We have talked a few times recently about the fact that big international oil companies have joint ventures in Russia and decided pretty hastily to exit them. Here is a Wall Street Journal story about “ How Oil Giants’ Bets on Russia, Years in the Making, Crumbled in Days.” As we have discussed, it is one thing to say “we are exiting our Russia ventures” and another thing to figure out how to actually do that. You can’t exactly sell the shares of these joint ventures on the open market, and abandoning them essentially means selling them to Russian companies for free. Conceptually the right approach is something like:
Promise to get rid of them.Cross them off the list of “assets we own” and move them to a list of “assets we don’t want to own,*” with a little footnote saying “*but still technically own.”Wait a while until things are more normal, or until you find an acceptable buyer.Eventually sell them for some amount of money.Do something with the money.Obviously that is a very schematic description. Each part is complicated but here let’s focus on Step 2, crossing them off one list and putting them on another list. That is a pretty metaphysical step; here’s the Journal:
Lawyers, accountants and outside advisers are working to determine how the oil companies can restructure their Russian holdings. They are exploring complex options for ring fencing them from ongoing operations—transferring the assets to separate corporate entities—while winding them down and trying to preserve as much value as possible, some of the people close to the companies said. Options include escrow accounts with shareholders named as beneficiaries and special-purpose entities walled off from continuing businesses.
Asset sales would be challenging, some of the people close to the companies said. One primary goal is to avoid ceding direct control to a Russian counterpart or otherwise inadvertently benefiting Russia, they said.
“Escrow accounts with shareholders named as beneficiaries”? Like, before the restructuring, BP Plc (say) would own the asset, and any value from the asset would belong to BP’s shareholders. After the restructuring, some entity set up by BP would own the asset, and any value from the asset would belong to BP’s shareholders. But in some legal or perhaps only metaphysical sense BP would no longer own the asset, so it could say that it was getting out of Russian oil ventures, which is the point here.
This is all a bit uncharted and you have some options on what you want to accomplish with this structure. Like:
What does “shareholders” mean? Most simply, the escrow account would be for whoever owns the company’s shares at any particular time; if the company sells the asset in 2023 and realizes some proceeds, it will pay out those proceeds to its shareholders in 2023. But you could imagine, as it were, distributing the claims to current shareholders, so that if you owned the company’s stock in March 2022 and the asset pays out in 2023, you get a share of the proceeds even if you have sold your stock. (The theory being that, since you owned the stock at the time the company abandoned the asset at zero, you were the one hurt by that and you should get the money.)If you’re doing that you could make the escrow claims … tradable? Like, issue a tracking stock on your abandoned Russian JV assets? That seems distasteful and yet somehow correct. If you want to get rid of your JV assets, can’t sell them, and don’t want to abandon them to your Russian partners, one move is to effectively spin them off to your shareholders. Then you don’t own them anymore, but you have maximized shareholder value. And then if your shareholders don’t want to own Russian JV assets they can sell them, in indirect tradable-escrow-claim form to someone who does. (Who is that?) Why shareholders? When Shell Plc bought Russian oil after the invasion of Ukraine, it saidthat it “will commit profits from the limited amount of Russian oil we have to purchase to a dedicated fund” that will be used “to alleviate the terrible consequences that this war is having on the people of Ukraine.” (It has since decided to stop buying Russian oil.) I suppose one could do the same thing with Russian JVs: Put them in a special-purpose entity and escrow any proceeds to help Ukraine? In some loose sense the JV assets belong to the shareholders now, so it’s weird for the company to donate them, but that is loosely true of Shell’s oil trading profits too and that didn’t stop it from donating them. Still elsewhere in oil:
“Biden Says U.S. Will Ban Russian Fuels to Pressure Putin.”
“China Considers Buying Stakes in Russian Energy, Commodity Firms.”
“The Future Turns Dark for Russia’s Oil Industry.”
“Russian tankers at sea despite ‘big unknown’ over who will buy oil.”
“ Maduro hails ‘cordial’ talks with US as west seeks new oil supplies.”
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