Russia capitalises on BP's oil spill experience

Russian Prime Minister Vladimir Putin (right) speaks with BP chief executive Bob Dudley
Image caption Russian Prime Minister Vladimir Putin says his government supports the BP-Rosneft deal

The creation of a joint venture and a share swap between BP and Russian state-controlled energy firm Rosneft could not have happened at a better time for the two businesses.

The deal to exploit potentially huge oil and gas deposits in Russia's Arctic shelf is the first for BP after both its profit and reputation were hit by the disaster at the Macondo oil well in the Gulf of Mexico last year.

"In spite of the Macondo experience, and at the same time because of it, BP is betting that its relationship with the Russian government, which has often been fraught with problems, will now be its saviour," says IHS Global Insight's senior energy analyst Andrew Neff.

Alexander Nazarov, senior analyst at IFC Metropol, believes that BP has become something of "an outcast" among the leading global energy firms as a result of the oil spill, which has already cost it billions of dollars.

Valery Nesterov, an oil and gas analyst at Troika Dialog, says that there have been attempts to force BP out of the US energy market in the aftermath of the spill.

Rosneft has used the situation to negotiate a much better share swap deal with BP than it would have been able to do before the spill, experts say.

Mr Nazarov believes that Rosneft managed to get at least a 25% bigger BP stake as a result of last year's troubles for BP.

BP will take 9.5% of Rosneft's shares, bringing the stake it owns in the Russian company to 10.8%, in exchange for 5% of its own shares.

Beaten vs unbeaten

BP's recently acquired experience in dealing with the oil spill could have played an important role in why Russia chose the company as its partner to exploit the Arctic shelf.

Image caption The market value of BP fell as a result of the oil spill

Russian Prime Minister Vladimir Putin quoted the Russian proverb "one beaten is worth two unbeaten", when speaking of BP's problems in the Mexican Gulf.

Experts also name other factors that helped BP become Rosneft's partner, including BP's experience in developing its Alaska offshore oil drilling project and the company's eight-year presence in Russia through TNK-BP.

In 2003, BP and the AAR Consortium, representing a group of Russian oligarchs, created the joint venture, which now accounts for a quarter of BP's output.

But in 2008, Bob Dudley, who was then TNK-BP's head, had to leave the post and the country as a result of a conflict between BP and the Russian oligarchs.

Now Mr Dudley is BP's chief executive and, according to a BP spokesman quoted by Reuters, he discussed the BP-Rosneft deal with one of the oligarchs on Thursday, one day before it was officially announced.

New shareholder dispute?

Russian business papers have quoted Stan Polovets, head of the AAR Consortium, as saying that AAR lawyers are looking into whether the Rosneft-BP deal violates TNK-BP's shareholders agreement.

Mr Polovets says that under the agreement, both AAR and BP must get involved in any new project in Russia exclusively through TNK-BP, unless one of the partners refuses to participate in the project.

But experts doubt that there will be a new public shareholders conflict in TNK-BP this time.

One of the reasons is that TNK-BP lacks expertise in offshore oil drilling, Mr Nesterov says.

In turn, Mr Nazarov says that Rosneft and TNK-BP have a good record of successful cooperation in a number of projects in Russia.

Investment climate

Russia's oil industry requires huge investment for the country to remain a leading oil producer, but the Russian investment climate makes many potential investors worry.

Last year, ConocoPhilips decided to sell its stake in Russia's Lukoil, while E.ON Ruhrgas sold a Gazprom stake.

And while the reasons for the sales might be unrelated to the general investment climate in Russia, they were seen by many as another example of investors' fears.

Seen in this perspective, the Rosneft-BP deal gives the Russian government a chance to show that the climate is not as bad as some critics say.

As Mr Dudley put it: "It's my hope that you will see this step of cooperation with Rosneft as a very strong signal from BP in our confidence in the investment climate in Russia."

Future risks

But the shadow of Yukos, once a giant oil company owned by Russian oligarch Mikhail Khodorkovsky, could create troubles for both Rosneft and BP.

After the oligarch found himself behind bars and the company went bankrupt in 2004, Rosneft bought its main asset.

As a result, Yukos shareholders are suing Russia in the European Court of Human Rights, seeking $98bn (£62bn).

"BP shareholders should be concerned that once again the company has invested in a deal with Rosneft in assets over which there is a significant question as to security of Rosneft's ownership," said Claire Davidson, who represents the former Yukos shareholders.

Meanwhile, the former Yukos lawyer, Robert Amsterdam, believes that BP is taking a serious risk placing trust in the Russian officials.

"It is impossible to imagine a scenario in which the two companies [Rosneft and BP] have a dispute that is not artificially resolved in favour of Rosneft and its owners in the government of the Russian Federation," he wrote in his blog.

On the other hand, experts say that there are some risks in the deal for Rosneft as BP shareholder.

Financial services firm JP Morgan estimates that the total fine for BP could reach $69bn if the company is charged with gross negligence over the Mexican Gulf oil spill.

Searching for reserves

According to estimates, BP and Rosneft will be required to invest up to $2bn in the first stage of the Arctic project - seismic testing and drilling wells.

Mr Putin said last week that Russia's Arctic offshore might hold 5bn tonnes of oil resources and 10 trillion cubic metres of gas.

"These are serious figures that need further confirmation, but they are quite realistic and I hope that these estimated resources will become proven reserves," said Mr Putin.

If his words come to be true and the two sides manage to remain on good terms with each other, both BP and Rosneft could get a huge prize for what is seen by some as a gamble.

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