Among the squares of 17th century London, St. James’s is one of the least pretentious, even if several of the buildings on the square have made a reputation for themselves as pretenders to such things as wealth management, war-fighting, and diplomacy. For them, the equestrian statue of King William III, set in the centre of the square’s garden, is an ill omen. For in 1702 William died of complications from falling off his horse.
BP, whose headquarters are at No. 1 in the Square (left image, behind the horse), has a bad knack for picking the wrong horse, the wrong footing, and then falling off catastrophically. The selection this week of Robert Dudley (right image) as the new chief executive replacing Tony Hayward is a fresh example. No doubt there must be at least one fall guy for BP’s disastrous performance in the Gulf of Mexico. But to pick Dudley requires a spill of brains in the BP board room that is blacker than the spill around the Macondo field. Miscalculation as great as Dudley made in Russia deserves to be remembered now, before he brings to the United States and remainder of BP’s operating territories three characteristics that brought his company down two years ago in Moscow – under-estimation of rivals, political incompetence, and the incapacity to learn from mistakes. At least, in the US it is already clear to Dudley who the president of that country really is. In Russia, it was his mistake on that point which led to all the others.
Dudley’s official BP biography puts Russia at the centre of his career achievement. He started out, says the bio, with the Amoco oil company from 1979 until it was taken over by BP in 1998. Then, “following a variety of posts in the US, the UK, the South China Sea and Moscow, in 2001 he became group vice president responsible for BP’s upstream businesses in Russia, the Caspian Region, Angola, Algeria and Egypt. From 2003 to 2008, Mr Dudley was president and chief executive officer of TNK-BP in Moscow.” What happened in Moscow was this:
Chapter 1, June 2008. Dudley conceives the idea of making a secret alliance with Gazprom and freshly elected President Dmitry Medvedev, wagering they would help Dudley multiply TNK-BP’s value with the addition of Gazprom-owned oil and gas reserves; and oust the Russian shareholders in TNK-BP led by Mikhail Fridman, head of the Alfa Bank group. Dudley thought Medvedev was strong; Fridman weak. He also thought his secret was a sure bet. Fridman began by issuing public warnings. Dudley, then Hayward refused to listen. “BP’s mistake,” Fridman said at the time, “was that it anticipated it would really know what was going on in Russian political circles. They misjudged if they thought that Gazprom would easily push us out of business. I said many times to Mr Hayward we are not selling and nobody will push us. It is not an intention of Putin or Medvedev, despite all these rumours”.
Chapter 2, July 2008. Under pressure from the Russian courts, the visa agency, and from high-level Russian officials, Dudley thinks of retaliating by filing a UK High Court claim against Fridman and the other Russian shareholders. This reveals that BP’s board and management may have intentionally misled their own shareholders over profit flows and tax liabilities in Russia, not to mention other embarrassments that doom the court claim.
Chapter 3, September 2008. BP begs Prime Minister Gordon Brown to intervene on their behalf with the Russian leadership. He does. He fails. BP signs its unconditional surrender, Dudley is ousted from the country, and the appointments of operating executives for the company placed under Fridman’s control. Deputy Prime Minister Igor Sechin announces: “We are pleased that the conflict has been settled and the parties to the negotiations have reached an agreement on the shareholder level without involving third parties, including the state. This sends the right single to the entire market.”
TNK-BP is the single most valuable oil producer in the BP group. According to BP’s last annual report, its share of TNK-BP’s oil production in 2009 amounted to 840,000 barrels per day, 33% of BP’s total output – see page 27.
By contrast, all of BP’s wells in the Gulf of Mexico contributed less than half as much – 387,000 barrels per day. If it wasn’t for the spill, BP’s production of crude oil in the US, including the Gulf, Alaska, and onshore oilfields, would be a relatively small part of the company’s global production — 665,000 barrels per day, or 26% of the aggregate. That is 175,000 barrels less than TNK-BP. If not for the spill, command of Russia would be of far greater production and financial significance to BP than the US.
TNK-BP’s reserves have been counted at about 23% of BP’s global total. This proportion will grow as BP sells off assets, including mature oilfields in North America, Egypt, and elsewhere, to pay the Gulf of Mexico spill costs. For its future growth, BP’s disposal plans will demonstrate that while the Gulf of Mexico crisis focuses attention on the company’s problems in the US, its future as a company is elsewhere – that is, if the US pressure isn’t aimed at breaking BP up for takeover by US oil companies. If BP’s board is anticipating combat with them, Dudley’s defeat by Russian oligarch Mikhail Fridman ought to be exemplary.
At current share prices, BP’s market capitalisation is $121 billion. TNK-BP’s market capitalisation is $30 billion – 25% of BP’s size. The trajectory of their share prices shows the damage the spill has inflicted: