While gathering up various links relating to the BP-Rosneft deal, I was struck, after reading this week’s Economist, by the limitations of journalism in general (BP in Russia: Dancing with Mr Putin | The Economist). I mention the Economist not so much to single it out, as it is a most respected paper (and exceedingly well written), but rather to remind myself that it is not presentation, prestige or society’s esteem which is important, but the articulation of relevant facts which may be helpful to me as a speculator.
A close reading of this article provides a signal example of why one cannot merely rely on a prestigious publication to do one’s research. One may be so swept up by their eloquence that one follows their argument to its logical conclusion, Percy Thomas style (see “Reminisces of a Stock Operator” for the reference), and ends up making a bet for the wrong reason (that is not to say that luck might not result in gain, only that the trade logic was wrong). From the Economist:
EARLIER this month Bob Dudley was ferried along the ten-lane avenue that links Vladimir Putin’s home to the Kremlin. The Russian prime minister shook hands with the boss of BP, sealing a $16 billion deal. The British oil firm will gain access to Russia’s vast and deeply frozen Arctic oilfields. It will also get a 9.5% stake in Rosneft, Russia’s state-controlled oil giant, to add to the 1.3% it already owns. In return Rosneft will get 5% of BP. The deal was announced to the world on January 14th.
The article opens with a personal detail and insider background which is excellent for the story but irrelevant to the speculator, followed by facts of the deal.
It is the first share swap between a national oil company and a private oil major. It is also the first joint venture to explore in an area that could hold as much oil and gas as the North Sea. Far from keeping a low profile after its disastrous oil spill in the Gulf of Mexico last year, BP seems eager to prove that it is as bold as ever.
More background and colour--still, this is not helpful for the speculator. The next paragraph considers the benefits to Russia and then raises the question of whether it makes sense for BP, a question which could be illuminating for the purposes of speculation.
Hydrocarbon potential is mentioned, vaguely, but then the article moves to risks. Operational risks are outweighed by potential rewards, the article concludes. But that is not the focus of the article. The greater risks are political. Rosneft was formed from assets “grabbed” from Yukos. BP is betting that the misfortune suffered by Yukos won’t befall BP. The now successful operation of TNK-BP is cited.
Lucy Haskins, position unknown, of Barclays Capital expresses the view that the deal is a mutual vote of confidence. Because the Russian government now has an ownership state in BP and the deal showcases Russia’s investment climate, Mr Putin will want it to succeed.
Yet critics, including an American congressman, find much to complain about. Oil firms often have to do business with iffy regimes, but by taking a share in Rosneft, BP is in effect buying stolen goods. Yukos’s former shareholders are suing the Russian government in international courts for roughly $100 billion. One court in Sweden recently found that the Kremlin’s expropriation of the company was “unlawful, not in the public interest, discriminatory and without payment of compensation”. BP will surely become embroiled in this legal mess, and its reputation may suffer.
The deal with BP legitimises the Kremlin’s carve-up of Yukos, and converts a portion of its ill-gotten gains into something liquid and secure—BP shares. It vindicates Mr Putin’s conviction that the rest of the world operates in much the same way as Russia and that Western lectures about ethics are hypocritical. It silences Russian liberals who argued that the destruction of Yukos would deter foreign investment. And it tells foreign investors that they have no choice but to cuddle the Kremlin. That could have long-term consequences.
Is the assertion that BP’s deal legitimises the Kremlin’s carve-up of Yukos correct? These points were also raised, with greater relevance, during Rosneft’s IPO (Rosneft IPO: Less Than Meets the Eye). So, if one is to level the charge that BP’s investment in Rosneft is buying stolen goods and legitimises the Kremlin’s carve-up of Yukos and so forth, that would be a conclusion one would have reached during the IPO in 2006. The subsequent increase in holding from 1.3% to 10.8% doesn’t make BP more “pregnant” than they were in 2006. In an echo of the coverage during the Gulf oil disaster, the article ignores all the other buyers of Rosneft shares such as CNPC, Petronas and India’s ONGC. The Financial Services Authority, despite an attempt by Yukos to block the IPO, permitted it to proceed.
