David Peattie , BP Russia
Release Date: 2010-09-07
David Peattie, Group Vice President and Head of Russia and Kazakhstan for BP, was interviewed by Russiaenergy.com for the Russia Special report for Oil and Gas Financial Journal to discuss BP's diverse interests and investments in Russia and its view of the country's potential and the future of its projects in Russia.BP has many diverse interests in Russia, from TNK-BP to Sakhalin, to a thriving downstream business, as well as shares in Rosneft, the country’s largest oil company. How would you describe the scope of BP’s interests in Russia today?
Russia is hugely important to BP. Today, Russia accounts for 25% of BP’s production, just over 10% of its profit, and around one third of the reserves bookings on average over the last few years.
It is also necessary to emphasise the importance of TNK-BP, of which BP is a 50% owner, along with our partners AAR. This partnership has been a very strong success over the last six years. TNK-BP has paid over $110 billion USD of taxes in Russia, and has paid a significant amount of dividends to its shareholders. It has had its challenges, but we think the industrial logic behind the original conception, which was bringing BP’s leading technology in oil and gas field developments and exploration together with our partners’ ability to get things done in a Russian context through their relationships and their knowledge of Russian infrastructure and politics is a winning combination. It has been very successful by any measure.
BP also has some very important businesses apart from TNK-BP in Russia. The company is involved in aviation fuels, trading, marine lubricants and Castrol lubricants within Russia. We also own 1% of Rosneft, which cost BP $1 billion USD, and was a very important strategic investment. As well as this, BP has some joint ventures with Rosneft, most notably offshore Sakhalin, where BP has retained one license area. The company has some work to do there – we did some offshore seismic last year, and we shall be drilling a well offshore next year, and we look forward to the results.
Finally, something not widely reported is that BP does a lot of social investment in education in various universities in Moscow and St. Petersburg. The company sponsors various programmes related to the oil and gas industry. I am particularly proud of what the company did last year, which was for the first time bring the BP-sponsored project academy at MIT out of America, for its first pilot programme
at the Skolkovo Moscow School of Management. Deputy Energy Minister Kudryashov came twice during the programme, which was a huge success. BP also sponsor arts in Russia, and is a supporter of the Mariinsky Orchestra and Theatre. It is very important that BP, in addition to its investment in TNK-BP, has its own presence here and is seen to be supporting Russia’s energy future.
Are they any synergies in the way that BP approaches these investments in Russia?
One is to have local content in the teams. BP has learned this over many years from its operational experiences around the world. It is important to have both strong local content of employees and a presence on the ground. When I took over as head of BP Russia 18 months ago one of the first things I did was to bring the whole team to Moscow.
Another common denominator here, more than any other place in the world, is the importance of the relationships with the government authorities, regulators and our partners: whether that’s AAR or Rosneft, with whom BP has a very strong technical alliance. Here in Russia, relationships are of paramount importance. Having people on the ground and having Russian teams is absolutely critical to that.
You mentioned that Russia accounts for 25% of BP’s production, 10% of its profit, and a third of the company’s reserves. This equation was obviously decided upon some time ago. Is it something that BP will sustain in the long term?
We’re very happy with the business we have here right now. BP has a good balance, but we want to do more in Russia. We can see the potential here. Russia has been blessed with natural resources, and BP can see further opportunities for foreign companies over the next 20-30 years, and hope that BP will be invited to do more. We are part of the oil and gas community here. We have shown our commitment to Russia, and continue to show that commitment. As head of BP Russia, I would like to see it continue to succeed and grow.
The dispute between the shareholders of TNK-BP was well publicised at the time. What do you think have been the positive outcomes of this dispute, and what were the biggest lessons that BP took away from it?
Both parties went through a difficult time, but ultimately gained as a result of it. We have more independent management as well as a much clearer shareholder agreement, which is much clearer on the governance processes in the subsidiary boards. The top-level board, of which I am a member, has 11 directors: 4 AAR, 4 BP, and 3 independents. TNK-BP’s new CEO Maxim Barsky will take his position in January 2011 and is currently spending time in the various upstream businesses of BP and at BP’s head office in London. I have met him many times and believe he will be a great CEO. In many ways, the company is stronger as a result of the fight that took place between the shareholders.
The most important lesson that I take away from the dispute is that companies and organisations are organic: they evolve and are dynamic. The attitude and organisation of the owners in those first few years of life needs to change as the business reaches a certain level of maturity. One lesson for BP is that we didn’t recognize how quickly TNK-BP was evolving, and didn’t modify our attitude to it quickly enough. It’s changed now, and we have very constructive board meetings, and very good relations between the partners.
At the next board meeting in May, we will be looking at the longer wavelength plan for TNK-BP, as most oil companies do at this point in the year. The very start of the year is time to set the programme and targets for the year. As May approaches, it’s a time to step back and reflect on the prospects for TNK-BP over the next five years and try to see where there are biases of investment, between national and international, oil and gas, and new fields and old fields. It’s all solid planning work that a good oil company should do.
In 2009 TNK-BP had a very good year in terms of production. How is this reflective of the overall production portfolio of BP worldwide?
It’s about in line. BP is growing between 1.5% and 2% per year. BP has consistently grown over the last few years and will continue to grow. It is a big company, producing 4 million barrels a day; to grow 2% per year is not insignificant. TNK-BP is growing at about the same rate, probably a little above average for our portfolio, with the old fields, and increasingly the new fields in Siberia that have advantageous tax benefits. We also have new projects starting in the Yamal Peninsula in the next couple of years; we have started to lay in some of the early investment for them already.
