While most Russia-watchers have been concerned about the recent OAO Yukos investigation and subsequent unraveling of the company's proposed merger with rival Russian giant OAO Sibneft, TNK-BP has been going about its business and is poised to capitalize on potentially explosive energy growth in Russia over the next decade.
BP PLC's $7.7 billion investment for half of what would become TNK-BP, as of September 2003, marked the largest single foreign investment in a Russian company in history.
Analysts say the TNK-BP deal spurred talk of the Yukos-Sibneft deal, and increased interest in Russia from the likes of ExxonMobil Corp., ChevronTexaco Corp., and other major oil and natural gas companies.
"The asset base is mature, but not like the North Sea or Gulf of Mexico. We are looking to transform some of these assets," said Bob Dudley, the American president and CEO of the Russian-British energy company, in a recent interview with OGJ. TNK-BP already has nine major oil producing areas, five refineries, and six prospective upstream assets scattered all over the Russian territorial expanse.
While many have been concerned about the circumstances leading to dissolution of the Yukos-Sibneft merger, Dudley remains bullish on Russia.
"The current uncertainty hasn't affected our day-to-day operations or our plans at all," added Dudley, alluding to the company's ambitious plans for a natural gas pipeline network across Russia traversing into China and potentially reaching other Asian markets, including South Korea, in the future.
Ambitious plans
By its own estimate, TNK-BP is already the eighth largest oil producer and ninth largest oil reserves holder among private oil and gas companies. TNK-BP is Russia's third largest oil company, with oil production now at 1.33 million b/d, up from an average 1.2 million b/d.
Western Siberia accounts for two thirds of TNK-BP's oil production, or close to 800,000 b/d in the Khanty-Mansiysk, Yamal-Nenets, Tyumen, and Novosibirsk regions.
BP-TNK also produces 400,000 b/d of oil in the in the Orenburg, Saratov, Volgograd, and Udmurtia areas of the Volga-Ural region.
Dudley says he expects TNK-BP's oil and natural gas production growth in Russia to reach 6-8% in 2004 and 5% in 2005.
And BP-TNK is diversified, with refineries in Russia and in Ukraine at Ryazan, Saratov, Orsk, Neizhenvartovsk, and Lisichansk. The company has a total refining capacity of 500,000 b/d. BP-TNK also has considerable marketing operations with more than 2,100 branded retail gas stations in Russia and Ukraine, and more than 20% of all Moscow retail stations.
With more than 115,000 employees in Russia, TNK-BP controls the assets of the former Tyumen Oil Co., OAO Sidanko, and BP's existing operations in Russia. The company is 50% owned by Russia's Alfa Group in combination with the Access-Renova consortium, and 50% owned by BP. The market value of TNK-BP is pegged at $15-17 billion.
Commenting on the challenges of blending BP's corporate culture with its Russian partners, Dudley said his company is "making remarkable strides weaving together different business cultures.
"We are in the process of transforming the company in terms of corporate governance and complying with modern accounting standards and GAAP [Generally Accepted Accounting Practices] systems," he added.
Dudley didn't minimize the complexity of the task of melding its Russian partners' practices with BP's standards, noting that it's "going to take some time" before all the accounting systems are fully integrated.
One issue is the consolidation and cost-savings achieved by the recent merger. Dudley said there are two headquarters in Moscow and that any merger of this scale involves finding "better efficiencies" by eliminating "duplication of functions." BP-TNK is expected to reinvest much of the cost savings it is able to achieve from the merger.
The new savings will undergird a cash-flush position for the new company.
"Our operations generate enough cash that we don't need to borrow, and thus we fund our investments with cash flow," he said.
Gas market potential
Chief among the opportunities for TNK-BP are Russia's vast gas resources and huge potential gas demand.
While Dudley is optimistic about the potential of the Russian gas market, he also said real change will only happen "if and when the Russian gas industry restructures itself."
One of the hottest topics in the debate by western energy companies over potential future investments in the Russian natural gas industry is what will happen in the Far East.
