Sunday, July 06, 2008

Fings Are Breaking All Over Russia



BP Sues TNK-BP Russia Partners
Action Is to Recover $370 Million Debt; Venture Rift Widens


By GREGORY L. WHITE and GUY CHAZAN
July 5, 2008; Page B6

MOSCOW -- Fighting back amid a deepening rift within its TNK-BP Ltd. joint venture, BP PLC has sued its Russian partners to recover a $370 million debt.

—The Wall Street Journal



Vlad is at it again.

By “Vlad,” we refer to not to Vlad the Impaler—as Vlad III, Prince of Wallachia and reportedly the model for Dracula, was known—but Vladimir Putin, Ex-President of Russia and now its Prime Minister, who does things Vlad the Impaler did, only with slightly less bloodshed.

For his latest energy grab, The Wall Street Journal reports Putin is turning his attention to British Petroleum’s important Russian venture:

Relations between BP and its Russian partners have worsened sharply in recent months, with the Russians charging BP with mismanagement and the British company accusing its partners of trying to take over the 50-50 venture by stealth. The battle is playing out amid widespread expectations that a state-controlled company like OAO Gazprom ultimately is likely to take a stake in TNK-BP.

How important is TNK-BP to British Petroleum? Pretty bloody important: it accounts for one-quarter of BP’s worldwide oil production.

Without it, BP might have to change it's name to “British Somewhat-Less Petroleum.”

We have, however, no doubt the whole thing will be settled amicably—which is to say Vlad will win. Not that we here at NotMakingThisUp are by any means geopolitical experts. It seems obvious that Russian interests tied to Putin’s Kremlin will eventually “acquire” BP’s interest in the same way those interests acquired Shell’s share of the Sakhalin gas project: by force masquerading as commerce.

To get a sense of why today's headlines should have been no surprise to BP, let’s look back at that sorry Sakhalin episode, reported here for precisely the state-sanctioned thuggery that it was, orchestrated by the man whose eyes George Bush claimed to have peered into before famously announcing, “I was able to get a sense of his soul.”

Vladimir Putin, of course, has no soul: what Bush got a sense of was the ham sandwich Putin had eaten for lunch.

___________________________________________________________________
Tuesday, December 12, 2006
Fings Break in Russia, Don't They?
.
Shell May Cede Control of Project To Russia's Gazprom


The “project” to which that headline in today’s Wall Street Journal refers is the Sakhalin-2, part of a 4.5 billion barrel-equivalent sub-Arctic oil and gas development off the coast of the former Soviet Union.

Sakhalin is a large island: look it up on a map and you will see it actually appears to be an extension of the islands which constitute Japan.

And that’s exactly how Japan thought of Sakhalin, too, until the Russians—pay attention here, we are making a point—forced out the Japanese at gunpoint after invading the island on August 11, 1945. Sharp-eyed readers will recognize that date as coming the week after Hiroshima and Nagasaki had been obliterated by atomic bombs.

Old Joe Stalin really knew how to hurt a guy when he was down!


And so, it seems, does Vladimir Putin, today’s Strong Man at the Kremlin, who appears to have successfully muscled his country’s way into majority ownership of a major LNG project now that Shell has done much of the heavy lifting.

Readers may recall that Royal Dutch Shell could certainly use its 55% stake in Sakhalin-2 to replenish so-called “proved” reserves that became distinctly unproven several years ago after it was discovered Shell's engineers had been using Fannie-Mae-like juggling of its oil and gas reserves.

Which is to say, Royal Dutch’s bookkeepers were making them up. Smelling desperation, Putin’s men cleverly used a cost overrun for the Sakhalin-2 project as a device to muscle Shell out.

Like all good citizens with their backs to the wall in a dark alley and no recourse to either a gun or a passing officer, Shell is putting a very good face on the situation:

Shell has proposed ceding a controlling stake in the Sakhalin-2 project in Russia's far east to state-run OAO Gazprom, an official close to the situation said. Another person close to the talks stressed they are continuing and an agreement hasn't been reached…


So this is what it’s come to in a country with the largest untapped reserves of energy in the world: muckraking journalists get shot, anti-Putin KGB veterans get poisoned, and major oil companies like Royal Dutch Shell get squeezed out of large energy projects in the manner of the old Monty Python “Army Protection Racket” bit, in which Luigi and Dino Vercotti pay a visit to a starchy old colonel:

Dino: ‘Ow many tanks you got, colonel?
Colonel: About five hundred altogether.
Luigi: Five hundred! Hey!
Dino: You ought to be careful, colonel.
Colonel: We are careful, extremely careful.
Dino: ‘Cos fings break, don’t they?
Cononel: Break?
Luigi: Well, everything breaks, dunnit colonel?

Fings are breaking in Russia too.


BP might be wishing they paid more attention.


Jeff Matthews
I Am Not Making This Up


© 2006, 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

11 comments:

Tahoe Kid said...

