Streetwise Professor

Today’s WSJ ran an extensive article on BP’s misadventures in Russia over BP-TNK.   It is titled “Misreading the Kremlin.”   Yes, truly an understatement.

This quote stands out:

“The mistake was believing that there was consensus among all the guys that make these decisions,” said one person close to BP.

Repeat that quote to yourself a few times.   Then ask yourself: who in their right mind could possibly think that there was consensus “among all the guys that make these decisions”?   Anyone who follows this at all knows–knows–that there are battling clans in Russia, and that the most prominent and the most powerful and the most adversarial center on Rosneft and Gazprom.   There is never consensus among these guys.   At best there is a truce, like that between the Five Families of the New York mafia.   Putin’s main job is to balance these factions and keep things from breaking into outright warfare.     There is an uneasy peace, and one faction is not going to do anything to help the other.   Indeed, each will try to torpedo the other whenever possible.

Anyone following Russian energy also knows that Igor Sechin is the godfather of the Rosneft clan.   So what does BP do?   It goes to Sechin–the engine of Yukos’s destruction–to talk about its plans to cooperate with Gazprom:

In April, Mr. Hayward visited Igor Sechin, a powerful Putin confidant. According to people familiar with the meeting, Mr. Hayward laid out BP’s efforts to reach a deal with Gazprom.

Un-freaking-believable.

This is a runner-up in the understatement derby:

Mr. Sechin was in an interesting position: He also serves as chairman of state oil company Rosneft, and is generally opposed to further expansion of Gazprom, especially into the oil business, say several people who’ve discussed these issues with him.

“Generally opposed to further expansion of Gazprom.”   You don’t say.

I can only imagine the derisive laughter echoing off the walls of Sechin’s office after Hayward left the room.

In other words, if this article is to be believed, BP was unaware of the most basic contours of the Russian political landscape.   It assumed that “the Kremlin” was a monolithic body at odds with the AAR oligarchs.   Certainly the oligarchs were in a tenuous position, but their very survival was–and is–almost certainly attributable to the fact that the “Kremlin” is anything but monolithic.   The balance of power between the Rosneft-Sechin and Gazprom factions would have been disrupted by ousting the oligarchs, and putting one of the factions in control of BP-TNK.   Hence, these oligarchs survived.

Given the history of Yukos, it should have been readily apparent if the powers that be wanted to destroy these oligarchs, they would have already been destroyed–and BP would not have been the beneficiary.   Their very existence should have raised questions in the mind of BP CEO Tony Hayward.   No doubt Gazprom was feeding Hayward and other BP people a line that “the Kremlin” was looking to boot the oligarchs.   But one must take any representation from Gazprom with all the grains of salt from all the mines in Siberia.   And one must also base all strategies on an understanding of the fundamental Gazprom-Rosneft rift, and an analysis of how one’s proposed moves would play into that battle.

Any strategy involving the Russian energy business must start from a recognition that   there is bitter division and intense rivalry within the Russian hierarchy, especially in anything involving energy.   Basing a strategy on an assumption of “consensus” was a blunder of the first order.   Dealing with Sechin to advance a transaction that would benefit Gazprom is an even worse blunder.

In short, this article makes Tony Hayward and the rest of BP’s upper management look like complete incompetents.   This quote pretty much sums it up:

“There’s a group of people who know what’s going on and know what to expect,” said one person close to BP. “And then there’s the London office.”

Well put.

This is not to say that there is any right way to navigate the Russian energy labyrinth.   Or, to mix classical metaphors, in attempting to do business in Russian energy one must steer between Scylla and Charybdis–a virtually impossible task.   But blundering along as if these dangers do not exist is inexcusable.