about operational control of the company.

In late 2008 a peace deal was struck. A new board structure and governance arrangements papered over the cracks as BP effectively accepted a reduction of operational control in the venture. TNK-BP continued to generate impressive dividends for its shareholders. This quieter phase of the company's development came to an abrupt end in January 2011 when BP announced a $16bn share swap with Rosneft as part of a strategic alliance to jointly explore the Russian continental Arctic shelf.

Despite assurances of Russian government support from Prime Minister Putin and the efforts of Deputy Prime Minister and Rosneft Chairman, Igor Sechin, the deal did not go through. The AAR consortium, led by its principal investor, Mikhail Fridman’s Alfa Group, again showed its formidable determination and ability to protect its interests. Overriding the previously powerful figure of Sechin, AAR argued that the TNK-BP shareholder agreement meant that all BP's business development in Russia had to be conducted through TNK-BP. In a dramatic attempt to save the deal, BP offered to buy out its Russian partners for $32bn and came within a whisker of doing so. For reasons that are still unclear, AAR walked away from the table. From that point, BP's relationship with its Russian partners was no longer retrievable.  

What to Expect Now

The question now is how easily BP will sell its stake and to whom. There will be further twists and turns over the next few months but, for the moment, it seems that BP has lost the will to continue as a partner in TNK-BP and will wait to see if other opportunities emerge in Russia.

The break-up of the partnership at TNK-BP speaks volumes about the challenges and pitfalls of large-scale investment in the Russian oil and gas sector and will unsettle other international oil companies committed to Russia who had long admired BP's ability to establish and hold such a prominent position in the Russian industry.

The impending change of ownership will affect the balance of the Russian oil and gas industry. If AAR buys BP's stake, it is likely to sell it on to Rosneft or Gazprom Neft, placing another roughly 8% of Russian oil production in state hands (the state already directly controls around 30% of oil production and indirectly another 12% through Surgutneftegaz that is believed to be closely affiliated with the government). This assumes, of course, that AAR itself does not exit the venture.

Igor Sechin's exclusion from the government and his appointment as Rosneft's CEO provides more questions than answers about his role and residual influence. He is also a board member of the holding company Rosneftegaz that could emerge as a new platform for state-owned energy assets, perhaps including TNK-BP's.

John Lough worked in TNK-BP's international affairs department between 2003-08.