BP's alliance with Rosneft a master stroke
Despite a year of difficulties, BP's latest Russian venture shows the UK supermajor is still playing at the top table
IT'S KNOWN as a krisha and few, if any, successful businesses in Russia are without one. Now BP, which is staking some of its future on a partnership with Rosneft to explore Russia's Arctic frontier, has its own "roof", or political protection. It goes by another name, too: Igor Sechin.
On 14 January, BP shocked investors by announcing a new alliance with Russia's state-controlled oil company. It involves an asset swap, which will see Rosneft acquire 5% of BP's stock in exchange for BP gaining 9.5% of the Russian firm. Rosneft's new BP stake is valued at about $7.8bn, and will come from new shares to be issued in the coming months. Thanks to BP's misadventures in the US Gulf of Mexico, its share price remains depressed. Rosneft will hope it has secured a good slice of stock in a company whose valuation can only grow.
The risks to that hope come from the US, where BP's liabilities for the Macondo disaster are not yet clear. But the deal with Rosneft offers riches that could exceed even the most severe financial penalties from the spill. Within BP, it is seen as a new, strategic shift.
At the heart of the deal are what Rosneft says could be 40bn barrels and 350 trillion cubic metres of oil and gas in the Kara Sea, an Arctic frontier region north of the Yamal Peninsula, in Russia's northwest. BP and Rosneft will form a company to explore three blocks in the region, with the Russian firm taking two-thirds of the venture. BP will carry its partner, providing capital and expertise gained from its decades of production in Alaska.
Exploration will begin in 2015 and output is unlikely within the decade. Sechin, Rosneft's chairman, says the firms will spend up to $2bn searching for the hydrocarbons, although in private, BP officials concede the investment is likely to be far higher.
Analysts like the look of what BP describes as an "historic" strategic alliance, with the upstream portion of it deemed particularly attractive. Fadel Gheit, of brokerage Oppenheimer, says it shows "BP is still among the most preferred international partners with resource-rich nations," adding that the reserves alone – which BP says it can book once production begins – could mitigate any punitive actions taken against the company by the US government.
Renaissance Capital said in a research note that the alliance would help Russia's transition from "cheap legacy assets built in Soviet times, to the development of new, complex projects that require a new level of capital spending and technological know-how". The deal could herald others with big foreign firms, it said.
Bolshoi Petroleum backlash
But BP's news prompted a backlash in Washington. There, Edward Markey, a Democrat Congressman who sits on a congressional energy committee, said BP had become "Bolshoi Petroleum". He wondered if the deal had "economic security" implications for the US. A bout of paranoia has left others in Congress asking if BP's oil pipeline to the Lower-48 states, or its energy supplies to the US military, should be left in the hands of a company that will include the Russian state as a big shareholder. (US oil imports from Russia were about 0.65m barrels a day in October; and even at the height of the Cold War, Russian oil was making its way into US cars.)
The Russian government holds just over three-quarters of Rosneft's stock, and Sberbank, the country's largest bank and itself majority owned by the Russian state, controls just over 13%. BP's holding in Rosneft will grow to 10.8%, making it the third-largest shareholder.
But it is the politics of the alliance that truly mark a new departure for BP. Its history in Russia has been patchy, at best. Its alliance with AAR, a consortium of Russian tycoons that own the other half of TNK-BP, has been dogged by ownership conflicts. In 2008, the BP-appointed head of TNK-BP fled Russia, after a dispute for management control turned ugly. When he was president, Vladimir Putin, now Russia's prime minister, famously told BP and AAR that their 50:50 ownership structure would eventually bring a conflict. "A whip master" was needed to keep the quarrelsome sides in hand, he told them.
The TNK-BP chief who fled Russia for Prague in 2008 was Robert Dudley, now BP's boss. He, better than most foreign oilmen in Russia's sector, should understand the perils of doing business in the country's most strategic industry, where the government has steadily increased its influence since Putin's ascendancy.
Part of his strategy involved the destruction of Yukos, once Russia's largest oil firm, and the imprisonment of Mikhail Khodorkovsky, its former chief executive – who was sentenced to another term in Siberia last month. Yukos's main producing asset, Yuganskneftegaz, was sold, after an opaque auction in 2004, to Rosneft. Shareholders in Yukos say the new deal with BP legitimises that sale and some have threatened to sue. BP points out, in response, that it has owned a small stake in Rosneft without consequences for years. So have other shareholders, ever since Rosneft listed some of its stock in London in 2006.
After difficulties with TNK-BP, however, Dudley and BP have this time landed a Russian agreement that looks far less risky than its earlier ones. Sechin is not just Rosneft's chairman. He is also Putin's enforcer and the de facto head of Russia's oil industry (he is thought to have instigated the attacks on Yukos). His influence within the Kremlin gives BP security – its krisha. He may also claim a seat on BP's board, according to some analysts, although BP says it has not yet discussed this.
Such political protection will be critical if BP is to turn Russia into one of its new "pipelines" – the name its executives once gave to Alaska and the North Sea, two pillars of its business in previous decades. Indeed, a new dispute is brewing. TNK-BP says it may challenge BP's right to deal unilaterally with Rosneft. Its chief executive, Stan Polovets, told reporters that the partners had agreed "all new business opportunities in Russia and Ukraine must be pursued through TNK-BP".
This is an argument that BP, with Sechin on side, and not TNK-BP will win. A likelier outcome is closer co-operation between all three companies. Rosneft, goes one rumour, may now even buy out AAR's share in TNK-BP – broadening its alliance with BP, which also includes refining assets in Germany, and could take Rosneft into other parts of the world, too.
A man who's been beaten is worth two who haven't, Putin is said to have noted after BP's deal with Rosneft was announced. It was an odd proverb for the occasion, even from Putin, and many took it to mean BP's lessons in the Gulf of Mexico's deep water would prevent an accident when it begins exploring in the shallow waters of the Kara Sea.
A better interpretation is that having been stung twice in Russia in a decade, BP now knows how to do business there, and with whom.