On Feb. 8, after delivering the highest quarterly profit in a decade, BP Plc Chief Executive Officer Bernard Looney offered a strong defense of the company’s deep ties with Russia’s largest oil producer. Russian tanks had not yet crossed into Ukraine, but with 130,000 troops at the country’s borders, tensions were quickly rising, and BP’s 20% stake in Kremlin-backed Rosneft PJSC meant the London-based oil giant had a lot at stake.
Wearing a V-neck sweater, plain white shirt, and no tie, Looney in a television interview offered a simple rationale for continuing operations in Russia: “Our job is to focus on the business of business. We avoid the politics.”
A little more than two weeks later, the politics became unavoidable. And as the reality of Russia’s unprovoked invasion in the early hours of Feb. 24 sunk in, BP executives quickly realized they needed to end the company’s relationship with Rosneft, the fruit of 30 years of investment in Russia.
The day after the invasion, BP’s board gathered—some in person, some virtually—at its London headquarters. At 5 p.m. executives including Looney dialed into an emergency meeting with U.K. Business Secretary Kwasi Kwarteng, who made it clear that the government wanted them to end the Rosneft relationship.
“The world tends to look very different after one has an invasion of a neighboring country,” says Jonathan Elkind, a senior research scholar at the Center on Global Energy Policy and a former official in the U.S. Department of Energy.
The board met again on Sunday, Feb. 27, and agreed that Looney and former BP head Bob Dudley would resign from Rosneft’s board. BP would exit its stake in the company and all other ventures in Russia. After informing Rosneft’s leadership, it made the decision public.
The cost to BP shareholders? About $25 billion, more than a quarter of the company’s market value. With little prospect of finding a buyer or getting the Kremlin to pay for the shares, BP was forced to acknowledge it was likely to lose the whole value of its investment.
“Anyway you look at it, it’s not good,” says James Henderson, who heads energy transition research for the Oxford Institute for Energy Studies and is the author of an upcoming book on the history of Rosneft. He agrees that there’s very little chance of BP finding a route to getting its money back.
BP’s abrupt decision started a wave of energy companies leaving Russia. In the oil and gas world, Shell Plc and Norway’s Equinor ASA were next, followed by Exxon Mobil Corp. A day later, France’s TotalEnergies SE was more equivocal, saying it wouldn’t provide capital for new developments; it ultimately stuck to its investments.
Beyond energy, the list of companies severing ties or suspending business activities has grown, including the likes of Apple, Harley-Davidson, and Mastercard.
Industry observers say the move was more than a public-relations gesture. “That’s pretty damn expensive virtue-signaling,” Elkind says. “The reality here is that government decision-makers and business executives alike have had to confront the really unwelcome reality that Russia’s invasion of Ukraine” changed everything.
John Browne, who was then a senior executive at BP, first thought of the possibility of investing in Russia while on a business trip to the Soviet Union in 1990. Five years later, Browne became CEO, a role he held for 12 years.
It took until 1997 for BP to make its first investment in the country, paying $500 million for a 10% stake in Sidanco Oil, a major production company run by oligarch Vladimir Potanin. The investment quickly soured because of some local managers’ use of obscure bankruptcy laws to sell off assets on the cheap for their own benefit, but Browne was able to salvage what was left of the business by plowing even more money into Russia. He plunked down an additional $8 billion for a 50% stake in Mikhail Fridman’s TNK oil operation. That created TNK-BP, a lucrative joint venture that made BP Russia’s largest foreign investor and the world’s second-largest private oil and gas producer, behind Exxon.
By the time Browne left BP in 2007, the company had recouped its investment in the TNK operation and was on track to make four times the money it had put into the venture, he wrote in his memoir.
Still it was a bumpy marriage, and eventually the relationship soured between the Russian owners and BP. The oligarch partners, unhappy about things including the swelling costs of providing expatriate staffers tied to BP with high salaries and lavish living expenses, waged an extended campaign against the joint venture’s head, Dudley, using lawsuits and labor and tax inspections to exert pressure to change the deal. Eventually, Dudley fled Russia, saying he’d been subjected to “sustained harassment.”
BP and the Russian partners found a solution by orchestrating a complex deal in which the London oil giant received $12.5 billion and a 19% stake in Rosneft in exchange for its part of TNK-BP. The oligarchs walked away with cash for their share.
Twice a year, BP took its dividends from Rosneft, headed by Igor Sechin, a close associate of President Vladimir Putin’s. Even though BP had little influence over Rosneft’s day-to-day operations, the stake added millions of barrels to its reserves and accounted for about a third of its daily production.
At first glance, the impact on BP from its looming Russian divestment seems severe. Rosneft accounted for almost half of the company’s reserves. BP devoted a section in its quarterly results to its share of profit from Rosneft. But that was mere accounting: BP didn’t have access to those barrels of oil and gas, it didn’t receive a share of quarterly profit from the Russian major, and it didn’t have to contribute cash for Rosneft’s capital spending each year. Instead it was largely a passive investor, collecting lucrative dividends.
If this wasn’t a forced exit, BP might have been able to sell its shares in return for something, but it was never going to be easy, Henderson says, “not once they had a 19% stake in a major state company.”
Now the prospect of getting a top price for its Rosneft stake seems to have become moot. “The current situation effectively leaves the perception of the decision out of BP’s hands—that is to say, the market may be more forgiving around BP not receiving fair value for the holding,” says Biraj Borkhataria, an analyst at RBC. “We doubt they would have received fair value for any sale under most circumstances. … I think the market will ignore the noncash impairment and focus on the loss of dividends.” RBC forecasts the dividend loss to be $2 billion a year, but Borkhataria says it “is more than offset by higher commodity prices.”
As a rule of thumb, for every dollar the benchmark price of Brent crude rises, BP adds $340 million to its pretax profit. Since BP announced its Rosneft exit, oil has climbed $29 a barrel.
The split could also help BP’s green ambitions. It’s one of a group of European energy majors promising to slash their greenhouse gas emissions by the middle of the century. To the chagrin of environmental groups and environmental, social, and corporate governance-minded investors, the U.K. company’s aims didn’t take into account emissions produced from its stake in Rosneft. With the Russian oil company out of the picture, BP’s energy transition strategy seems more credible.
Yes, having to take a potential $25 billion hit stings, Henderson says. “But if you did the ledger of BP’s investments in Russia over the last 30 years, the ledger would be positive, not negative, despite the short-term pain,” he says.
And that’s certainly more than Browne bargained for when he took his proposal to invest $500 million in Russia to BP’s board decades ago.
“We should consider it an outright gamble,” he recalled telling the board, in his memoir, at the time. “We could lose it all.”Read next: Russia Sanctions Could Send Its Economy to New Lows
©2022 Bloomberg L.P.
