From Russia with Greed: British Petroleum's Other Crisis

Article excerpt

No matter what settlements British Petroleum eventually pays for the 2010 oil spill, BP's problems in the US seem a mere skirmish compared to the losing war it has been waging in Russia for the last several years. In 2007, a BP executive admonished me for telling an audience that Russia would seize the company's Kovykta gas field. Allegedly BP's negotiations with the Russian government were truly serious and progressing well. I replied that having studied Russia for thirty years I knew my market. Two weeks later, BP announced it was surrendering Kovykta to a new firm created out of TNK-BP, its joint venture with Moscow. In 2008, the British head of TNK-BP, Robert Dudley, now CEO of BP, had to flee Moscow lest he be arrested after Russian police raided the company and arrested an analyst on charges of industrial espionage. Thus Mikhail Khodorkovsky's travails, though more serious, are hardly uncommon; nor is Russia's theft of his Yukos Corporation unusual. Rather these cases are of a piece with Russia's never-ending game with BP, and the predatory personality this conflict reveals. Russia wins, but the price of victory is high: despotism, backwardness, underinvestment, capital flight, and the discrediting of President Medvedev's calls for reform.

In 2007 and 2008, Moscow forced BP to give up majority ownership of TNK-BP and Kovykta to ensure that only Gazprom and Rosneft, its favored companies, controlled Russian gas exports. Gazprom then shelved plans to export Kovykta gas to China, claiming that the gas should go to the domestic market. Consequently Russia still has no gas pipeline to China or East Asia. Subsequently Kovykta, through a complex series of machinations, was passed to Russia Petroleum, the OGK-3 regional electricity-generating company owned by Norilsk Nickel, and TNK-BP, which remains a major stockholder. Early in 2010, Russia's Natural Environment Inspectorate, notorious for expropriating foreign investors on alleged ecological grounds, recommended stripping TNK-BP of the Kovykta field. In June 2010, Rusia Petroleum filed for bankruptcy. Russian law states that if a license-holding company declares bankruptcy, it should pass to the buyer of its immobile property. But since Kovykta is a strategic mineral company, no foreign firm may hold ownership. Consequently BP will probably be forced out of Kovykta. Indeed, Gazprom's leadership recently announced that there is no need to develop Kovykta anytime soon since gas production in the Yamal-Nenets Autonomous Area will soon start to decline.

Meanwhile Medvedev called BP a partner and said that he wanted to protect the interests of BP's Russian partners even if BP lost a lot of money in 2010. Indeed, Russia even seemed ready to lighten BP's burden of having to compensate the victims of its operations in the Gulf of Mexico. Thus Moscow welcomed BP's former CEO, Tony Hayward, onto TNK-BP's board, allowed BP to explore the Arctic waters off Russia's coast, and refrained from criticizing BP throughout the entire US crisis. But Moscow's motives for riding to BP's rescue have nothing to do with charity, and BP's acceptance of its help has nothing to do with appreciation.

BP's Russian assets represent eight hundred and forty thousand barrels per day, almost one-third of BP's global output. TNK-BP also netted BP $1.7 billion in 2009 for its share of dividends and lets BP claim vast reserves of oil on its books. BP, too, has sometimes been very helpful to Russia, such as when it agreed to facilitate Gazprom's 2007 foreign acquisitions well before other majors and governments agreed to do so. In return, Gazprom was supposed to help BP in its Russia business, buying back a major Siberian gas field that risked having its license revoked due to Moscow's usual predatory tactics. Gazprom would then sell back twenty-five percent of the field to BE

Thus Russia's earlier "rescue" of BP essentially and typically resembled a sophisticated version of a protection racket--and the shakedown continued outside Russia. …