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Home > Blogs > Anthony Harrington > BP and Rosneft’s Arctic Adventure, part 1

BP and Rosneft’s Arctic Adventure, part 1

Russian economy | BP and Rosneft’s Arctic Adventure, Part One Anthony Harrington

At QFINANCE we are always interested in major mergers and joint ventures so the BP-Rosneft deal announced on January 14 is a natural focus, particularly since it throws such a bright light on the issue of corporate governance. This issue has yet to unfold in its full glory, so to speak, but the constituent elements are fascinating from the outset. For example, if you were passionate about the environment and you heard that a major oil company that had just featured centre stage in the biggest environmental catastrophe in US history, was teaming up with the state owned oil company of a country with a lamentable record on environmental pollution, to tackle deep water drilling in the pristine seas of the Arctic, it is a safe bet that you would not be happy.

However, that is just one take on the BP-Rosneft joint venture. There are many other perspectives. Two alternative takes that spring to mind are a) the pressure on oil majors to replenish reserves, as discussed by Ian Fraser in a recent blog and 2) the idea put forward by Brook Horowitz, head of governance and anti-corruption programs at the International Business Leaders Forum, that Rosneft and BP could be good for each other – or at least that BP could show Rosneft the way to better governance and improved corporate and social responsibility. This would also have a direct bearing on environmental concerns, of course, since good governance is about being a good corporate citizen broadest sense. This includes not trashing the place as well as keeping your accounts in good order and not bribing the locals or breaking Securities and Exchange Commission (SEC) or International Accounting Standards Board (IASB) rules.

On the first point, Fraser pointed out that the absence of fresh discoveries in well hammered provinces like the North Sea, or the Gulf of Mexico is increasingly pushing the oil majors into stocking their reserves with larger and larger chunks of oil sands terrain. Environmentalists hate oil sand and oil shale extraction, pointing out that it takes almost as much energy to crack the oil out of the shale as one gets from the finished product. Again, the environmental lobby will not be easily convinced that restocking reserves by chalking up billions of barrels of Arctic oil and gas equivalent is a better route forward.

However, Horowitz sees it somewhat differently:

"Hostility to BP’s Arctic alliance is understandable but misplaced. The $18 billion share swap between BP and Rosneft announced on Friday (14th January) in fact provides the best opportunity to help Russia develop its resources while ensuring that this happens according to the best international environmental and governance standards.

The risks of the deal have been well documented by its detractors. Days after a U.S. congressional report into the Deepwater Horizon spill, BP, a company with a recent record of industrial accidents that have caused environmental damage in the Gulf of Mexico and Alaska, signed a deal in the Arctic where the environmental risks and technical challenges are greater than any in the history of the oil industry. The deal is with Russia, a country that has, by its own admission, fallen short on environmental protection.

The benefits of the alliance are likely to outweigh the risks and demonstrate how collaboration between multinational companies and state-owned entities in emerging markets can be a force for positive economic, social and even geopolitical development.”

Horowitz goes on to cite a comment from Deputy Prime Minister and Rosneft chairman Igor Sechin which stands BP’s Deepwater Horizon “misfortune” on its head, claiming that it somehow makes BP a more fitting partner, because of the “knowledge and experience” it has gained from the Gulf of Mexico disaster. Doubtless BP has indeed learned some very hard lessons from this and doubtless people will be much more careful with deep water wells and the way they are cemented into place in future, and whether the safety cut offs work as they are supposed to. Still, it’s a little odd to argue that the driver of a particularly messy train wreck is the best person to take the throttle on the next train since they’ve gained “knowledge and experience”. However, there is a case to be made along these lines. As Horowitz says:

“Indeed, if any company can be entrusted to develop the delicate Arctic ecosystem safely, it would one that has paid the highest price for its past mistakes in terms of billions of dollars of lost revenue, litigation and settlement cases, lost reputation and rolling heads. BP CEO Robert Dudley, referring to the Gulf of Mexico disaster, said, “It has shaken the company to the core.” Rosneft seems to be open to learn from the experience of its joint venture partner.”

He points to the fact that BP’s other existing operation, TNK-BP, seems to have managed its environmental risks well so far. “There has been special attention to the impact of exploration and drilling, for example, in environm entally protected areas such as the wetlands in Khanty-Mansiisk in West Siberia, one of TNK-BP’s major sites and a region under the protection of the 1971 Ramsar Wetlands Convention. Similarly, Shell’s joint venture with Gazprom, Sakhalin Energy, has taken on board the environmental concerns of international nongovernmental organizations in a way that would have been unlikely had Gazprom worked on the project alone.

While the challenges in the Arctic are on a much different scale, these examples show that a responsible environmental approach is possible in Russia.”

His point, quite clearly, is that if these reserves are going to be exploited, and they most definitely are if Vladimir Putin has his way, then it is best done by a Russian company in partnership with a “responsible” western company with a reputation to protect (OK, a tarnished reputation, but a reputation nontheless.) Time, as they say, will tell. In part two I look at the environmental issues in a bit more detail and at the concerns of Russian environmentalists with Russia’s approach to industrialisation and extraction generally.

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