BP’s Trouble And Strife In Russia

rosneft_1856717b.jpgFrom the plethora of commentaries on the collapse of the BP-Rosneft deal, there’s an edifying piece from the Oil and the Glory which adumbrates the events leading up to the deal’s, and its ultimate failure:

The details were tantalizing — already the most active Big Oil company on the Russia patch, BP would double-down by forming a marriage-type arrangement with state-owned Rosneft. The two companies would swap a significant number of shares, and then explore the extravagantly rich oil fields of the Arctic. Tens of billions of barrels of oil were at stake, and at once BP seemed to be back in the game.

Only, BP already had a Russian spouse — four oligarchs collectivelyknown as AAR — with which it had an exclusive, first-right-of refusalagreement for any dealings on Russian soil. AAR obtained Europeaninjunctions against the deal, so Dudley had to scrape and grovel inorder to try to persuade AAR to be bought out, and Rosneft to helpprovide the funds (one reason being that Prime Minister Vladimir Putin– superior in rank to Medvedev — would never allow a foreigner to own100 percent of a Russian oil company; the other reason being that, evenif Putin would, BP didn’t have $30 billion in cash at its disposal,apart from the $30 billion and more that it’s collecting to pay offvictims of the spill).

As of Monday night, BP and AAR had agreed on a $32 billion buyout(Sylvia Pfeifer and Catherine Belton of the Financial Times haveassembled a good chronology.). But in the end, the deal was upended bydeep-seated mistrust between the Russians — those at Rosneft, and thefour oligarchs. In terms of the sequence of events, AAR wanted its cashfirst, before BP and Rosneft proceeded with their tie-up; Rosneftrejected that idea, and wanted the oligarchs to be paid only after therest of the deal went through. They failed to bridge the gap, and thedeal died.

A Moscow Times op-ed penned by academics Matthew Hulbert and Christian Brutsch employs the same marriage metaphor, but suggests that the bride may not have bolted from the altar just yet, but BP will have to be careful future suitors don’t get in there first. 

Rosneft still needs BP’s access to capital, technology, experienceand human resources to bring the Arctic reserves online. London mightstill greet Dudley with a standing ovation, and politicians might admitthat arranged marriages have considerable merit. In any case, upstreamoptions remain inherently limited elsewhere, and a difficult bride isbetter than no bride at all.

In short, upstream prizes have never been more lucrative than theyare today, but getting there — let alone staying there — is not for thefainthearted. BP was strategically wise but tactically stupid. It’s tooearly to classify the deal as annulled, but expect BP and other oilmajors to keep going upstream in search of new partners. This could wellmean that Shell, Total and ExxonMobil will soon be knocking on theKremlin’s door, but the question is whether they are as ready andwilling as BP to accept that going upstream and national is the way ofthe future.

Don’t be too surprised if Beijing proves to be the next groom walkingdown the Russian aisle. Political risk, price and contractual wranglingaren’t core concerns for Beijing, but long-term security of supplycertainly is. Who knows, PetroChina might even decide that BP would makefor an attractive groomsman.