BP: Beyond StuPid

A Swedish arbitration panel has ruled in favor of the AAR consortium and found that BP’s deal with Rosneft to explore and develop oil properties in the Arctic  had violated the TNK-BP shareholder agreement.  Under this agreement, BP (BP) pledged to undertake all its Russian operations through TNK-BP.  After BP signed the deal with Rosneft, its TNK-BP partners, AAR, succeeded in obtaining in London an injunction halting the Rosneft transaction.  The arbitration ruling extends the injunction and makes the deal’s ultimate fate even more doubtful.

Given BP CEO Robert Dudley’s experience with AAR–he was CEO of TNK-BP until he was ousted in an ugly dispute with the Russian “partners”–you have to wonder what the hell he was thinking when he entered the Rosneft deal without first securing a release from AAR.  The shareholder agreement’s term wasn’t a secret.  Dudley knew from harrowing experience that AAR plays rough and plays for keeps.

Did he assume that Sechin and Rosneft would lean on AAR to make things go forward?  Did Sechin provide assurances that he would?  Dudley would have been utterly foolish to rely on such an assumption–trebly so to rely on any assurance from Sechin.

Did BP believe that it knew how to navigate the treacherous shoals of Russian energy politics and бизнес?  What could have possibly led them to that conclusion?  The company’s handling of Kovykta was a disaster (e.g., going to Sechin to ask for help in convincing Gazprom to play ball–as if!).  Dudley’s humiliation at TNK-BP was another fiasco. Once burned, twice shy, you’d think.  Twice burned, thrice shy.  But not BP.

AAR now has Dudley and BP by the short ones, and can extract a pretty price from the British company.  Although some have suggested that AAR will not want to cross Sechin and will eventually accede to a BP-Rosneft joint venture (in exchange for a nice lump of cash no doubt), you cannot rule out the possibility of a double game here, with Sechin and Fridman et al cooperating behind the scenes to shakedown BP.  Think of the side-payment possibilities between AAR and Sechin: Sechin stands aside while AAR bleeds BP for the last cent–or pence–and in return, AAR kicks back some of that to Sechin/Rosneft.

Or Sechin could effectively stand aside, forcing BP to give up on the Arctic partnership–but continuing with the stock swap with Rosneft.  That would give Sechin his cake–a big share stake in a western supermajor–with the opportunity to sell the Arctic JV to another supermajor.

Amazingly, BP has said that it plans to proceed with the share swap even if the Arctic JV must be aborted. (Just what is beyond stupid, anyways?)  Many investors have apparently not lost their minds, even if the company’s management has: these investors are telling BP it should scrap the swap if the exploration deal is scuppered.

Maybe that’s not what is going on, but you can bet that Sechin is hardly taking BP’s interests to heart here.  Instead, he is scheming to figure out how to work the situation to his advantage–and letting the devil take BP.

There is a lot of irony in this story.  For one thing, the original AAR-BP spat over TNK-BP was in large part a dispute over strategic direction.  The AAR group wanted TNK to extend operations overseas, whereas BP wanted to focus in Russia.

The other major irony, of course, is that BP can’t blame Russian lawlessness for this one.  BP lost fair and square in western courts.  These courts found that BP had violated a contract, and that its Russian partners could enjoin BP from proceeding with transactions that constituted the breach.  Proving that the law is sometimes as it should be–no respecter of persons.

And the irony just doesn’t stop: presumably BP wanted the TNK deal subject to UK law in order to protect it against Russian predations.

The real irony would be that BP was counting on Russian lawlessness to allow it to breach its contractual agreement.  That Sechin and Putin would intervene to undermine AAR’s legal rights.  That visions of Khodorkovsky would keep the oligarchs in line.  That may yet happen, but don’t count on it.  But if that was the company’s calculation, it deserves whatever it gets, and worse.

This is just the latest in a series of major screw-ups by BP.  There’s Macondo, of course.  Texas City.  The propane corner.  The connivance in the release of the Lockerbie bomber.  The scandals involving Lord Browne.  Not to mention its pratfalls in Russia.  All the other supermajors put together–Exxon Mobil (XOM), ConocoPhillips (COP), Chevron (CVX), plus some foreign firms–haven’t matched BP’s collection of mis-steps.  I’d say that this record of mismanagement would make the company a takeover target–but who’d want to take over such a snake-bit firm, especially since the takeover would also bring with it deep entanglements with sweethearts like Sechin, Rosneft, and Fridman/AAR?

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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