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British company to help Russia's Rosneft drill for oil, gas in the Arctic.
MOSCOW, Russia — It seems BP has turned to Russia to raise its fortunes.
Last week the British company announced a landmark agreement with Rosneft, Russia’s biggest oil firm, that will give BP access to Russian Arctic reserves previously off-limits to foreign companies.
The experience accrued by BP as a result of the 87-day oil leakage into the Gulf of Mexico last year was cited as a reason Rosneft chose the company as a partner in the biggest deal of its 18-year corporate history.
“One that’s been caned is worth two that haven’t,” said Prime Minister Vladimir Putin quoting a Russian proverb in a reference to the benefits of the oil spill for BP.
Rosneft and BP will work in partnership to explore the icy Kara Sea, an area on Russia’s Arctic continental shelf containing 5 billion tons of crude oil and 10 trillion cubic meters of gas, according to estimates.
Russia’s Arctic shelf is estimated to have enough oil to supply world demand for four years and is an increasingly attractive prospective for Russian oil companies looking to maintain production levels as traditional fields in western Siberia begin to run dry.
Scientists estimate that global warming will melt enough of the polar ice cap by 2025 to 2030 to open the Russian Northern Sea Route to commercial shipping, which is encouraging investment in the region now.
Domestic oil companies, however, do not have the experience to develop the offshore resources — their exploitation is dependent on the drilling expertise of international companies. Though the Kremlin is likely to work on a case-by-case basis, the BP-Rosneft deal is a first step, said Constantine Cherepanov, an analyst at UBS, “which could open the door to other international companies.”
Rosneft, which is controlled by the Kremlin, is also using BP as tool to spread the not inconsiderable economic and environmental risks. BP will receive only a one-third stake in the joint venture but it will front all the exploration costs, likely to be a significant sum.
“The deal allows Rosneft to let BP go first,” Cherepanov said.
There has been much criticism of the potential environmental impact of drilling in the sensitive Arctic region. A blow-out on the scale of what occurred on the Deepwater Horizon rig in the Gulf of Mexico would have catastrophic consequences in Arctic waters, which are frozen for most of the year.
There is no way of clearing oil from under several meters of ice and bacteria break down oil much slower in cold conditions, making environmental regeneration a much slower process. Vladimir Chuprov, the head of Russia’s Greenpeace energy unit, described Rosneft CEO Igor Sechin’s defense of Rosneft’s safety record as “black humor.”
The joint of intentions of Rosneft and BP in Russia’s Arctic, he added, carry “serious economic and ecological risks.”
The companies cemented their partnership with a share swap worth $8 billion. Rosneft will be the second largest BP shareholder while BP becomes Rosneft’s biggest private stakeholder. Rosneft absorbed the lion’s share of jailed tycoon Mikhail Khodorkovsky’s oil company Yukos when it was broken up by the state in 2006.
The tie-up with Rosneft is a gamble for Robert Dudley, BP’s CEO, said Chris Weafer, chief analyst at Uralsib. He said it makes BP a potential Western target for shareholders of Menatep, Khodorkovsky’s holding company, which is currently suing the Russian state for $98 billion in the European Court of Human Rights.
Markets, however, responded favorably to what BP described as a “groundbreaking global strategic partnership.”
“It is a win-win for both companies” said Vladimir Rusinov, an oil analyst at Renaissance Capital.
BP has gained access to new resources at a time when it is facing increasing difficulties in the United States following the spill, while Rosneft will receive the technology and experience it needs to implement offshore exploitation of the Arctic region.
The deal is also a coup for Rosneft as it will help fulfil President Eduard Khudainatov’s stated ambition to boost the company’s international presence.
Sechin, who is also a deputy prime minister of Russia, said, “Russian companies are quickly emerging at the forefront of the global energy industry.”
Today Russia and Jordan announced an agreement encouraging Russian companies to explore for oil and gas in the Arab country.