BP’s $9 billion merger with TNK-Sidanco, Russia’s fourth-largest oil company, is the largest one-off investment in Russia ever. With oil reserves falling and the Middle East volatile, other super-majors are considering deals with the remaining Russian oil companies. But the Russians may not want to do deals and president Putin may not let them.
Last December, in oil industry journal World Energy, a vice-president of Exxon Mobil admitted that oil discoveries since the 1960s had fallen dramatically, while demand was still rising steeply. In other words, oil reserves were declining. As Jim Meyer, director at the Oil Depletion Analysis Centre (Odac) says: “This was perhaps the first time the super-majors had publicly acknowledged that reserves were falling.”
The decline in big new oil discoveries means the super-majors need to buy companies that have reserves. As Meyer says: “Russia is a great market because it has substantial reserves left in it.”
BP took a calculated risk that things have changed in Russia since 1997 when its investment in a 10% stake in Sidanco was the subject of a bitter legal battle with AAR, owners of TNK-Sidanco and now its partner in the new merged entity. As one person who worked on the deal says: “The way to get over the bad feeling is not to look at it emotionally.” BP decided it was strictly business, and nothing personal. As Andrew Chulack, vice-president of M&A at Merrill Lynch, who advised BP, says: “It would be naive to think other Russian powerbrokers wouldn’t have done exactly the same thing, given the circumstances of the time.”
That said, it was not a foregone conclusion that a BP deal in Russia meant a deal with TNK-Sidanco. In fact, Morgan Stanley, BP’s other adviser, was for some time promoting a deal with Yukos. But BP decided that Mikhail Khordorkovsky, effectively the owner of Yukos, might not be prepared to relinquish control of the company.
And TNK-Sidanco was being pushy. It had a call option on three-fifths of BP’s stake in Sidanco, which it said it would call if the deal fell through. This was a slightly ominous return to the hardball days of 1998, and BP found it “mildly irritating” according to one source. But Chris Baxter, managing director and co-head of European energy at Merrill Lynch, says: “At the margin, it might have helped it move forward. If it had gone backwards, it may have cost BP in PR terms, although in our opinion it would have potentially cost TNK-Sidanco more.”
BP decided to go with TNK-Sidanco partly because it thought AAR was more likely eventually to sell the remaining 50% of the company. But it went with an initial 50% stake because it wanted TNK-Sidanco’s local expertise in the initial stages.
The deal puts BP at the very top of the oil industry in production and reserves. Troika Dialog estimates that it puts it in front of Shell in production, and in line with Exxon Mobil by reserves. And it gives BP a good opportunity to exploit relatively undeveloped oil fields in eastern Siberia. And having a 50% stake in a Russian company gives BP the opportunity to participate in other deals. As Chulack at Merrill Lynch says: “In Russia, to do business you need to be part of the in-crowd. If you’re BP now, you’re the partner of TNK-Sidanco, a major oil company. So you get invited to the parties.”
Sniffing around
Other super-majors are sniffing around, but not that many opportunities for more big mergers exist. Yukos and Sibneft are obvious candidates, but Yukos, the private company with the best assets and the best corporate governance, might be difficult. Baxter at Merrill Lynch says: “It’s difficult to see Yukos being acquired. It would rather acquire.” Khordorkovsky has made clear his belief that Yukos is a viable long-term player in the global oil market. Sibneft would perhaps make more sense, though it is still digesting its purchase of half of Slavneft. It is likely to want to acquire the other half of Slavneft, from TNK-Sidanco. There is also a possibility that Yukos and Sibneft could merge. The super-majors are engaged in a race as well. The Russian government welcomed the BP-TNK deal, thanks in part to a direct intervention by UK prime minister Tony Blair. But as Mikhail Fridman, chairman of AAR, says, further deals could meet political resistance. Adam Landes, director of oil and gas research at Renaissance Capital, says a second big foreign deal should be OK, but a third might stall. The big super-majors need more reserves if they are to stay at the top of the oil league. So who goes second?
