Much of the commentary on Rosneft's buy out of Russian oil group TNK-BP has focused on the size of the deal that makes Rosneft the world's largest publicly-traded energy company and a new national champion.
Less has been said about why Russia's leadership has chosen this path and why BP's tie up with Rosneft worked on this occasion but not 18 months ago. The legal obstacles used by Alfa, Access, Renova (AAR), BP's oligarch partners who own half of the business, to stop last year's deal and their subsequent refusal to be bought out by Rosneft and BP could probably have been overcome if President Vladimir Putin and his close associates had wanted it.
So, what changed?
A key factor is the continuing demise of Gazprom as a national champion. Its sustained underperformance and lack of responsiveness to the rapidly changing global gas situation -brought about by the shale gas revolution - are confirmation of a trend that had built up over many years. The company does not currently have the ability to reform itself and adapt to a more competitive environment. Its business model in Europe is coming under increasing pressure and it has so far been unable to diversify to the Asian markets. What was a symbol of Russian power and prestige as recently as 2008 has started to look more like a liability than an asset.
Rosneft's CEO, Igor Sechin, seems to have timed his approach to perfection. BP’s announcement in June that it intended to sell its 50% stake in TNK-BP put its partners on the back foot and created a new opportunity to land a deal that would galvanise the Russian energy industry and send a strong signal globally about Russia’s continuing importance as an energy producer. This logic clearly appealed to Putin who has always regarded energy resources as a prime source of Russia’s international power projection.
For Sechin there was the opportunity not just to create a new national champion but to grow it rapidly. This is where BP was needed. BP was hugely successful in creating value at TNK-BP by its disciplined approach to portfolio management and its application of world-class technology and skills. Rosneft has a patchwork of production companies that require integration in a way that was achieved after the merger of BP’s and TNK's disparate assets in 2003. It will not have been lost on Sechin that the value of TNK-BP quadrupled in nine years.
It is not clear at this stage how Rosneft will seek to use BP's expertise but this will be key to creating long-term value for the company. While critics will see the dangers of Rosneft underperforming like Gazprom by virtue of being a dominant state company, the decision to give a foreign company a 20% stake in a national oil company is unprecedented and is a further powerful signal that Russia's energy sector is open to investors with the right skills and experience. Rosneft's earlier agreements this year with Exxon, Eni and Statoil to develop offshore projects are further evidence of this, and significantly, Putin went out of his way to praise BP's performance in Russia.
The vital question that will determine the success of the Rosneft-BP deal is how Rosneft will seek to apply BP's expertise and experience in improving the performance of Russian assets. The value creation achieved at TNK-BP shows that both sides will have a strong vested interest in finding an effective modus operandi.