Email This Post - Print This Post Print This Post

By John Helmer, Moscow

The primaries for the Russian presidential campaign have already begun, and there are three contenders – Igor Sechin, Dmitry Kozak, and Dmitry Medvedev. Vladimir Putin isn’t a contender – he is the convention with all the votes; he makes the choice.

Sechin and Kozak, both deputy prime ministers at the moment, are antagonistic rivals. Sechin arranged to banish the skilled St. Petersburg lawyer from the Kremlin in 2004, when they both were Putin’s assistants and were competing for access. They differed strongly on policy issues. Kozak was in the firing line when Sechin decided to change the management of state shipping company Sovcomflot, and instal Sergei Frank as the new CEO over the objections of Kozak, then Sovcomflot board chairman. Kozak was despatched to the Caucasus where he languished for several years, while Sechin rose to the pinnacle of power over all of Russia’s natural resource concessions, shipping included.

But things aren’t going so well for Sechin at the pinnacle. Others want to be there in his place. He doesn’t make friends easily – noone does at the pinnacle. Judging by Medvedev’s actions so far, he is more afraid of Sechin than he is of Kozak. There are also unpublishable reasons for their disliking each other personally.

Into this murk on January 14, stepped… The Dud. Sechin’s Dud.

Bob Dudley’s sense of his own skill in Russian politics has been tested twice before, and he lost both times – defeated by Mikhail Khordorkovsky in 1997, then by Mikhail Fridman in 2008. The learning curve must have been speeding up, and the American oilman must have thought he would finally break his losing streak after BP appointed him chief executive last July. Or so he must have assured the gullible BP board, who wanted badly to believe him. This time, Dudley said six months later in January of this year , he had Putin and Sechin lined up for a deal with Rosneft, and with Medvedev’s past backing to be taken for granted. How could he fail?

It isn’t known whether Dudley asked his board this rhetoricial question. But on Friday last it ought to be clear at BP that the Big Dud has done it again – perhaps not as publicly as his predecessor Tony Hayward mangled BP’s relations with the US Government last year, during the Gulf of Mexico oilwell leak; but just as indubitably. And strange to tell, it has happened all over again, for the third time in a row, that Dudley has failed to read the small print of contracts he himself dictated – this time his 2003 contract with TNK-BP has contradicted his 2011 contract with Rosneft.

In announcements of March 24 and April 8, Fridman has won from the Stockholm Arbitration Tribunal the ruling that Dudley’s deal with Sechin, for a grand joint venture in Arctic oil prospecting and production, cannot proceed. The estoppel also bars the share swap, due to be implemented on April 14, according to which 5% of BP would be exchanged 9.5% of Rosneft for what amounted last January to $7.8 billion in value. On Friday, the swap stocks were worth $7.3 billion and $9.5 billion, respectively.

The reason for the Friday arbitral ruling is one Dudley and the BP board never thought possible — that an international court would judge their agreement with Rosneft to violate their prior contract obligations to TNK-BP. In effect, Dudley told BP to think like Russians, and to anticipate that whatever was written into the 2003 contract between BP and TNK, the Kremlin would settle what would happen next – and Fridman would be obliged to retreat.
 

You might say that Dudley applied the notorious Russian telephone justice rule – and with the Kremlin approval he thought he had in his pocket, decided he could violate TNK-BP’s contract rights with impunity.

Sechin even appeared in public in the columns of the Wall Street Journal, on February 22, to say that the foreign court application had taken him by surprise, and that if Fridman and his shareholding partners didn’t pull back, they might be punished. With Len Blavatnik and Victor Vekselberg, their association is acronymed AAR, after the names of their respective holding companies, Alfa, Access, and Renova.

Sechin, too, hadn’t read the small print of the 2003 contract, he told the Wall Street Journal, and took Dudley’s word for it. “If we had assumed something like that we would have included it into the overall assessment and, perhaps, would have bargained for more [from BP]. We asked BP whether it would fulfill all the requirements of its shareholder agreement. And just before the signing of the deal, I even appealed to the management of TNK-BP with the request to support it. I met with [Fridman partner German] Khan and said that we are discussing the possibility of such a deal. I asked him to assist in working with…BP. I hope that all misunderstandings will be resolved and the matter will be settled in a civilized manner, we will be monitoring it. And we would not like Rosneft to have to take some actions to protect its interests, connected to the subjective approach, which is aimed at the delay of the implementation of a major project of its cooperation with BP. If such a subjective approach will be admitted by any of the parties—we do not care which one, BP or AAR—Rosneft would estimate its losses from the unrealized deal and would require compensation from those who would have inflicted the losses.”

