BP-Rosneft Deal: Implications & Intentions

Recent weeks have seen much news and analysis by Russian, UK and other commentators on the TNK-BP takeover, which will make the Russian listed company Rosneft one of the world’s biggest oil producers. Though listed, Rosneft is state controlled - over 70% of its equity is controlled by the government of the Russian Federation. The new Rosneft will register (it is estimated) at 23 billion barrels of oil reserves, is as much as those of ExxonMobil or Brazilian Petrobras; and produce at just over 4 million barrels per day; significantly more than Exxon or Petrobras.

There is lot's of indications on the possible appointment of a representative from Rosneft at the BP's board. The appointment of a Russian director to BP’s 15-strong board would be a first in the company’s 104-year history. Also, it is not excluded that this representative will be Igor Sechin - Putin's close associate and energy "Tsar". From fighting capitalism in the Angolan jungle to the board of BP represents a remarkable career trajectory for Igor Sechin, Putins close associate and "energy-Tsar".

Rosneft is taking BP's 50% stake in TNK BP and also BP is taking 12.84% of equity in Rosneft. BP, will buy 5.66% of Rosneft equity shares for the price of USD 4.88 billion (USD 8 for each share) and make its total share of Rosneft 19.75%. It will give BP right to assign two members to the Rosneft board. Presumably one of them will be Robert Dudley - who had to take refuge outside Russia in 2008 when tensions with BP’s former partners in TNK-BP were at their height - now returns to help the Russian state run one of its main economic pillars.

Opinions are split across the expert communities as to whether the deal is financially profitable for both Rosneft and BP. BP's annual income from TNK BP production was USD 3 billion. After selling its share the company's income from its activities in Russia will be dropped as much as three fold. It will also lose 25% of its production base. So, why the British oil major which has got about 20 % of its oil and gas assets in the Russian public company, is dropping a profitable and growing upstream business voluntarily and demoting its role to just a minority shareholder of state-controlled Rosneft?

Furthermore, some have asked why AAR didnt buy the 50% share of TNK-BP and become the sole owner of the company by outbidding the Rosneft offer?

Consequently all the analysis and comments missing one fundamental point: the deal as now structured is mutually politically beneficial for both Moscow and BP rather than financially. Now with Russia's direct participation in its board, BP maybe has a political response to Baku and SOCAR for the last 2 years of tension on key decisions regarding existing and upcoming gas projects? And has Moscow in turn finally found the best way to impede the Southern Gas Corridor (SGC) and Shah Deniz (SD) projects in which BP is a leading player ?

Or maybe Putin and Sechin acknowledge that - whether they like it or not - in the long term gas from the Caspian will be strategically important for European markets so why not profit from it? Gazprom has sale and purchase agreements with the South East European and Balkans markets but the terms of those agreements do not go beyond the year of 2022. All the markets that are completely reliant on Gazprom do not want to deepen their gas import dependence on Gazprom and are waiting for the gas coming from SD. Maybe there is realisation that Gazprom's tradition of monopoly positions and attitudes are not the way Russia wants to evolve in a "WTO-world". As consumer choice increases (LNG, shale gas, east Mediterranean gas) maybe the Russia's strategists realise that they need to upgrade their portfolio of options.

Moreover, from the broader geopolitical perspective, Moscow with this tool in hand is able to threaten - or participate profitably in - the Euro-Atlantic energy security concept which NATO (among others) has been promoting. On the Southern flank of NATOs analysis four countries neighbour Russia around, or by way of, the Caspian – Azerbaijan, Iran, Kazakhstan and Turkmenistan. These countries also have access to signficant energy resources and compete with Russia for the same lucrative and strategically significant markets. In some scenarios those countries could be Russian partners and help Russia realize its broader energy strategy on the Eurasian continent - this might lead to a Eurasian energy producers consortium under Russian patronage.

It is clear how such a consortium would benefit Russia - it is not so clear what benefit it would be to the other participants. In order to realize such a long-term strategy Russia has to have make a case, have a lever or incentives, for participation. Several of those countries have no desire to return to a de-facto USSR; they have created successful independent energy and other policies over the last 20 years. How will a seat on BP's board be used by Russia to further its long term strategic aims? And we should maybe expect that those aims will evolve as Russian's leadership prepares for the post-Putin era later in this decade.

Geopolitical speculation aside there are possible positive implications for SGC and SD. Overall Rosneft (and Russia) are better operational and strategic partners for BP than the AAR oligarchs. With the Macondo aftermath and other challenges, BP management has been stretched. It could just be, with AAR tantrums removed, the BP board will now make higher quality decisions on behalf of their shareholders. So its entirely possible that in terms of focus and priority Azerbaijan and SGC could benefit (indirectly) from the deal.

As to Russia, it has finally arrived in the WTO, despite the nationalist rhetoric which its elites indulge. Sakhalin and now Rosneft are huge upstream joint ventures in Russia with significant foreign participation. Though he had a military and no doubt marxist education and early career, it seems likely that Sechin has been spending time on reading Adam Smith in the last 20+ years the evidence so far is that he is now charged with delivering a long term future for Russian oil in a bilateral and reciprocal world. Maybe BP and Azerbaijan should be considering opportunities - outside the Former Soviet Union - where they can become investment partners with the novy Rosneft and then everyone can move away from the Soviet legacy of squabbles over gas pipelines.

From Azerbaijans national strategic viewpoint there is no doubt that SGC & SD represent vital national concerns. Maybe Russia will gradually shift its energy strategy to a more WTO and market oriented one - but maybe it won't. There is no doubt that we are now entering a new stage of energy geopolitics in the region and particularly a new stage for the SGC. Non technical risks to the project are still high and as the above indicates show little sign of decreasing in the next few months. Indeed we are (as the Chinese saying goes) living in some particularly interesting times.

Note: This article, originally published at 7:00 GMT, was amended at 17.30 GMT

Our kind thanks to the authors: Ms. Gulmira Rzayeva, Leading Research Fellow at the Center for Strategic Studies of Azerbaijan in Baku and Mr. Ilham Akbarov, Energy expert based in Germany

 


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