BP and Rosneft form “global alliance” to explore oil in Russian Arctic

BP and Rosneft, two of the world’s largest oil companies, have formed a “global alliance” to explore three license blocks in the Kara Sea on the Russian Arctic continental shelf. BP is the world’s third-largest energy corporation, while Rosneft is a major oil extraction company owned by the Russian government. Rosneft will now have a 5% stake in BP’s shares (worth approximately $7.8 billion), while BP will obtain 9.5% of Rosneft’s shares. If the deal goes through, the Kremlin will become the largest shareholder in BP via Rosneft, which will also secure its position over Gazprom, a gas exploration company in which the Russian government holds the largest stake.

Map of three license blocks in the Kara Sea. © BP

This joint alliance is intended to help the two companies’ align their interests and strategies, yet the Financial Times was wary of the deal. It noted the many controversies surrounding Rosneft and Yukos, whose assets it bought at a state-run auction. Yet an editorial in the newspaper acknowledged,

“Given the industry in which BP is engaged, however, risks are unavoidable. Large undeveloped oil reserves are to be found principally in countries with democratic credentials that are less than impeccable. BP must do business in such places if it is to remain in the oil business at all.”

Still, American policymakers seem less than thrilled at the prospect of a Russian state-owned entity controlling part of BP, the largest supplier of oil to the U.S. military. Representative Edward Markey (D-Mass) requested that Treasury Secretary Timothy Geithner launch an investigation into the share-swap and formation of a business alliance. He alleged,“BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum.”

BP and Rosneft have also agreed to form an Arctic technology and research center in Russia to discover new methods of offshore oil exploration in the region. BP’s press statement claimed, “The technology centre will build on BP’s deep offshore experience and learnings with full emphasis on safety, environmental integrity and emergency spill response capability.” Investors are probably hoping that its “learnings” include some lessons from the Deepwater Horizon incident.

The Globe and Mail, one of the leading Canadian dailies, expressed anxiety at the announcement of this new technology center, stating,

“BP and Rosneft have set the stage for a sort of icy technological arms race that has raised important questions for Canada, which has long specialized in Arctic offshore exploration.”

A “technological arms race” seems far-fetched, but if Russia comes to dominate this sector, it could become the new center of oil exploration in the Arctic, upstaging regions like Canada’s Beaufort Sea, which witnessed a lot of growth, development, and feats of polar engineering in the 1970s and 1980s. While this part of the Arctic is rich in oil,  companies like Exxon and BP have failed to surmount the legal and regulatory hurdles necessary to begin drilling. But though the Russian Arctic probably poses less rules and regulations, it is still quite undeveloped and likely a minimum of 20-30 years away from turning a profit for investors.

Norway, another circumpolar country with major oil activity in the Arctic, was pleased with the new alliance, believing in the importance of “plurality.” In an email to Reuters, Per Rune Henriksen, the Deputy Oil and Energy Minister for Norway, wrote,

“We are encouraged by international oil companies being introduced to the Russian Arctic offshore…Norway has employed international oil companies in its Arctic region for decades, because this adds to pluralism in a constructive and rewarding manner.”

Still, it’s hard to defend the notion of pluralism in the Arctic when you hear the same names over and over – BP, Rosneft, Exxon, and Shell, to name a few, and particularly when two of them join forces.

News links

“Oil-rich Norway welcomes BP-Rosneft Arctic deal,” Reuters

“Rosneft and BP form global and Arctic strategic alliance,” BP

“Shell fears yearlong delay of Alaska drilling program,” Dow Jones Newswire

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