Sechin is good at talking out of both sides of his mouth – an essential qualification to be prime minister in almost any democracy you can think of. Dudley has shown the folly of not being able to listen out of either ear. When the Financial Times reached Sechin after last week’s ruling was announced, Sechin’s threat of sanctions had switched direction – to BP, no longer AAR. “ ‘After April 14, we will be working under different conditions,’ Mr Sechin said. ‘Rosneft is in an agreement, but if the agreement expires, it will take all necessary steps to defend its interests.’ One person familiar with the situation said Mr Sechin’s warning targeted only BP for failing to complete the deal, saying there was ‘no legal basis for Rosneft to take any legal action against AAR.’

The April 8 ruling is not in a documentary form which has been released by the tribunal. TNK-BP says it won’t release it, and won’t comment either. This, according to TNK-BP, is a matter for the shareholders to discuss. Here is what AAR has announced:

“The Stockholm Arbitration Tribunal has ruled today that the interim injunction prohibiting the closing of the share swap transaction between BP and Rosneft will remain in place until further notice. The Tribunal has also requested BP and AAR to submit additional evidence so that it can review the share swap component of BP’s proposed Strategic Global Alliance with Rosneft announced in January. The Tribunal has ordered a further round of hearings to be held on this issue at a later date. This decision follows an Arbitration Tribunal hearing on April 4, 2011 requested by BP to rule on whether the share swap component of its proposed Strategic Global Alliance with Rosneft can proceed on the basis that BP is precluded from any commercial cooperation with Rosneft, including joint exploration of the Arctic.

‘AAR welcomes the decision of the Tribunal, which we consider fair, balanced, and Thoughtful’ said Stan Polovets, chief executive officer of AAR. ‘We will be pleased to continue to cooperate with the Tribunal and will provide any additional information and evidence it requires during the next stage of the hearings.’”

And here is BP’s version: “BP announced today the arbitral tribunal has ruled that the interim injunction prohibiting closing of the share swap transaction with Rosneft will remain in place until further notice. However BP is now able to discuss the possibility of an extension of the April 14 deadline under which the share swap agreement will terminate. The Arctic opportunity remains under injunction pending further hearings. The share swap and the Arctic opportunity announced January 14 remain subject to the final decision of the arbitral tribunal.” This means that Dudley will ask his board and shareholders at the AGM later this week for more time on the red telephone to Sechin, and for Sechin to spend more time putting pressure on Fridman and AAR.

It is not going to be easy for Dudley to overcome the two findings of fact and law by the arbitration tribunal – that TNK-BP’s 2003 contract with BP gives AAR the first right of refusal for project opportunities in Russia; and that it also bars the BP-Rosneft share swap. For the time being, Rosneft has a lot more of what it wants from the deal than BP. Rosneft’s share value is up – up, in fact, by 22% since the deal announcement on January 14. But BP’s value cannot rise on the increase of Russian reserves, which Dudley thought he had in the bag — not now, not later. BP’s share price is down 5% over the same period.

3-month share price for Rosneft

3-month share price for BP

But for the BP board and shareholders, there is a grave risk in giving Dudley more time to renegotiate his deal with Rosneft. That’s because the arbitral ruling, and Sechin’s apparent sanctions switch, allow only one way forward for BP – it must buy Fridman out, at the latter’s price.

There is no reason for Fridman to accept a junior role in the BP-Rosneft Arctic projects, or any form of fresh paper, because Fridman already knows from experience that he cannot trust Dudley to abide by his signature. Dudley has taught AAR that they can trust only the colour of BP’s money. TNK-BP’s current market cap is $51.3 billion. In 2008, when they last fought Dudley, Fridman and Vekselberg said the company was worth at least $60 billion; their stake, at least $30 billion. Time and markets have been cruel to Dudley – in 2003 he might have bought out the AAR stakeholding for $6 billion; in 2008, for $27 billion; but now the price is probably more than BP can afford.

How could Dudley have failed to foresee that when it comes to encouraging conflict resolution between warring shareholders, Sechin usually backs the higher premium? Have Dudley and the BP board not been reading the history of Sechin’s performance during the conflict between Norilsk Nickel and Rusal, as the premium valuation has grown to a point where it now exceeds the market cap of Norilsk Nickel by more than 50%?

Supposing Fridman has convinced Sechin to put the Deripaska squeeze on Dudley, the buy-out price to remove AAR from TNK-BP, allowing BP to proceed with its Rosneft deal, would add 50% to TNK-BP’s market cap – that’s an extra $25.7 billion. AAR’s half-share of the new valuation would come to $38.5 billion. That amounts to one-quarter of BP.

Is there a lesson in all of this for BP shareholders to vote on this coming Thursday, when they hold their AGM? Which portion of BP will the shareholders agree they can do without – that quarter of the company’s value, or Bob Dudley? To fit the answer on the space of a tee-shirt, maybe this is what the message is:
 

THE DUD CAN’T ABIDE

Leave a Reply