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Monday, June 25, 2007


ZAXI blog offers the following penetrating commentary (as usual) regarding the recent ejection of the BP oil concern from the Russian market by the malignant nationalizing forces of the Kremlin:

It matters not if you spent ages preparing for the final exam. You will still fail without a pencil. And the teacher not only failed to provide a pencil in this case – he threatened to kick the groveling student out of the room for taking too long with the test.

Russian justice has turned so twisted that BP was feigning delirious joy at its handover to Gazprom of the ill-fated Kovykta gas field. BP’s new chief executive called it both “historic” and “powerful.” A host of Western oil analysts in Moscow said BP should feel grateful. Indeed BP and its Russian partner TNK faced the option of simply getting stripped of Kovykta’s license under pretext that the two could not market its gas in time to meet a fictitious deadline. They first needed permission to access pipelines – and the Russian state refused to hook up the stranded field to nearby China by claiming this was not in its plans. TNK-BP may have crammed all it wanted but it was about to go home with a failing grade and snot running down its quivering lip.

So Roland Nash of the Renaissance Capital investment house was nearly right to say the deal “is almost a billion dollars more than they might have otherwise gotten.” TNK-BP did get almost double its Kovykta investment in an actual legal agreement with Gazprom. And it now has the hilarious option of buying back a quarter stake at an “independently verified market price” or by swapping some of its European assets.

But of course Nash was not right. Gazprom could and did steal Sakhalin-2 from Royal Dutch Shell. It is about to illegally bar ExxonMobil from selling Sakhalin-1 gas to China – it wants that right for itself. Yet Gazprom could not simply pinch Kovykta because the B in BP once stood for “British.”

The Kremlin seems to abhor all things Albion except for its gas. Centrica may not have made any of the stories about Friday’s deal but the British Gas owner – seeking buyers because its fields are running dry – is the only reason why BP got any cash here at all. The prospect of Gazprom owning their gas has left Brits feeling understandably queasy. Parliament has proposed legislation blocking a potential deal. Centrica has put out hopeful feelers to gas firms stretching from France to Norway. The Kremlin knows it is not being welcomed with open arms. But Gazprom wants a foothold in Western Europe – perhaps as much for its prestige as its bottom line – and Centrica’s 16 million customers are a start. A small sacrifice on Kovykta in exchange for some whooping endorsements from BP mangers was a bargain in Kremlin eyes.

And has BP whooped. The company has waged war on Tony Blair for suggesting that British business calm its courtship of a Russia that looks to have donned its 1930s garb. It sunk one billion dollars in a Rosneft initial public offering that came up against stern analysts’ warnings. It placed a ceremonial bid in a staged auction for Yukos assets. BP has now offered Gazprom new joint ventures abroad. All this fine work has left BP with the right to still do business in Russia. Vladimir Potanin on the other hand just twiddled his thumbs. And all the Interros boss now has is a 26 percent stake in a Kovykta project that is suddenly worth tens of billions of dollars because of its imminent access to China.

The “baby billionaire” – a title Potanin earned from a fawning Fred Hiatt of The Washington Post in 1998 – learned quickly that silence is golden in President Vladimir Putin’s Russia. He kept everything pilfered under Boris Yeltsin and remains one of the few standing oligarchs without training in the KGB. The Kremlin’s wrath has spared him again. His Kovykta stake was untouched by its campaign against the Russian partners in TNK-BP – confirming that Putin will let the select few who came before him enjoy their wealth.

Not all of it. It seems that Potanin’s Norilsk Nickel has the misfortune of holding rights to a titanium mine that looks just right to Putin’s old Dresden spy partner Sergei Chemezov. He now runs the state military industrial complex conglomerate being forged from the arms exporter Rosoboronexport. Potanin’s titanium mine fits nicely into Chemezov’s plans and the local governor has already blessed the whispered handover – perhaps citing the watertight legal argument that Putin would otherwise sack him.

Potanin’s team has also suddenly discovered that it will have a tough time digging through the titanium mine without Chemezov’s help. It told Kommersant it was willing to “discuss cooperation.” And who would not be after finding themselves sitting on top of enough gas to keep Asia – rather than some impoverished Siberian customers – running for over a year?

Interros will likely be booted from Kovykta in the long run if BP is ever allowed back in. Gazprom would not stand losing its majority stake and considering Potanin’s chumminess with Putin he can expect another handsome reward. But the future of TNK-BP itself looks grim. Putin has made clear his displeasure with the Russians involved in the arrangement – “I am not even going to talk about how they obtained the permit” for Kovykta in the early 1990s – if not with Potanin. And all the Kremlin really needs is BP’s technology rather than the remnants of a joint venture that Putin blessed in 2003. That fall Kremlin ceremony marked the apex for Western involvement in Russia. Pages of ink were spilled hailing the country’s rise to prominence almost five years to the day after an economic implosion saw investors stampede for safer shores. Those articles reversed course weeks later when the arrest of Mikhail Khodorkovsky sounded the starting gun to the Yukos campaign.

One may now frown at BP’s naive enthusiasm at spotting a potential cash cow standing untended off the upper-left coast of Lake Baikal. A super-giant gas field that maps place just inches from China – the temptation was there. And BP could argue that others have also looked into Putin’s eyes and claimed to see something warm and fuzzy. Now energy analysts use stock phrases to insist that the Kremlin has done its work – the old deals have been “renegotiated” and all Western firms now operate under defined if subservient terms. It is safe to bet on Russia again.

Perhaps. But someone should first report the good news to ExxonMobil.

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