BP and Rosneft Swap Shares and Embark on Arctic Oil Exploration in South Kara Sea

Sources:
BBC: BP and Russia’s Rosneft sign Arctic Oil Deal
ITAR-TASS: BP, Rosneft to Jointly Work on Arctic Shelf
FT: Pioneering Tie-Up for BP and Russia
Forbes (blog): BP & Russia Cosy Up in the Arctic (by Stephen Pope)
Al Jazeera: BP and Russia Sign Arctic Oil Deal

Bob Dudley, CEO of BP, met with Russian Prime Minister Vladimir Putin last week to announce a joint venture to begin oil exploration in Russia’s Arctic shelf. Rosneft will swap 9.5% of its shares for 5% of BP. The deal will be beneficial to both parties as they combine resources and expertise to develop technology for Arctic extraction of hydrocarbon resources.

The Deepwater Horizon oil spill in the Gulf of Mexico in 2010 halted BP’s growth in the U.S. This project is an opportunity for BP to shift its economic focus to the vast potential for growth in Russia, a country that contains some of the largest reserves of oil and gas in the world. The Arctic shelf is still underdeveloped and could contain 5 billion tons of oil and 10 trillion cubic meters of gas. Since Rosneft is state-controlled, the project will also receive very favorable tax status as well as preferential access to strategic deposits in the Arctic unavailable to other private companies.

The venture will likely raise environmental and safety concerns about oil-spill response and cleanup in the Arctic. The prospective sites in the Arctic are 200 meters deep in a sea of ice and slush where weather conditions prohibit working for all but 100 days of the year. Arctic drilling will require advances in current technology, which may delay drilling for several years.

However, most see the deal as positive for both BP and Rosneft. For Dudley, the deal is a personal success—much needed after his failed management of the TNK-BP joint venture that ended in 2008 after bitter disputes. Dudley heralds this agreement as the first major cross-shareholding between a private international oil company and a nationally owned and controlled oil company.

Discussion questions:
1. Will the BP-Rosneft venture be more cognizant of environmental and safety concerns due to the recent Gulf of Mexico oil spill?
2. Is the modest percentage of BP owned by Rosneft cause for concern that the Russian government will now have its foot in the door of BP’s worldwide strategic oil reserves?