Saturday, January 22, 2011

BP Commits to Russia

British Petroleum has been pursuing a long-term strategy of expanding its operations in Russia. Beginning in 1997, BP acquired a 10% stake in the Russian oil company, Sidanco. This company was created by the privatization of some of Rossneft's assets. After a number of lawsuits and other maneuvers, in 2003 BP merged its Russian and Ukrainian assets with another Russian firm, TNK. The result, TNK-BP, was led by BP's current chair, Robert Dudley, until he was forced to flee the country in 2008 in a power struggle for control of the company. BP still owns 50% of the joint venture, but the company now has stronger Russian management.
In 2008, the BP Group Vice President for Russia and Kazakhstan, David Peattie, told US Ambassador John R. Beyrle that BP was in Russia for the long haul, and that the company was actively pursuing options with Gazprom and Rosneft for the future. Peattie said BP plans to be in Russia "for the next 50 years." He considered BP's one percent stake in Rosneft as the potential long-term foundation of BP's involvement in Russia. To pursue this strategy, the company planned to sell its share of the Caspian Pipeline Consortium and divest its interests in Kazakhstan.
This month, the long-term strategy of cooperation with Rosneft took a major step forward. BP is giving Rosneft 5 percent of its shares, in return for 9.5% of Rosneft--a company that is 75% owned by the Russian government.
BP and Rosneft both gain tremendously. The two companies have agreed to jointly develop three licensed block in the southern Kara Sea, an area of approximately 125,000 square kilometers (over 48,000 square miles). The area has a forbidding, Artic climate covered most of the year by ice and snow. BP is able to add to its reserves, and Rosneft gains access to BP's artic technology. Russian experts estimate the Kara Sea blocks may hold up to 36 billion barrels of oil and 10 trillion cubic meters of gas. Rosneft Vice President Peter O'Brien said exploration of the tracts will begin soon, and the company plans to begin drilling in 2016.
Critics of the deal include Congressman Edward Markey, the Democratic minority leader of the House Natural Resources Committee. He raised concerns that Russian control of BP shares might compromise US economic security (as a reminder to readers on the West Coast, BP owns Arco). He scoffed that "BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum." Other critics are concerned about the rule of law. Rosneft obtained many of its assets from Yukos Oil, which the Kremlin broke up and sold when it threw Putin rival Mikhail Khodorkovsy into prison. The legality of the breakup is under question. Recently, a court in Sweden ordered the Russian government to pay compensation to a Yukos shareholder who had brought suit over these actions. Kremlin critic and former Russian deputy prime minister Boris Nemtsov said that Russian Prime Minister Vladimir Putin was hopeful that BP's ownership of Rosneft shares would blunt western criticism of Moscow's treatment of the former oligarch Khodorkovsky. He said that the deal ignored human rights and property rights. BP spokesman Jeremy Huck tried to duck the issue in an interview with Radio Ekho Moskvy by pointing out the proposed projects were sanctioned by the Russian government: "The question about where those assets are from, that's better asked of Rosneft or the government."
BP has cast its lot with the Russian bear, for better or for worse.
Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at