Engineering Economic Analysis

(Chris Devlin) #1

Selection of a Minimum-


Attractive Rate of Return


BPGoes to Russia
In the early 1990s, western investors flocked to Russia, hoping to reap a fortune as market~
opened up followingthe fall of the Soviet Union. Manydidn't stay long once they discovered
what it was like to do business in a country where contracts were often impossibleto enforce
and bribery was the norm. In 1998, when Russia devalued its currency and defaulted on
debt obligations, most of the remaining investors fled in panic.
Despite this dismal business outlook, British
Petroleum (BP) announced in early 2003 that it
was planning to pay $6.75 billion for a 50% in-
terest in Tyumen Oil Company, Russia's fourth
largest producer of oil. BP's decision is particu-
larly striking in view of the company's own past
history in Russia: in 1997 it bought a share in a
small Russian oil company, only to lose part of
its investmenta few years later after a bitter court
battle. Moreover, Russia's state-owned pipeline
infrastructure is outdated and inadequate-and
.the government has been slow to allow pri-
vate companies to build and operate their own
pipelines.
Given all these drawbacks, BP would seem
to be taking a big gambleby investingin Tyumen.



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