BP escapes Russian impasse — at a cost

May 6, 2011

By Jason Bush and Fiona Maharg Bravo
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

MOSCOW/MADRID — No compromise is pain free. But BP’s peace agreement with its oligarch partners could have been much more costly. The UK oil major seems to have killed their opposition to its Arctic exploration alliance with Russian energy giant Rosneft — but without resorting to penal concessions.

The key to the compromise is that TNK-BP, the UK group’s joint venture with the oligarchs, will replace BP as Rosneft’s partner in the Arctic project. At the same time, BP will still be allowed to proceed with a proposed share swap with Rosneft — albeit on restricted terms. As BP owns 50 percent of TNK-BP, BP can still look forward to future upside from the exploration of the Arctic, a valuable source of long-term growth.

True, BP is only benefitting half as much as before. But that is better than nothing. The fact that BP may still proceed with the share swap is regrettable given the drilling opportunity is now smaller. But it would have been even more damaging to BP to back out of that and risk damaging relations with Rosneft.

This should take some pressure off BP Chief Executive Bob Dudley. Critics will still ask how he got BP into the mess to begin with. Nevertheless, the TNK-BP oligarchs have settled for less than they had previously demanded. Dudley has also avoided having to take the really expensive escape route — finding the $35 billion rumoured to be the cost of buying them out.

The final outcome may in fact be close to the one the oligarchs originally hoped for. It makes good sense for them to insist on TNK-BP replacing BP in the Arctic, which helps address concerns about TNK-BP’s future growth, improving its value and their own wealth. The oligarchs have also asserted a vital principle — that BP cannot cut them out of other deals in Russia in future.

BP’s shares rose 3 percent on the news and might have been expected to fare better. But there’s still one big unanswered question. Will Rosneft agree to the compromise? Rosneft had previously scorned the idea of working with TNK-BP, suggesting it wasn’t up to the job. In practice, BP can still supply the joint venture whatever technical expertise is needed. It shouldn’t be too hard to bring Rosneft on board.

This won’t be a total end to the acrimony between BP and its TNK-BP partners. BP now has two Russian spouses. This uncomfortable menage a trois could be a rocky relationship.

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