Why are people so surprised by Putin? As a former career KGB officer and Communist Party member his professional life has been centered on opposing the West. And what better way to get back at the West than to steal their money through oil deals. Maybe BP will eventually stand for "Belongs to Putin."

Mikhail said...

I am trying to remember when has anyone complained when Western companies bribed and stole their way into questionable possession of the numerous companies in Russia in early '90s. It seemed par for the course then and no one complained, so when the pendulum swings back the other way, it is all of a sudden bad.

And when bringing up Sakhalin-2 as an example, it should be helpful to note why cost overruns were such a huge issue, especially for Russian side. The contracts signed in the '90s favored one side more than the other, and no, it wasn't Russian side.

And this old "KGB officer" and "Communist Party member" shtick has got to go, tahoe kid, it is overplayed by the media that has little understanding of what it really means and adds nothing to discussion.

punchcard said...

Great post. This is off topic, but fings may be breaking at GE too.

Thinking GE was supposed to be a great consumer product company, we bought one of their fridges instead of the many cheaper brands available. The expectation was great service in case of a product defect.

Well the product was certainly defective, but it took a month of hair pulling, automated system dialing and no-show servicemen (sorry about that sir, can you be home between noon and 4pm next Friday?) before GE finally fixed it.

However now there are large spare parts sitting in boxes on our front lawn, waiting to be picked up. GE delivered them without a serviceman even putting in an order. We still can't get GE to pick them up (sir, calm down, we have no record of a prior call from you, now what is it you need from us?).

Maybe GE slashed the service budget as soon as they decided to sell this division, in order to boost margins. Or maybe it's a low margin division that can't afford high service levels, and we just got unlucky with a product defect. I just hope it isn't a sign of bigger problems there.

Tahoe Kid said...

Mikhail- Apologies for the "sthick." You're right, Vlad is just a terribly misunderstood politician that has a very firm grip on a government that has taken over control of media outlets, thrown political opponents in jail for "unpaid corporate taxes" and seen investigative journalists murdered. We must be reading news from different media outlets because the KGB/Communist Party angle doesn't get much play where I come from and I read more than just the Sierra Sun. But unlike Putin, I respect your right to disagree with me.

Reissuer said...

Bit slow on this one but think this The Moscow Times story is in the same space:

Listings Abroad Face New Curbs.

This comes on top of a serious lack of infrastructure spending by (Russia) oil and commodity majors - it all goes on London property and Caribbean holidays.

Now Vlad is wreaking the capital markets, it's no wonder Russian oil producers output is declining.

On the other hand if they can get that internal liquidity going then GDR issues will stop paying for all that property and holidays, and domestic issues will pay for the infrastructure.

Really...and pigs drink vodka but don't fly!

Mikhail said...

tahoe kid, apologies accepted. Although following it up with more misinformed "schtick" certainly points to your insincerity.

No one claims that things are fine and dandy in the land of snow and bears and if you are actually to read my post, you will see that in no way did I imply that. The use of the KGB/Communist party/etc. argument simplifies the actual political and social circumstances to factors that are not even relevant. If you knew how Communist Party worked in Soviet Union, you might have a better grasp of why it is irrelevant in just about any discussion nowadays. And you must be outside of United States or UK, since nary an article slips by without mentioning Putin's past as KGB officer. And as I said, if you actually understood what it meant to be in a Communist part, you would understand why it is irrelevant to discussion of his character.

As to news sources, I can agree that we certainly have a difference there. Apparently mine cover more angles. After all, if you take example of "political opponent" Mr. Khodorkovsky, he is considered to be a criminal even by UK, no friend of Russia. And Mr. Berezovsky is still trying to wash his billions of stolen blood money, sometimes unsuccessfully, as the stories from Brazil can point out to you.

Unquestionably, Russia is trying to get a strong grip on its own energy resources. I reckon, US is trying to do the same, except they have differences forces to confront. The main point of contention, and the one not touched on by Jeff, is that BP wants the venture to expand work within Russia, while TNK is more interested in securing oil interests outside of Russia. That approach allows it to stay out of Russia's overall energy policy (which is quite obvious) while diversifying the venues it plays in.

I have never stated that the way Russia is going about securing its energy resources is the right one. However, companies that invested and bribed their way into Russia, and they all did, should not be surprised when the pendulum swings all the way back. They had the power 15 years ago, now they don't. Tough luck, it's always been a dirty business.

I do recommend widening the number of news sources. If you are to read Russian based news sources, you'd be amazed at how much criticism is published (and not punished in any way, as opposed to what you might think) on a daily basis. Whether the government responds to it, now that's a separate issue familiar to many.

Jeff Matthews said...

Mikhail,

Why is Putin's past as a KGB agent "irrelevant"?

If a President of the United States had been a long-time CIA agent, you'd hear about it in every article and interview in every U.S. media outlet. It would be seen here as very relevant.

Why, again, is Putin's past "irrelevant" except that he wants it that way?

JM

Reissuer said...

