Oil and trouble: Sometimes it’s not worth it

There must come a point when BP and Royal Dutch Shell give up on the whole messy business. In Russia, the chief executive officer of TNK-BP, the British firm’s half-owned Siberian oil producer, is again facing the loss of his Russian visa. In Nigeria, Shell is pondering new threats of violence by militants in speedboats targeting the company’s offshore operations.

These are core oil-producing regions. For BP, its share of TNK-BP represents almost 900,000 barrels a day, about a quarter of the multinational’s annual output of oil and gas, while Nigeria is Shell’s heartland, a country it has inhabited for almost 50 years. The war of attrition conducted by militants and criminal gangs in the Niger Delta is chipping away at oil production but Shell ought to be getting some 400,000 b/d from Nigeria, about 12 per cent of Shell’s total.


This is not the whole story, however, because profitability is what these companies are about and the barrels emerging from these troublesome countries are subject to punishing tax regimes. In both Russia and Nigeria, it is the state, not the oil companies, that gets the windfall from oil at $140 (U.S.) a barrel. For Shell and BP, these most troublesome parishes are the least profitable, per barrel.

BP should not have been surprised by the behaviour of its partners, who last week issued a series of demands, the principal being that Bob Dudley, the BP-nominated CEO, should be removed from TNK-BP and that the bulk of the management seconded from BP be replaced by Russians.

It’s an attempt at a management putsch for reasons that remain undisclosed but not hard to fathom. The Russian partners, Mikhail Fridman, Viktor Vekselberg and Len Blavatnik, who form the Alfa-Access-Renova (AAR) consortium, fear their future. The Kremlin hankers after a government holding in TNK-BP, probably via one of the state-controlled energy groups, Gazprom or Rosneft. It is unclear how it should happen (Gazprom has delivered conflicting messages) and the Russian government seems to be enjoying its view of the fight between BP and the oligarchs without overtly taking sides.

What is inevitable, however, is that one or both of the sides will see its interest in TNK-BP reduced and the AAR partners fear a squeeze and a bad deal.

Globe and Mail