Tony Hayward said recently that BP was happy to bring its technology to Russia in order to develop the Arctic region. Do you feel as if the Arctic is still a viable opportunity? There has been talk about Arctic development for years now, but even in terms of legislation it is still not clear what will happen.
BP has been around for 100 years, and throughout its history has a record of pioneering new regions, such as the North Sea, Alaska, and the deep water Gulf of Mexico. BP has stayed in those places for as long as fifty years. Now, when the company looks at a new province such as the Arctic, which seems very important in terms of geography, and oil and gas prospectivity, it is natural that BP should want to play a part in its development. The company is very capable of it: it has the technology, skills and experience. It is up to Russia to decide when, how, and which partners they will choose. We stand ready to bring what we can over the next generation.
What is the view you have of the future of Sakhalin? Will you stay there and wait to see what happens?
BP has a 49% interest in a joint venture with Rosneft at Sakhalin, and we are looking at this last area of prospectivity to see whether we can make a development out of it. We will have to see how the drilling turns out before we can make a judgement on it. It has allowed us to work with Rosneft, and get to know each other technically. Future development depends on the result of the drilling. If it is a success, we can build on that and do more. If it’s not, BP will focus on other things within Russia.
In 2009, BP began to divest in its assets in Kazakhstan, at a time when the other supermajors are ramping up their involvement in Kazakhstan. Why did BP feel that it would be better placed to focus more on Russia?
It is important to understand the history in order to understand the decision. BP’s position in Kazakhstan came from the merger with Amoco, and the takeover of Arco. When we put these two together, our position in the Kazakh value chain was not advantageous. To be successful in Kazakhstan, a company needs to have an upstream position and to own part of the pipe to get the oil to market. All the other stakeholders in the Caspian Pipeline Consortium had upstream volume; BP didn’t, and so was fundamentally disadvantaged.
When I took over as Head of Russia and Kazakhstan, I wanted to be very clear that in this part of the world, Russia is BP’s most important investment. In terms of our signalling to employees, partners and the Russian government and leadership, there can be no doubt where BP’s priorities lie.
BP is traditionally a very strong downstream player. However, trends in downstream have changed. When you look at BP’s Russian assets, is there any possibility to complementing them with downstream activity?
There could be, but around the world today downstream, particularly refining, is a tough business: margins are very tight all over the world. The great benefit of Russia is that it still has a growing resource base, with new infrastructure being built towards both the east and the west. There could be further opportunities, either for TNK-BP or for BP itself.
From the moment you started to work for BP until today, a lot of things have changed in the global petroleum business. Generally speaking, how do you find that they have evolved?
Over the last twenty years, we have seen the fundamentals that drive the oil price shift dramatically, to a point where history cannot be reversed. The cost of producing the marginal barrel today $50-60 USD. That’s a big change: 20 years ago the cost of the marginal barrel was between $10-$20 USD.
Developments in technology mean that today, people spend much less time researching, which was once a labour-intensive process but has now been made easier since the internet revolution. This means that they can spend more time on building a distinctive competitive advantage. All the supermajors have very similar technologies now: we all have access to Schlumberger and Halliburton. Creating a distinctive advantage today has to come from areas like the new developments in acquisition and analysis of 3D seismic. An example where this technology proved to be very strong for BP was imaging sub-salt in the Gulf of Mexico. We are now just entering Brazil through the company’s deal with Devon, where the technology will doubtlessly be very useful again.
These breakthroughs in 3D seismic are strong example of results produced because people do not have to spend their time doing routine research, but rather can focus on sources of real competitive edge. BP has some really great new technologies: one called Bright Water, which works like popcorn in a reservoir. It starts off small, and when it gets to the underground reservoir, it pops up like popcorn and blocks the path for the water, allowing oil to flow more freely. It will be incredibly useful in Russian mature fields with very high water cuts. TNK-BP’s Samotlor field is 95% water: for every barrel of oil we produce we also produce 20 barrels of water. If we can reduce that water content using Bright Water, we can massively improve oil recovery.
As someone that has spent such a long time in BP, do you feel like the company’s relationships with producing countries has evolved?
These relationships have evolved hugely over the last thirty years. From the resource owners inviting in British or American companies to bring their secret technologies has shifted now because of the sharing of information and the opening up of the service sector. You can see the change in the level of sophistication of the national oil companies now that wasn’t there thirty years ago. BP welcomes that. The company’s technical meetings with Rosneft are amongst the best it has in the world. Rosneft has some very able technical people, which is conducive to a very live and active debate.
So is Russia that bad? At a personal level and at a business level, is the country as challenging as people outside make it out to be?
Not at all. It has its unique challenges, but so does every country. I love the people. I find them to be very warm, polite, friendly and respectful. They are very straightforward people, which I welcome. From an oil and gas perspective, this is a country that is blessed with hydrocarbon resources, so an oil company like BP should show a lot of interest in the potential here. It’s a country with huge promise. The natural resource for me is not just the oil and gas in the ground, but the people I get to work with, who are full of energy, optimism for the future, and a willingness to learn. The optimism that I see in the generations I work with fills me with a lot of confidence about Russia.
| Company: | BP Russia |
| Position: | Group Vice President and Head of Russia and Kazakhstan |
| Country: | Russian Federation |