Investing in Russia: A BP perspective

Jun 17, 2007 02:00 AM

Speaker: Tony Hayward
Speech date: 17 June 2007
Venue: Investing in Prosperity conference – Moscow
Title: Group Chief Executive

Thank you, ladies and gentleman, and good evening. It is a great pleasure to be at this conference and to hear so many thoughtful and relevant contributions.
Events like this are particularly important to BP because it is one of the biggest inward investors in Russia, principally through our joint venture -- TNK-BP, of which I have been a director since its inception in 2003. What I would like to do this evening is to give you some facts about our investment and share with you some insights into our experiences.

For those hoping for commentary on the political debate which has sprung up recently between Russia and the West -- I am afraid you will be disappointed. I am a businessman and BP is a business. We understand our place in society. Politics is the preserve of voters, politicians and Governments, and when large international companies throw their weight about or interfere, it is rightly resented. BP’s job is to work with Governments and within the law, wherever we operate.
So, how have we found doing business in Russia? In short, it is a success for us. Many of you will know my predecessor at BP, John Browne. I took over from him two months ago and I would like to reiterate not just BP’s continuing commitment to Russia -- but our commitment to the wider cause of Russia’s integration with the world economy. Incidentally, our hosts, Renaissance, deserve great credit for being at the forefront of that process.

This is a country I know quite well, and for which I have a great deal of affection. I have been to Russia six times so far this year, including once with my family on vacation. In fact, I first visited 16 years ago and I don’t believe anywhere in the world has come so far, so fast, in that time. So much has changed for the better. In 1991, Russia was just emerging from the Soviet era. Now, incomes and employment are rising rapidly, investment is increasing and lives are being transformed.
Of course, if you had to name one sector which has played a decisive role in that transformation, it would be oil and gas. As one of Russia’s biggest investors in that sector, BP is proud to have participated in the march of progress.

BP made its first investment in 1995 when we opened our first retail outlet in Moscow. Today, TNK-BP and BP combined have over 1600 sites across Russia and Ukraine. Our retail operations continue to be an excellent investment for us and when I recently met President Putin, he told me that our retail sites in Moscow pay more tax than all their competitors combined. In fact, the President clearly knew as much about BP’s business in Russia as I did - I stopped being surprised by his attention to detail some time ago. The next phase in our investment came in 1997 when we acquired a minority interest in Sidanco. And in 2003 TNK-BP was formed. It has thrived ever since. I would be misleading you if I claimed everything has always been sweetness and light. It hasn’t. There have been bumps in the road --you might have seen we are going over one at the moment. But we continue to make progress and, as I have just said, we are in this for the long haul.
When TNK-BP was formed, BP was making a big strategic call -- that Russia was a market which we should continue to invest into and, furthermore, we should take a quantum leap forward. We made that call for two reasons. First, as the possessor of the world’s biggest gas reserves and as the second biggest oil producer, Russia was bound to be an important source of new production to meet the world’s growing energy needs; and second, the Russian economy would continue to advance and provide the right backdrop for investment. We concluded that this was a market we could not ignore.

I believe that we called it right, on both counts. The figures show that the new demand for oil from China and India has been met almost barrel for barrel by rising production in Russia. The Russian oil and gas sector has benefited from new investment and the transfer of new skills and technology. And it has put those things to good use and is making a really significant contribution to world economic stability.
The energy sector has also been a major contributor to Russia’s own economic renaissance. This is the ninth consecutive year of GDP growth; international public debt is minimal; there is a fiscal and current account surplus; capital markets are deepening; incomes are rising; the workforce is highly educated; and prosperity is growing fast.
Furthermore, the fundamentals are strong and indicate that this growth will continue. The earnings from Russia’s commodity exports are being carefully managed and should provide some of the funds needed to diversify into new sectors, such as services and technology.

BP has been proud to witness this transformation and to play its part through investment. We put $ 8 bn of cash and assets into TNK-BP, capex has grown strongly every year since, and I amglad to say that this has been a profitable investment for us, for our Russian co-investors and, I would submit, for the Russian Federation. On a consolidated basis, TNK-BP provides about a fifth of BP’s reserves; about a quarter of our production and just under a tenth of group profits.
TNK-BP is a truly Russian enterprise. Uniquely, it is a genuine joint venture. We own 50 % and our three partners have 50 % between them. There is no 50 plus 1 here, where one party effectively has control.

On a personal level, my greatest satisfaction over the last four years has been to witness Russian nationals and expats working side-by-side, learning from each other, developing friendships, mutual respect and trust. When so many people seem to be claiming that Russia and the West are moving apart, this is the other side of the story. Co-operation among colleagues is a necessary part of all successful inward investment projects. It is a force for good, the world over and I find it extremely motivating to see it at first hand.
In 2003, we made four commitments by which we asked to be judged. These are very important, both to us and to the Russian Federation, let me give you a brief progress report on how we are delivering on those.

First, we said we would grow TNK-BP’s production. We’ve done that, increasing production by 30 % in the last three years. We have replaced an average of 131 % of our reserves in the last four years.
Second, we agreed to transfer state-of-the-art technologies and skills. That is moving ahead rapidly and 200 BP experts are working inside the company, with nearly 50 young Russian engineers on secondment to BP. We have introduced new seismic imaging and processing technologies -- which have enhanced exploration success; we have improved water flood management -- dramatically improving recovery rates; and we have applied best practice in areas such as drilling, completions, wellwork and reservoir management.

