The price of survival in Big Oil: 5 percent of the company

The math of BP’s $7.8 billion share swap with Russia’s Rosneft has been long clear: To survive as we know them, the major oil companies known as Big Oil must form serious tie-ups with their largely state-owned counterparts in the petro-states, and Western governments will have to go along with it. The difference now is the shock of an actual benchmark for the cost of such a marriage: 5 percent of your company. BP’s example suggests that the titans of Chevron, ExxonMobil and Shell will think hard before similarly tying the knot because it would take few such covenants before one’s shareholder structure is fundamentally changed.

In both the United States and Great Britain, politicians are asserting a possible nefarious geopolitical outcome from Rosneft becoming the largest shareholder in BP, which still obtains a quarter of its worldwide production from the United States. In a widely repeated remark, U.S. Rep. Edward Markey called BP "Bolshoi Petroleum"; in Britain, Labor Leader Ed Miliband said BP ought to be diversifying out of oil and not reinforcing its investment in fossil fuels. In addition, the Financial Times‘ Catherine Belton concludes that Russia scored a trifecta — it for the first time won a stake in a member of the elite club of Big Oil; it demonstrated that its imprisonment of Mikhail Khodorskovsky — whose oil assets make Rosneft as rich as it is — is really no big deal; and Rosneft Chairman Igor Sechin, a confidante of Prime Minister Vladimir Putin who is usually described in dark terms by foreigners who deal with him, arose triumphant and with much prestige.

Is there reason for genuine concern outside Russia, or is this just the usual reflexive stuff we hear at the time of unconventional ownership agreements?

On paper, the deal is attractive: BP obtains access to an area of the South Kara Sea "comparable to the U.K. North Sea — which contains some 60 billion barrels of oil and gas — in terms of its size and potential," reports Guy Chazan of the Wall Street Journal. BP would own a third of the operating company that developed the reserves, for which it will cost up to $2 billion for initial seismic and drilling tests.

TNK, BP’s long-time Russian oligarch-owned partner, has publicly reminded BP that, under their partnership, it has an option to participate in any such deal on Russian soil. A senior TNK source told me that the key factor in whether the oligarchs choose to join the Rosneft deal is the high expenses — the billions of dollars in costs will be a mighty deterrent; one wonders whether BP in fact will end up having to carry Rosneft’s expenses, as has often been the case in other oil deals on former Soviet soil.

Then, is the deal smart? After all, BP’s neck is stuck out further than any of its rivals – it now will much add to the one-fourth of its global production currently obtained from Russia, probably making it, and no longer the United States, its most strategic geographical holding. I asked Nick Butler, a former BP vice president and senior strategic adviser to John Browne when he was CEO of the company. "I think I would sum it up with the motto of the British SAS: Who Dares Wins," Butler replied in an email.  

At the FT, Stefan Wagstyl notes that BP is doubling down on a place where it has competitive advantage, and on a technology — deepwater drilling — in which it has much experience. "The prize is worth it — the Arctic is one of the last huge reservoirs of undeveloped hydrocarbon reserves," Wagstyl concludes. "It will be complex and costly, but if it weren’t, Rosneft wouldn’t need BP."

The Wall Street Journal’s Liam Denning writes that, "The risks are high; this is Russia after all." But Denning also says that "the deal sends a powerful signal that newly installed Chief Executive Bob Dudley is remaking BP in radical fashion."

There are grounds for geopolitical concern to the extent that, like Italy’s Eni, BP becomes a stalking horse for Russian policy abroad. As for BP’s perspective, it is taking a mighty risk – we have previous examples of Putin showing a willingness to be open to dealmaking with foreigners at times, such as now, when he feels Russia is relatively weak economically, only to revisit them at a later date when the country is stronger. But BP as a company and Dudley as its CEO arguably are in a position where they must roll the dice or wither away as a major player.