LONDON (Reuters) – Within hours of Moscow launching its invasion of Ukraine, BP’s chief executive summoned his senior team to discuss the limited options for its Russian operations, including separating the British energy giant’s stake in Russian oil firm Rosneft or exiting completely, according to three senior BP (NYSE:BP) executives.
Bernard Looney made it clear at the Feb. 24 meeting that he saw the investment as untenable, the executives said. The decision, which marked a reversal of BP’s three decades-long relationship with Russia, was made easier by reservations Looney had about the Rosneft stake. Looney had become increasingly uncomfortable with BP PLC’s nearly 20% stake in the Kremlin’s state oil champion, according to the three BP executives and another person close to Looney, despite publicly defending the investment.
The chief executive has staked his future on a bet that BP can make the transition to clean energy much faster than its peers, moving away from the company’s 112-year history in oil. Rosneft’s strategy, by contrast, is to keep pumping oil for as long as there is demand for the fossil fuel.
“Rosneft was dissonant with our strategy,” said one of the three BP executives, who was familiar with the Feb. 24 meeting. The speed at which Looney, a 51-year old Irishman, moved to exit Russia reflects what was a clear-cut decision for him, the three executives said.
Looney had privately expressed his concern about Rosneft’s place in BP’s strategy to other top executives, according to a second of the BP executives plus the person close to Looney. The Rosneft investment had become a liability for BP because of Russia’s growing political isolation since 2014 but Looney didn’t know who to sell it to, said two western oil executive familiar with BP’s leadership thinking.
Within three days of Looney’s summoning his team, BP announced it was abandoning its Rosneft stake at a cost of up to $25 billion, becoming the first major Western company to pull out. The rapid retreat represents a dramatic exit for BP, one of the biggest foreign investors in Russia, wiping out half of BP’s oil and gas reserves, a third of its production and almost $1 billion in annual dividend.
The move put pressure on other oil majors, with London-based Shell (LON:RDSa) PLC and Exxon Mobil Corp (NYSE:XOM) of the United States quickly following suit by quitting multi-billion dollar investments in Russia. Those decisions will be harder to execute because both companies operate large projects in Russia; BP is a passive shareholder in Rosneft, although it has a joint oilfields project with the Russian firm.
The exit by Western firms adds to energy market uncertainties and disruptions. With gas and oil at or near record levels, analysts predict a further spike in inflation and a possible economic recession in the West in the coming months and a deep recession in Russia.
Other Western companies have since said they’re exiting business activities or putting them on hold as a result of the invasion, which Moscow calls a “special operation” to demilitarize Ukraine and capture what it says are dangerous nationalists.
“There was only one decision we could make,” the first senior BP executive said. “The exit was the only viable way.”
Speaking at an energy conference in Houston Tuesday, Looney said the decision to leave Russia was the “right thing.”
In response to Reuters questions for this article, BP referred to the company’s Feb. 27 statement. The situation in Ukraine “caused us to fundamentally rethink BP’s position with Rosneft,” Looney said in the statement.
The Russian company, whose full name is NK Rosneft’ PAO, didn’t respond to a request for comment. Rosneft has said it regretted BP’s departure and that BP came under unprecedented political pressure from “regulators and shareholders” to quit the partnership, without elaborating.
On Feb. 28, the European Union imposed sanctions on Rosneft’s CEO, Igor Sechin. The EU described the former deputy Russian prime minister as one a close advisor and personal friend of President Vladimir Putin. France last week impounded a luxury yacht – the 88-metre (190-foot) Amore Vero, or True Love in Italian – which it linked to Sechin.
Rosneft has said Sechin was unaware that any company linked to him owned the yacht. Sechin, who couldn’t be reached for comment, has in the past accused the West of using energy as a political weapon.
The day after Looney’s management meeting, Britain’s business secretary expressed concern to the BP CEO over the energy company’s large interests in Russia. In response to Reuters questions about whether the British government pressed BP to exit the stake, a government spokesperson said: “While this is ultimately a commercial matter, we welcome the growing number of organisations and governments” joining international efforts to isolate Russia diplomatically and financially.
BP has said it didn’t come under political pressure.
By contrast with Looney, his predecessor Bob Dudley stood by the stake when Russia annexed Crimea in 2014 and sought to act as a bridge between Moscow and the West. Dudley had spent several years of his career in Russia. He sought to prevent Western sanctions imposed at the time from impacting BP and used his personal relationship with President Putin and Sechin to broker diplomatic talks between Western and Russian leaders.
