In a surprise 11th-hour move at the weekend, Energy secretary Ed Davey blocked the acquisition of North Sea oilfield assets by Russian oligarch Mikhail Fridman. They are part of a €5bn asset sale by German energy giant RWE to Mr Fridman, funded from the proceeds of his share of TNK-BP, BP‘s (LSE: BP) past joint-venture in Russia. Former BP CEO Lord Browne has been appointed to head up LetterOne, the acquisition vehicle.
The deal was completed on Monday anyway, having already received approval from other countries involved. Mr Davey is threatening to force LetterOne to divest its North Sea assets. A furious Mr Fridman threatened to sue, and has now been given seven days to argue his case. The UK government’s justification is that a future extension of economic sanctions against Russia might affect production at the North Sea assets, but there’s more than a whiff of anti-Russian sentiment about it.
Such posturing may play well in Westminster, but it could rebound in the real world. It’s worth considering a couple of aspects of the Russian character. Firstly, they stick together against perceived foreign threats and interference. Mr Fridman may not be a close ally of President Vladimir Putin, but he wouldn’t be where he is today — a billionaire living and working in Russia — if he weren’t connected. Secondly, they play tit-for-tat, a tradition that goes back to Cold War era expulsions of spies and diplomats.
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Retaliation
So it wouldn’t be surprising to see Russia retaliate against the UK’s unilateral extension of sanctions over-and-above what has been agreed by the EU and US.
And I fear BP could be in the firing line. BP is mixed up in Russian oil politics at the highest levels. It came out well from the manoeuvrings by its partners in TNK-BP and the state-owned oil company Rosneft in 2012, but only by the skin of its teeth. BP CEO Bob Dudley, then head of TNK-BP, was forced to flee the country. Rosneft’s CEO, Igor Sechin, is a close ally of Mr Putin and is now on the US/EU blacklist.
BP’s near 20% share of Rosneft is most significant for its contribution to the UK company’s reserves. It makes up over half of BP’s total proven reserves of oil and nearly a quarter of its proven reserves of gas. BP makes an easy target, with Mr Putin likely to relish echoing Barrack Obama’s deliberate misnomer, “British Petroleum”.
The long view
Russia’s vast oil and gas reserves remain vital to Western oil companies. Exxon, the world’s second-largest listed oil company after Rosneft, increased its Russian exploration holdings more than five-fold last year. It now has four times as much acreage in Russia than in the US. Despite its Russian Arctic drilling programme being halted by sanctions, the US company is taking a long-term view, seeing past the end of sanctions.
BP still faces uncertain liabilities in the US over the Gulf of Mexico spill, in addition to the high risk nature of its Russian venture. Investors used to be compensated by a discount on the shares, but on a forward PE basis BP’s stock is now more expensive than Shell‘s, at 19.6 times earnings against 18.1. The yields are similar at 5.9% and 5.7% respectively.
I believe big oil with weather the downturn in the oil price successfully, and those yields are highly attractive. But there is now no reason to favour BP over Shell.