Thought it might be useful to note here that The St. Petersburg Times has published the Financial Times article from Monday, July 7, 2008 by George Robertson, deputy chairman of TNK-BP.

See: A Beacon in Crisis.

Do not have a copy of the full original FT story except this commentary on their site:

Robertson hits at BP partners.

Mikhail said...

Jeff,

This might be just the difficulty of reading a back and forth exchange on the blog, but I do not see where you can read "Putin's pass is irrelevant" in either one of my posts. What I am saying is that simply dismissing Putin as a former "KGB spy/agent/office" and a "Communist" is too misleading and oversimplified, especially considering the connotations those words have in the minds of most Americans. At best, this brings nothing to the discussion and therefore making it irrelevant. I will address those two "titles" separately.

I doubt that US media would in fact call a president "President Smith, former CIA agent" as often as you think outside of election year or a meeting with a Russian counterpart. Even McCain, with his quite noticeable service record that he likes to flaunt, in this election year gets his service mentioned only in related discussion of war/security/torture. And I did notice your peculiar wording on "long-time CIA agent." I suppose you are trying to make sure that I do not bring up George HW Bush, who was a CIA Director and whose presidency hardly was full of headlines about him being a "former CIA spy." I know, Director is hardly a guy running around with a silenced gun, but then a position of an analyst based in EAST GERMANY (note the emphasis) and disclosed as a KGB agent does not make an exciting Bond movie either. Quite possibly because there is very little spying involved that you couldn't do yourself with a newspaper. In fact, the job is hardly different from that of many Wall Street analysts. So the moniker of "KGB spy" (and I am using the US media speak here), is more for creation of a certain image (bad, scary, secretive, etc.) rather than for conveying the true nature of Putin's experience as part of KGB. Besides, despite actual KGB service differing very little from CIA service, the connotation that people have with "CIA agent" and "KGB agent" is radically different in this country. So yes, you can bring up the relevance of KGB experience, which I am yet to see you do, but whenever you just dismissively say "Oh, he was a KGB spy/agent" then you are just in the tabloid territory, not any kind of reasonable analysis.

As for "Communist Party member," it is truly irrelevant on many different levels. To begin with, why is it one former Communist Party member better than the other? US applauds and embraces several former powerful Communist leaders from Russia (I am confident that you actually can name at least two that are still alive), yet when applied to Putin it's bad? Many of the younger generation businessmen were ardent Komsomol leaders and today many of them are accepted by the West without a question while others are considered Putin's lap dog. So if being a former Communist Party member leads to such diametrically opposite results, how is it a descriptive quality at all? To add to that, the significance of being a member of the Communist Party is simply exaggerated. Did you know that you could not get Ph.D. in Soviet Union without becoming a member of the Communist party first? Just like one of many unions in US. Say the words written for you, come to a few meetings and there you go. The same thing applied to any promotions beyond a certain level. It was just something a person had to do if they had the ambition to be anything beyond lower-mid level management. In a system like this, you can be rest assured that there were many more members in the Communist Party than actual Communists.

I apologize for wordiness, but I am trying to convey ridiculousness of simplifying a complicated political adversary to a few nicknames from the McCarthy era. It is that much more annoying coming from a person whose analysis is much more in depth for most other topics covered in this blog.
Feel free to comment/question anything I said here. While at it, please also consider explaining how Putin is actually connected to the article on TNK-BP? It seems like you threw him in just because he is such a powerful image to dislike. It’s quite interesting that Putin has a cult of personality ABROAD in the way that is unrivaled in Russia. There are other people there and there are many of them; they do things, they do bad things and they do good things and they do a great deal many of them. You should take a note of that fact.

Jeff Matthews said...

Mikhail,

Quote/Unquote: The use of the KGB/Communist party/etc. argument simplifies the actual political and social circumstances to factors that are not even relevant. If you knew how Communist Party worked in Soviet Union, you might have a better grasp of why it is irrelevant in just about any discussion nowadays.

That's where I read it.

JM

Mikhail said...

Jeff,

May be if you consider that I was responding to tahoe kid's explanation of Putin's actions (even though Putin is not even involved in this particular case), it will be a little easier.

I am saying that justifying any and all of Putin's decisions simply by the argument that he is KGB/Communist makes for an irrelevant conversation. It has the biased definitions and overly limited scope to explain interactions of a whole country with other countries and business entities. I don't think you can argue that "Communist" and "KGB (anything)" are not loaded terms in and of themselves for just about any American.

I already gave some of the reasoning why those two "factors" really would tell very little about Putin and then limiting the whole discussion to just those two? That's ridiculous.

Furthermore, discussing Russian politics in terms of just Putin, omits too many other factors. Of course, including other people and socio-economic factors would require more analysis. And who wants to do that nowadays?

As for this BP fiasco, you still have not explained how Putin is at all related. Russian side is controlled by a few rich Russian businessmen and they don't have to be Putin's cronies to do what they please, they just need to stay out of politics.