#5 - JRL 7064
The Sunday Times (UK)
February 16, 2003
BP risks billions in a game of Russian roulette
As the oil giant does deals with old foes in the former Soviet Union, experts fear it may be in for a shock.
By Lucinda Kemeny

TAKING a spin at the roulette wheel is part and parcel of running an oil business, but when that company happens to be BP, the stakes get very high indeed.

Last week BP pumped £4.2 billion into Russia to buy a half share in TNK, the country's third-largest oil company.

Not only has the region been one of the most politically risky, but BP's new partner is the same company that, through clever sleight of hand, almost cost it its first investment in the country five years ago.

Memories fade but what has driven BP back to the gambling table? Project Whitbread, as it was known internally, was not a fly-by-night idea but a deliberate policy to get into Russia.

Lord Browne of Madingley, the chief executive, has long been known to have had his eye on the area, which has about 5% of the world's oil just waiting to be found.

As the fields of the North Sea and Europe become mature, it has been harder and harder for the oil majors to keep increasing production by relying on these old faithfuls. Although there are likely to be new oil finds, the returns from new investments are unlikely to make a huge difference to reserves.

And so their attention, and that of BP in particular, which has now dropped the shackles of maintaining production targets, has turned elsewhere.

Last week Browne highlighted his new production areas -- Deepwater Gulf of Mexico, Trinidad, Angola, Azerbaijan and Asia Pacific. Closest of all is Russia.

BP made its first foray into the country in 1997, when it paid about $500m for a 10% stake in Sidanco, one of Russia's larger oil companies.

The deal, which was signed in the office of Tony Blair, the prime minister, looked like a fantastic coup, but it turned into a nightmare months later when the company found itself embroiled in a huge row with its now partner, TNK.

TNK also owned a stake in Sidanco and it decided to strip Sidanco of its assets. As one oilman who has worked in Russia for many years says: "The foreigners invest the money and the Russians keep it."

Rather than stand by, BP accused TNK of theft, finally getting it to return the assets, held in a subsidiary called Chernogorneft, to Sidanco. BP cemented the deal by paying $375m last year to raise its stake in Sidanco to 25%.

But the story does not end there. The owners of Sidanco and TNK, Alfa and Access- Renova, agreed to merge and gave BP a year to raise its stake in Sidanco or hand it back.

The rest is history, but the way the deal took place highlights the situation Browne has walked into. Play the game the Russian way or get out.

That is why the expectation of a dash for oil in Russia may be premature.

Shell already has a joint venture with Gazprom, one of the world's largest gas producers, and is unlikely to follow BP's example in the near future.

An industry source says: "Everyone will look closely at Russia, but lethargy about reform, coupled with worries over the oil price, mean the country's economy is on a knife-edge."

He says that the Russian economy has grown 5% per year on the back of high oil prices but once they fall, as predicted, the economy could falter.

And this says nothing about working in the country itself. Those in the know say it is not unheard of for neighbouring oil companies to try to steal drilling licences and for the regions outside Moscow to run things how they please.

Even once a company has got oil out of the ground, it has to contend with the state-run pipeline company, Transneft, which, insiders say, is quite capable of shutting oil producers out of the system if it chooses. And no pipeline means few exports. Just in case a company gets this far, Russian law means that only 30% of the oil can be exported while 70% must be sold within the country, where prices have crashed of late.

All this considered, BP has no doubt blazed a trail but competitors will be watching carefully to see whether it sinks or swims before they put down their chips and take their own spin at Russian roulette.