Exxon Mobil (
) is no longer the world's number-one oil producer. As of Friday,
that title belongs to Putin Oil Corp - oh, whoops. I mean the title
belongs to Rosneft (RNFTF.PK),R ussia's state-controlled oil
Rosneft is buying TNK-BP (TNKBF.PK) , which is a vertically
integrated oil company co-owned by British oil firm BP (
) and a group of Russian billionaires known as AAR. One of the
top-ten privately-owned oil producers in the world, in 2010 TNK-BP
churned out 1.74 million barrels of oil equivalent per day from its
assets in Russia and Ukraine and processed almost half that amount
through its refineries.
With TNK-BP in its hands, Rosneft will be in charge of more than
4 million barrels of oil production a day. And who is in charge of
Rosneft? None other than Vladimir Putin, Russia's resource-full
TNK-BP has been an economic dream, producing many billions in
dividend payments for its owners - but it has been a relations
nightmare. The partners have fought repeatedly. In 2008, R ussian
authorities arrested two British TNK-BP managers amid a dispute
over strategy that forced then-CEO Bob Dudley (who now heads BP) to
flee Russia - and that is just one of many partnership
The writing has been on the wall for TNK-BP since this time last
year, when one of the AAR billionaires quit his role as CEO of the
venture and declared that the relationship with BP had run its
course. Since then speculation has raged over who might buy into
the highly profitable venture.
Now we know: Rosneft is buying the whole thing in a two-part
deal. In the first part, Rosneft is acquiring BP's 50% stake of the
joint venture in exchange for cash and Rosneft stock worth $27
billion. The deal will give BP a 19.75% stake in Rosneft. In stage
two, AAR would get $28 billion in cash for its half, though this
deal is not yet finalized.
Finalized it will be, however, because the billionaires of AAR
are now eager to sell, rather than remain in a joint venture with
the powerful Russian oil company. Rosneft gained much of its
current heft at the expense of another Russian oligarch whom Putin
threw under the bus, and the billionaires of AAR know they could
easily meet the same fate if they try to partner with Rosneft as
If it all comes to pass, Rosneft's daily production will jump to
some 4.5 million barrels per day - enough to put the Russian firm
neck and neck with Exxon in the race to be the world's top oil
producer. And the deal that seals it will be worth something like
$56 billion - for comparison, Nike (
) is worth $34 billion and Kraft (KFT) onl y $27 billion. If the
TNK-BP deal goes through, it will be the largest in the industry
since Exxon bought Mobil in 1999.
Numbers like that deserve a little contemplation. Russia is
spending a heck of a lot to buy its own oil production - smells
like nationalization to me. And with Vlad Putin - the most
resource-driven leader in the world today - behind the controls, I
dare say we're witnessing the "Saudi Aramco-ing" of Russian
Putting Putin in a position of even greater resource power can
only lead one place: To high oil prices and an
amazing bull market in energy
What's In It For BP
Russia has been a pretty profitable place for BP, and while BP
is tired of dealing with the drama within TNK-BP, the British firm
definitely wants to stay in Russia to participate in developing the
country's vast northern oil and gas potential.
A cash and shares deal gives BP a nice ownership stake in
Rosneft, which is the best way to profit from Russia's immense
untapped oil potential - because Putin will ensure Rosneft gets
first dibs at prime opportunities. Depending on the size of BP's
slice, the company would likely also get a seat or two on Rosneft's
board. That is as important as anything else, because it would put
BP personnel in regular, direct contact with Igor Sechin, the CEO
of Rosneft, who has a significant say in Russian energy policy.
In general, a role in Rosneft would also allow BP to pursue
closer ties with a Kremlin that exerts a much tighter hold on the
oil industry than it did in the 1990s, when BP first invested in
Russia. And anyone who wants to operate in Mother Russia has to
have an inside track to the Kremlin - or you are likely to find
yourself unexpectedly kicked to the curb.