Actually, the fact that the IPO took place on the LSE would seem to be more determinative of legitimacy than purchases of shares by other companies (including BP). But this is all unhelpful, unfortunately, for the speculator. If this was something actionable, one could go short. But this is a matter dating from before 2006 and priced in by now (in both BP and Rosneft).
Will the deal succeed? Yes says Lucy Haskins of Barclays. But all we have is an opinion of someone from an investment bank.
Will the Yukos suit impair Rosneft? Actually the question should be two fold: will it impair Rosneft and will it impair the three blocks in the Kara Sea which are the subject of the deal? The three blocks were recently bid by Rosneft long after the demise of Yukos. So the three blocks and their development are presumably unobjectionable. Also, only Rosneft or Gazprom can bid on offshore leases in any event.
As for the second question, the article says the suit is against the Russian government. Rosneft, although a state controlled corporation, was presumably merely the buyer of the “stolen” goods. So does Rosneft as buyer have good title? This would seem to be a question for a Russian court and it would be difficult to see how an international court could claim jurisdiction to answer that decidedly domestic question (see US decision: https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2005cv2077-74). There could be other claims in the $100B suit but the article doesn’t mention anything other than the presence of the suit and a finding of a Swedish court that the expropriation of Yukos was without payment of compensation. Reading within the four corners of the article, at most the claim would be against the Russian government and the remedy would be payment of compensation. The article does not describe a mechanism by which a ruling favourable to the claimants could impair Rosneft’s market value.
So what relevance does this suit have to BP’s market value? Is it merely the conclusion that “BP will surely become embroiled in this legal mess, and its reputation may suffer”? As the suit is against the Russian government, it is difficult to see how BP becomes “embroiled.” If I buy shares in Rosneft will I face the risk of becoming embroiled in this legal mess? At most, it seems, I face only a possible drop in value of the shares, not a need to retain counsel. Again, BP held 1.3% of Rosneft since the IPO. How does increasing its stake-hold to 10.8% transform their position?
The Economist concludes by pointing out that the potential rewards are huge but distant. I won’t bore you with the expected timetable as this seems typical for projects of this nature (and will no doubt be extremely challenging given that the Kara Sea is ice bound for most of the year).
Finally, the Economist helpfully directs BP to re-read Rosneft’s prospectus, which points out that Rosneft may engage in business practices which do not maximise shareholder value due to control by the Russian government. I doubt they neglected to do this since they invested in the IPO.
Even in connection with the substance of the Yukos matter, Lord Browne, in his book “Beyond Business” makes clear from his personal experience when he was leading BP and dealing with Mikhail Khordorkovsky, that the issue is far more nuanced (Selective justice | East of Europe: The BRUK states). The objection might be that Putin applied the laws against Khodorkovsky for political purposes but not against other oligarchs; it seems it was common practice to avoid the payment of taxes but political activities singled Khodorkovsky out. Selective application of the laws, observed Lord Browne, was the problem in Russia. But this nuance is far from the George Soros moral grounds of a blameless Yukos as a grounds for boycotting Rosneft. The application of equity requires clean hands.
That is not to say that the critics cannot be adjudged to be correct as legal proceedings are still ongoing (and there very well may be more selective justice). But legal risks and political risks are inseparable from the business of oil and this article does not illuminate either.
Reliance on a summary piece, even by one published by so august a body as the Economist, can lead to a great deal of biases, prevent understanding of the issues, and raise the Percy Thomas risk of investing on the basis of a poorly formed story rather than a close analysis of the facts. Indeed, another article in the same issue points the other way (Doing deals in Russia: How bad is BP? | The Economist). But this debate is more academic than illuminating for this speculator.