BP facing backlash as Russian deal boosts shares

BP's new JV with Russia's Rosneft may have gone down well in the City. But it's fraught with potential problems.

by James Taylor
Last Updated: 19 Aug 2013

BP's tie-up with Russian oil giant Rosneft seems to have pleased the City: the oil major's share price jumped 2.5% this morning as markets got their first chance to react to the deal. The industry view is clearly that this is a sensible strategic step forward for BP, after all its recent setbacks. But the deal is already creating political waves on both sides of the Atlantic - with the environmental lobby, with the US government, and even with its other Russian joint venture partner. Perhaps BP had no other option - but the deal is still a risky one...

Both BP and Rosneft saw their share price soar this morning, after announcing their joint venture late on Friday afternoon. The idea of the deal, which is being structured as a £10bn share swap, is that the two firms will work together to explore the vast untapped Arctic seabeds off the Russian coast - combining Rosneft's access and BP's technical expertise. After a year in which the Gulf oil spill has done untold damage to its reputation, the City clearly feels this deal opens up a new frontier for BP - and potentially a hugely lucrative one at that. A signpost to a brighter future, you might say.

That's the positive spin, anyway. But the flipside is that the deal carries a lot of political risk. After all, Rosneft is state-owned - so effectively, the Kremlin is now BP's largest single shareholder. As you'd expect, this has gone down badly in the US: one Democratic congressman reckons BP should be renamed 'Bolshoi Petroleum' (geddit?), while a Republican counterpart has suggested that some scrutiny of the 'national security implications' is required, since BP is a big supplier to the US military.

BP may also be in bother with its existing Russian JV partner, TNK-BP. Today's FT reports that the four oligarchs behind that company are investigating whether BP is contractually allowed to pursue other opportunities in Russia with a different partner (that relationship is particularly spicy since new BP boss Bob Dudley was forced out of Russia after falling out with TNK's oligarchs, although he's been playing down the significance of the row lately). Meanwhile jailed oligarch Mikhail Khodorkovsky has been loudly protesting that 80% of Rosneft's assets were taken illegitimately from his company Yukos after he was jailed for 'fraud' in 2003. And as his example shows: while the Kremlin may be well and truly on board at the moment, what if it suddenly changes its tune somewhere down the line?

Environmentalists are also up in arms about the prospect of the two groups hacking into one of the planet's last unspoiled frontiers. Apart from anything else, there are huge risks involved with trying to extract oil from these brutally remote seabeds, as the Gulf spill proved. Labour leader Ed Miliband said yesterday that the industry should be trying harder to find renewable energy sources, rather than just 'digging and digging deeper and deeper for oil.'

The Kremlin may feel BP has learned its lessons on safety (as too do the Australians, judging by another exploration deal BP announced this morning). And arguably, this is BP's best strategic option for growth. But it's certainly not going to be plain sailing.

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