TNK-BP has said it will be expanding natural gas production in Western Siberia and recently said it is pushing forward with a $676 million pilot project to supply the Irkutsk region with gas. The company has said it provided 30% of the funds for the project, while JSC Sberbank of Russia will extend the remaining credit. In addition to producing the gas, the company also will construct the Kovikta-Sayansk and Sayansk-Angarsk gas pipelines. TNK-BP expects that by 2006 the Irkutsk region will be able to count on 300 million cu m/year of the Kovikta gas supplies and 2 billion cu m in 2007, with the potential to expand to 6 billion cu m/year in the future.
And TNK-BP isn't focusing only on the eastern reaches of Siberia. Dudley sees new development, especially in western Siberia. "In western Siberia we're seeing fast-paced explorationU," Dudley said, adding that the company has plans for expansion of its natural gas development projects intended to deliver supplies to Northeast China and South Korea.
"China and South Korea are logical markets for Russian natural gas," Dudley added.
Moving Russian oil east
Moving Russian oil east is just as logical a move as it is for natural gas, in TNK-BP's view.
Sergei Darkin, governor of the Primorsk Region near Vladivostok, recently told the Russian news agency RIA Novosti that the Japanese are ready to put $5 billion towards the construction of the Angarsk-Nakhodka oil pipeline, and as much as $14 billion in various oil and gas projects in the Russian Far East. On Dec. 15, 2003, Russian Prime Minister Mikhail Kasyanov said the Angarsk-Nakhodka pipeline would complement another Russian oil pipeline that leads to Daqing, China.
The Russian government has been negotiating simultaneously with both the Japanese and Chinese on the pipeline routes. Just as the Russian prime minister was talking about pipeline routes, Viktor Vekselberg, COO of TNK-BP, said his company supports the Nakhodka route as more favorable for its oil projects in East Siberia. TNK-BP is preparing a development plan for the Verkhnechonskoye oil field and has already applied to conduct seismic surveys of the Vostochno-Sugdinskaya area prospects. The Nakhodka route is backed by state-owned pipeline operator OAO.Transneft and state-owned oil major OAO Rosneft.
What's next
In November, TNK-BP said it plans to invest more than $1 billion in the oil fields of Western Siberia and areas of European Russia in 2004.
Dudley said there is a need for improving technology for oil recovery in Russia. His company plans to step up investments in order to boost oil recovery rates and to upgrade refining operations.
And TNK-BP on Dec. 19 received approval from the European Union for its deal for a $1.35 billion for a 50% stake in Russia's OAO Slavneft. BP-TNK will run Slavneft with its joint venture partner Sibneft.
It is unclear, now that Sibneft and Yukos have broken off their merger, if TNK-BP or other global majors, such as Royal Dutch/Shell Group, will take renewed interest in Sibneft. There are reports Total SA has expressed an interest in Sibneft.
Career highlights
Robert Dudley is president and CEO of TNK-BP, a joint venture between BP and the consortium of Russia's Alfa Group and the US-Russian Access/Renova investment group.
Employment
Before appointment to the job in March 2003, Dudley served as group vice-president responsible for BP's upstream businesses in Russia, the Caspian region, Angola, Algeria, and Egypt. He previously was group vice-president for BP's renewables and alternative energy activities within the gas, power, and renewables unit for BP in London, with responsibilities for BP's global solar business and wind and hydrogen activities. Prior to that he served as executive assistant to Group Chief Executive John Browne. In 1999 he held the position of general manager for BP group strategy in London and was in a similar role with Amoco Corp. in Chicago prior to the merger between BP and Amoco. Dudley has worked extensively across the international oil industry and was based in Moscow during 1994-97 with Amoco in a corporate development role for both upstream and downstream businesses. Prior to that he worked on the restructuring of oil and gas research and development activities in the US, and during 1987-93 he worked on the negotiation and development of projects in the South China Sea. In the 1980s he served in a variety of commercial and operating roles in the US and the UK North Sea working in Chicago, Aberdeen, and Houston.
Education
Dudley has a degree in chemical engineering from University of Illinois, a masters in industrial management from Arizona-based Thunderbird graduate international management school, and an MBA from Southern Methodist University.