BP had entered Russian oil production soon after the collapse of the Soviet Union. It bought a stake in a small Russian producer in 1998 and through a series of deals came to own 19.75% of the Russian company in 2013. For Rosneft, the partnership with BP gave it access to international financial markets and constituted an important link for the Kremlin with the West.
In an early sign of his hesitation about the stake, Looney didn’t take a seat on Rosneft’s board until four months after becoming BP CEO in February 2020. Meanwhile, Dudley stayed on Rosneft’s board, where he remained until last month.
“Unlike with Bob (Dudley), there was nothing that connected Bernard to Russia,” said the second BP executive. “He never worked in Russia, he never drank with Sechin.”
Dudley didn’t respond to a request for comment.
Looney’s relationship with Sechin has been strained at times, according to the person close to Looney and the two western oil executives. According to one of those executives, when Looney announced plans to dramatically cut BP’s oil output by 2030 as part of its clean-energy transition, Sechin said in a private meeting with other Western oil executives that Looney was destroying everything Dudley had built.
Looney felt he and Dudley lacked sway over Sechin to influence Rosneft’s development to bring it more in line with BP’s, according to two of the three senior BP executives. BP urged Rosneft over the past two years to outline a strategy to reduce its own carbon emissions, which helped prompt the Kremlin-controlled company to publish targets to reduce emissions from its operations to net zero by 2050 at the end of last year.
The targets, however, fell far short of BP’s climate ambitions. Rosneft targets focused on emissions from extracting oil and gas and did not include the much larger emissions from fuels sold to customers.
Still, Rosneft generated profits for BP. During a February 2021 call with investors, Looney highlighted that Rosneft had been a good financial investment, noting BP had received $4 billion in dividends since 2013.
Under its transition strategy, BP has said it would retain the most profitable oil and gas operations, designating them as resilient hydrocarbons, to fund the transition.
“It felt like we could hold on to the Rosneft stake under the ‘resilient oil’ pillar of our strategy for a while, but it wasn’t deeply strategic,” said the first BP executive.
‘A BIT RASH’
During a meeting on Friday Feb. 25, the day after Looney’s management meeting, BP’s board discussed the exit of the Rosneft stake at length, according to the three executives. The topics included the impact of the move on BP, its 190 employees in Russia and wider energy security as a result of the conflict. The three executives said the attendees included BP’s chairman, the Norwegian businessman Helge Lund, and the former head of Britain’s MI6 foreign intelligence service, John Sawers.
BP said Lund declined to comment beyond his remarks in the company’s Feb. 27 announcement, in which the chairman said the board concluded that Russia’s military action meant BP’s involvement in state-owned Rosneft was no longer tenable and that the holding was “no longer aligned with BP’s business and strategy.” Sawers declined to comment, BP said.
A brief board meeting followed Sunday, where members voted to immediately exit the Rosneft stake, the executives told Reuters. Shortly after, Lund and Looney spoke to Rosneft boss Sechin to deliver the news about the exit, according to the three executives, who said the call was cordial.
The following day, Looney addressed BP employees. He told them the company couldn’t reasonably carry on in Russia and that the board had made an informed and rapid decision, according to a person on the call.
BP faces a large writedown. It will lose a large revenue stream: the company received a $640 million dividend last year from Rosneft. By contrast, Shell and Exxon both receive billions of dollars of oil and gas annually, rather than dividends, from their Russian projects, and both have long-term contracts to sell that output that they now need to figure out how to make good on.
“While there may be a significant financial cost to BP in exiting Rosneft, it is unquestionably the right thing to do,” said Andrew Millington, the head of UK equities at fund manager Abrdn, which owns 0.2% of BP.
Not all shareholders agree. “It seems a bit rash on the part of BP to make such a momentous decision so quickly,” said one fund manager with a stake in BP. “Rosneft is an important part of the business.”
BP’s shares have risen 4% since the start of the invasion, while Exxon and Shell stocks are trading 16% and 4% higher, respectively, boosted by the strong rally in oil and gas prices.
As of Tuesday, the company had no buyer for the Rosneft stake, the three senior BP executives said. BP has begun the internal process for selling the stake, they said, but for now that’s more of a formality given there are few potential buyers as more and more countries impose sanctions on Russia.
“Aside, perhaps, from Rosneft itself, there are no clear buyers for its stake at this time in our view,” said Jason Kenney, an analyst at Santander (MC:SAN) Bank, wrote in a Feb. 28 analyst note.