Putin's Plan Is Working
Rosneft has grown dramatically in the last ten years - not by
chance, but because Rosneft is Vladimir Putin's vehicle to reassert
state ownership over a fair chunk of Russia's oil fields. The most
famous example happened in 2003, when Putin charged privately held
producer Yukos Oil with a $27-billion tax bill that bankrupted the
company. The Russian president then handed Yukos' oil fields over
to Rosneft, immediately boosting Rosneft's daily production from
400,000 barrels to 1.7 million barrels.
It was blatant nationalization. Yukos' chairman and founder,
Russian billionaire Mikhail Khodorkovsky, was convicted of fraud
and sent to prison. Overnight, Rosneft ballooned from a small
producer to Russia's biggest oil company.
With a snap of his fingers, Putin had created a national oil
giant, a vehicle through which he could pursue his plan to reassert
Russian influence in the world by controlling other countries'
energy needs. The pending TNK-BP deal is simply the next step in
this plan. If Rosneft does buy TNK-BP, the state oil giant will
pump almost half of the barrels of oil produced in Russia.
That is a massive amount of oil. Remember, only Saudi Arabia
produces more oil than Russia; and no country in the world exports
more oil than Russia. The country is an energy superpower - and by
gradually nationalizing Russia's energy resources, Putin is
tightening his grip on Europe's energy needs.
However, Putin knows he can't quite do it alone - his country
doesn't have enough oil and gas expertise. Without the right
expertise, production will tank, and Putin's whole plan will be
History proves that point. When Saudi Arabia nationalized its
oil industry in 1980, the country was producing more than 10
million barrels of oil per day. Within five years, production had
fallen by more than 60%.
For Putin, that's not an option. That's why he is encouraging BP
to stick around - Rosneft needs BP's technical expertise in order
to tap into Russia's huge reserves of unconventional tight oil and
shale gas. Having BP as a significant shareholder also lets Putin
continue the pretense that Rosneft is not simply an arm of the
But an arm of Putin's government it is, and as Rosneft gradually
takes control of more and more of Russia's oil wealth, Putin's
leverage on the international stage will increase. Saudi Arabia may
have struggled in its early years as an oil-producing giant, but
today the country hosts incredible clout on the world stage because
of its ability to open or close oil spigots and thereby influence
global oil prices.
Europe is reliant on Russia for oil and gas. To be in control of
other nations' necessary energy resources is to be in a very
powerful position - one that Putin has been working toward for more
than a decade.
He has built pipelines that bypass troublesome countries and
feed into needy markets. He is cornering the uranium market by
owning a large amount of primary production and controlling 40% of
global uranium-enrichment capacity, while leaving the United States
in need of a new nuclear-fuel supplier. He has increased Russia's
oil and gas production and encouraged unconventional
Gazprom (GZPFY.PK), the Russian state gas company, already has
Europe wrapped around its little finger. Russia supplies 34% of
Europe's gas needs, and when the under-construction South Stream
pipeline starts operating, that percentage will increase. As if
those developments weren't enough,yesterday Gazprom
the highest bid to obtain a stake in the massive Leviathan gas
field off Israel's coast .
Gazprom in control of Europe's gas, Rosneft in control of its
oil. A red hand stretching out from Russia to strangle the
supremacy of the West and pave the way for a new world order- one
with Russia at the helm.
It is not as far-fetched as it might seem - or as you might want
it to be. If Rosneft does buy both halves of TNK-BP, it will become
a true goliath within the global oil sector. All the little Davids
who rely on its oil will be at Putin's mercy. Same goes for Gazprom
as a goliath in the continent's gas scene.
In this scenario, Russia could choke off supply to raise prices.
Putin could play oil- and gas-needy nations off one another,
forcing European nations to commit to long-term, high-priced
contracts if they want to secure supplies.
Or imagine this: Russia could join OPEC. Suddenly the oil cartel
would control more than half of global oil production and most of
its spare capacity. With that kind of clout, the nations of OPEC
could essentially name their price for oil - and the rest of the
world would simply have to pay.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Christmas In Athens: You're A Mean One, Mr.