Rosneft Deal Shows Ex-KGB Spy’s Influence Under Putin: Energy

(Bloomberg – bloomberg.com – Matthew Campbell – October 24, 2012)

As a small army of advisers from eight investment banks huddled in London last weekend to negotiate Russian state oil company OAO Rosneft (ROSN)’s agreement to acquire BP Plc (BP/)’s Russian venture, the deal’s most important player had already left the country.

Igor Sechin, 52, a former Soviet spy and longtime ally of Russian President Vladimir Putin, 60, who is Rosneft’s chief executive officer, was back in Moscow. He had sealed the $55 billion deal to buy TNK-BP in an Oct. 18 face-to-face meeting with BP chief Bob Dudley at the British firm’s offices in St. James’s Square, leaving bankers to iron out details. He also helped negotiate buying out a group of Russian billionaires who own 50 percent of TNK-BP.

Sechin has been the driving force for the deal, reflecting his — and Putin’s — vision for an expanded state role in the Russian oil and gas industry, the world’s largest, according to people familiar with the situation. It also marks a dramatic turnabout in Sechin’s influence. Just last year Sechin was purged from the chairmanship of Rosneft by former president Dmitry Medvedev, part of a move to reduce the Kremlin’s influence in business, and humiliated by the billionaires in a rejected deal.

Sechin has “bounced back in a way that few people predicted,” said John Lough, a Russian specialist at London’s Chatham House think tank. After being spurned by Medvedev, Lough said, “He’s then scored this incredible victory. We are seeing the return of Igor Sechin.”

Initial Approach

The deal will boost Rosneft’s output to about 4.5 million barrels a day — equal to Exxon Mobil Corp. (XOM)’s production. Rosneft would become the world’s largest crude oil producer by acquiring TNK-BP.

Rosneft’s initial approach to BP in May, which came as Sechin was being named CEO, was an early indication of his strategy for the firm, one of the people said, declining to be identified discussing a private matter. That approach set off several months of behind-the-scenes discussions between advisers in London and Moscow before Sechin’s flying visit to the British capital last week, the person said.

The deal will expand Putin’s control of the energy industry as OAO Gazprom (OGZD), the state gas export monopoly that once dominated it, struggles to find growth. Russian companies majority-owned by the state now account for half the country’s economy, up from about 36 percent in 2006, BNP Paribas SA (BNP) analysts said in a note Oct. 22.

St. Petersburg

Sechin’s post-Soviet rise has mirrored Putin’s. Both men are alumni of the Soviet intelligence services with roots in St. Petersburg, Russia’s second-largest city, where the current president was deputy mayor in the 1990s.

In one episode from that time cited by the president’s 2000 autobiography, Putin rushed to the hospital — interrupting a visit to the city by CNN founder Ted Turner — after receiving a call that his wife, Lyudmila, had been in a car accident. Putin’s daughter Katya had already been picked up at the scene after Lyudmila asked someone there to call Sechin first.

Sechin joined Putin’s presidential administration in 2000, serving in positions including deputy chief of staff and becoming a key liaison between foreign energy companies and the Russian leader.

He was chairman of Rosneft from 2005 to 2011 before his removal by Medvedev, now the prime minister, who had sought a clearer line between government and business. Putin’s move to return Sechin to the helm of Rosneft was a sign of the president’s reassertion of power, Chatham House’s Lough said.

Buying out the billionaires’ stake in TNK-BP for $28 billion represents another comeback for Sechin. In early 2011 Putin announced that Rosneft, then still chaired by Sechin, had reached a deal with BP to jointly explore hard-to-reach offshore oil deposits. That agreement had to be reversed after the billionaires, through their AAR holding company, argued in court that BP was required to pursue all Russian prospects through the TNK-BP joint venture, dealing a setback to Rosneft. The group includes Mikhail Fridman, Viktor Vekselberg, Len Blavatnik, and German Khan.

Yukos Oil

Sechin has nonetheless built the company into Russia’s largest oil firm in part with the assets of bankrupt Yukos Oil Co., whose former chief executive Mikhail Khodorkovsky remains in prison on tax charges.

He oversaw the signing of cross-border alliances with other foreign companies including Exxon, Norway’s Statoil ASA (STL), and Italy’s Eni SpA. (ENI) Those alliances call for tapping new oil reserves that will be critical to maintaining Russian production at a post-Soviet high of 10 million barrels a day — and attendant geopolitical influence.

Sechin wants Rosneft to lead the next wave of Russian energy exploration as the country exploits offshore oil and shale deposits, and sees the scale of TNK-BP (TNBP) as essential to that vision, one of the people said. Under the terms of the deal, BP will become a pivotal Rosneft partner, with a nearly 20 percent stake in the Moscow-based firm and two board seats.

The British firm tapped Morgan Stanley (MS), UBS AG (UBSN), Goldman Sachs Group Inc. (GS), Lambert Energy Advisory Ltd., Renaissance Capital, and Credit Suisse (CSGN) Group AG to advise on the deal. Rosneft relied on Bank of America Merrill Lynch and Citigroup Inc. (C)

Less Volatile

“These national oil companies need the expertise of the international super majors to develop a lot of these things, and also need the capital,” said Matti Teittinen, an energy analyst at IHS Inc. (IHS) in Boston.

For BP, being in business with Sechin and Rosneft may mean a less volatile Russian position than it held through TNK-BP, which was “sort of an independent with unruly partners,” said Teittinen, referring to the billionaires’ group.

In 2008 BP’s Dudley, then heading up the Russian venture, was forced to flee the country amid a dispute with AAR that also saw TNK-BP’s offices raided by intelligence officers and foreign staff denied visas.

In economic terms at least, BP’s new Russian partner couldn’t be more stable. After absorbing TNK-BP, Sechin’s Rosneft will pump more oil daily than any Middle Eastern country except Saudi Arabia.

Sechin’s deal is a reflection of the fact that Putin and his allies “want state control of these key industries and the natural resources,” said Bernard Weinstein, a professor of energy economics a Southern Methodist University in Dallas. “And that’s why you see Rosneft on top now.”