Despite the high profile disaster of the Gulf of Mexico spill, BP is one of the cannier and more sophisticated players on the global scene. Yet even a company as sophisticated as BP has so far found doing business in Russia something of a roller coaster ride. To date, the company's experience with the state oil company Rosneft, and with the troika of billionaires who run the AAR consortium (joint partner with BP in its fractious TKN-BP venture) has been frustrating to say the least. It is perhaps important to realize that BP's TKN venture has been a very serious, decade long play, accounting for some 20-25% of BP's output and reserves, and making BP the only serious, large scale foreign oil company in Russia - until very recently that is.
Relations between BP and AAR have been difficult for years and soured further when AAR went to court in 2011 to stop BP forging ahead with a joint Arctic venture with Rosneft, on the grounds that such a venture would adversely impact the TKN-BP venture.
TKN-BP is the third largest oil producer in Russia and has been a source of both profit and pain to BP since its launch a decade ago. The company was formed when BP merged its Russian energy business with AAR (Alfa Access Renova). In recent days AAR billionaire Mikhail Fridman has been quoted as saying that TKN-BP's relationship with BP had "run its course".
BP has been willing to sell its share to AAR, but while AAR wants to raise its stake in TKN-BP, it doesn't want the whole of BP's 50%. Now it seems that BP and Rosneft have the basis of a deal which will leave Rosneft as AAR's new partner. Whether the deal will reopen the door to BP on the Arctic oil front remains to be seen. Three other oil majors have slipped in and signed deals while BP has been busy.
The Russian government recently reformed its tax regime for oil generally and announced particular concessions for Arctic projects. In April this year, Prime Minister Vladimir Putin promised to scrap taxes on exports of oil from Arctic projects and indicated a willingness to consider opening up licensing to foreign oil companies. Statoil, Eni and Exxon Mobile were the first off the mark, easily beating BP to the deal table, thanks to the blocking action of AAR nixing BP's proposed Arctic E&P joint venture with Rosneft. Putin is insisting that all Arctic projects remain under Russian control, but JVs are definitely on.
At the time Putin's spokesperson said that the tax incentives the government was putting in place would open the way for some $500 billion of investment in offshore energy projects over the next 30 years. However, things can change, and not necessarily for the better, and oil majors may well find a few years down the track that the tax deals that made the projects viable in 2012, have been reversed. As General Risk Assessment notes:
"Russian policy has gone through cycles of openness to foreign investment and then drawing back. The current phase is one of the most open in the last 20 years but it is far from certain that it will last for an extended period. Foreign investors might be vulnerable to a sharp deterioration in US-Russian relations -- over, for instance, America's plan to build in Europe an anti-ballistic missile shield against Iran -- or a capricious policy shift in the Kremlin."
The initial deals are for exploration only. Given the remoteness of the fields and the prodigious cost of developing them, Rosneft and its partners will have to discover huge reserves in order to justify bringing the oil on stream. And if they do, Rosneft might be inclined to renegotiate the terms -- especially if its expectations of expansion overseas have not been realized.
For Russia, the risk is that its international oil company partners might opt to press ahead with other projects first, if better opportunities emerge. On the basis of currently available information, it seems likely that offshore projects in Brazil, West Africa, and East Africa will be more profitable to develop than those in the Russian Arctic.Further reading on political risk:
- Measuring Country Risk, by Aswath Damodaran
- Lessons from Russia, by Bruce Misamore
- Where does Wikileaks’ description of Russia as a “Mafia state” leave the Russian economy? Part One, by Anthony Harrington
Tags: Arctic , BP , Gulf of Mexico , Rosneft , Russia , TKN-BP