Third, we promised to improve corporate governance by undertaking one of thelargest corporate restructurings in Russian history, increasing transparency and securing the rights of minority shareholders. Just three days ago at the AGM for TNK-BP Holding we approved another dividend in which our minority shareholders will participate fully.
And fourth we said we would be a good corporate citizen. Here we have made progress too. TNK-BP has paid $ 45 bn in taxes, duties and excises since inception. In the last two years we invested $ 370 mm in social programmes, ranging from disease prevention to the preservation and celebration of Russian culture. And we are engaged in a widespread programme of supporting universities and promoting educational links between Russia and the rest of the world. We have built partnerships with major oil and gas universities, including Tyumen, Tomsk, Ufa and Gubkin in Moscow.

TNK-BP has also invested heavily in Health, Safety and the Environment and the company is a cleaner, safer one than it was four years ago. Through the introduction of our driver safety standard, we have, for instance, significantly cut work-related road fatalities, from 9 in 2004 to 1 so far this year. The refineries produce cleaner fuels. We have remediated almost half of the legacy pollution issues we faced; and we are developing new projects to exacting environmental standards.
So, I hope you don’t mind me saying I believe we have, by and large, delivered on our promises and we are determined to continue to do so.

I think that is something which all investors in Russia should take on board. BP’s firm belief is that the principle of mutual advantage is critical to doing business successfully in any country, and that is certainly true of Russia. Over the years we have learned from experience, around the world, we will be judged by our performance. The returns we make for our shareholders are predicated on bringing material benefits to the nations and localities where we operate.
But I do not want to sound complacent or naive. Russia, like anywhere, has its risks. You onlyhave to look at BP’s experience in the US over the last two years to understand that doing business anywhere in the world can be challenging from time to time. Russia is no different. The speculation over Kovykta is certainly not ideal, but we understand the importance of strategic assets and I consider this issue to be no more than one of those bumps in the road, which, as I said a moment ago, we all have to navigate occasionally.

So from BP’s perspective, TNK-BP has been a great success. But what about the future?
Well, this is partly a case of more of the same. Russia not only has the world’s largest combined oil and gas reserves, it also has significant potential yet-to-find oil and gas. So BP’s aim is to continue to invest in Russia. We participated, for instance, in the initial public offering of Rosneft last year, buying a $ 1 bn stake. We are also working with Rosneft in our Sakhalin joint venture Elvaryneftegas, which this year will drill two wells in the West Schmidt license area in the firstefforts to establish the presence of hydrocarbons in this completely unexplored region North of Sakhalin. TNK-BP continues to pursue and invest in new opportunities with 35 new licences won or acquired in 2006 and a capital budget for 2007 of $ 3.4 bn.

And -- I think an important new trend we need to think about for the future -- is the growth of what we call “reciprocity”. Reciprocity is the development of not just foreign investment into Russia, but investment by Russian companies overseas.
Reciprocity is of growing relevance to the Russian Federation. So far, the metals and mining sectors are a little ahead of the oil and gas industry. Russia’s major metals and mining groups restructured rapidly in the last decade and companies like Severstal, Evraz, Norilsk and Rusal are now beginning to attempt significant investments abroad.

As an enthusiast for all the benefits cross-border investments can bring, I welcome that. So we should look forward to the Russian oil and gas sector investing overseas too. There are signs of that already, but I hope that trend accelerates in the next few years. Foreign investment is an expansive, confident thing to do, both for the investor and the recipient. Such investments can transform a company’s fortunes, bringing in more capital, know-how, technology and mutual understanding and respect.
A shared understanding of the importance of “reciprocity”, of trade and capital flowing across borders, is a vital concept which underpins the functioning of the world economy. When Russian companies want to make foreign investments, they should be encouraged to do so on a level playing field. We have much to learn from each other and much to contribute. BP certainly knows that to be the case from its own experience.

This takes me back to a point I raised at the beginning: Russia’s integration into the world economy.
To my mind, this is the be all and end all of what we are talking about today. Globalisation is one of the great features of our age. For those countries which have embraced it, globalisation has brought new levels of prosperity, transforming the lives of hundreds of millions of people around the world. Of course, it brings challenges too -- but overall globalisation is an incredible force for progress.

Globalisation is certainly the economic means by which Russia is putting the Soviet era well and truly behind it. I first visited this country in 1991 and the difference, in the form of rising living standards, is evident all around and is astounding to see.
But globalisation requires fair rules of the game to work properly. And that means, as I have said, Europe, Asia and America being open to investment by Russian companies, just as Russia has opened up its borders.

Perhaps the most important book of rules for the world economy is overseen by the World Trade Organisation.
I know that President Putin has indicated he hopes that Russian accession to the WTO proceeds. Such negotiations are inevitably complex and difficult. But I would just like to say that, from the perspective of this international investor, we hope both sides are able to move ahead. Russian WTO accession would be more than a technical agreement. It would strengthen the very principles which underpin an expanding world economy. I believe that those are proven principles which BP and its fellow investors endeavour to put into practice every day, in Russia and around the world.

Thank you for listening. I would be happy to take questions.

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