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Does BP’s Deal with Rosneft Legitimize the Kremlin’s Takeover of the Country’s Oil Industry?

Does BP’s Deal with Rosneft Legitimize the Kremlin’s Takeover of the Country’s Oil Industry?

What a difference a couple of years makes.

In 2008, gun-wielding police commandos raided BP's Moscow offices in what many saw as an attempt to pressure the company to relinquish control of its Russian joint venture. Its American chief, Robert Dudley, fled the country after police questioned him for five hours over alleged tax fraud.

Last week Dudley was back in Moscow. Now CEO of BP, he sat smiling next to Prime Minister Vladimir Putin, who praised the firm's major new deal with Russia's state-controlled Rosneft oil company.

"This project may become very big and have a significant influence on the global oil and gas industry," Putin said.

Dudley said he hoped the $8 billion deal to develop massive oil deposits under the Arctic Kara Sea -- and swap shares between the two companies -- would send a "strong signal about the possibilities of investment cooperation in Russia."

BP has dismissed criticism of its deal with Rosneft as "political," saying the company is in Russia to conduct business. But critics counter the agreement is political. They say the Kremlin is using BP to "legitimize" its forced takeover of the country's oil industry.

Yukos Fallout

The deal comes less than a month after former oil tycoon Mikhail Khodorkovsky was jailed for a second time on charges that opposition leaders say are fabricated because he poses a political threat to Putin. Last decade, Khodorkovsky's Yukos oil company was broken up and sold in a shady auction to a state-controlled company, part of the Kremlin's drive to put the energy industry back under state control. Yukos's best assets went to Rosneft, making it the country's biggest oil company.

Some Yukos shareholders filed suit abroad and hope last month's ruling by a Swedish court for the Russian government to pay compensation to one of them will set a precedent.

In Moscow, critics see the BP deal as an attempt to help protect Rosneft in the future by "diluting" the company's ownership of what they believe to be stolen assets. Opposition leader Boris Nemtsov says Putin hopes that injecting western capital into Rosneft will blunt criticism over Khodorkovsky's treatment.

"[The BP deal] is a very bad decision," he says, "showing that the fundamental values of human rights and property rights are just words that are forgotten when the issue is money."

Nemtsov says he believes Western courts will ignore the BP deal, which prompted some American politicians to call the company "Bolshoi Petroleum."

Clamoring To Invest

BP sought to deflect the criticism on January 18 when its head of operations in Russia, Jeremy Huck, told Radio Ekho Moskvy that questions about Yukos are political, saying BP is in Russia to "do business."

"The projects we're planning with Rosneft are sanctioned by the Russian government," he said. "The question about where those assets are from, that's better asked of Rosneft or the government."

Industry experts say that argument will probably fall on deaf ears. Oil and gas analyst Alexei Kokin of the UralSib financial corporation says Rosneft is paying BP handsomely by promising access to huge Arctic reserves, but says the companies' share swap won’t minimize Rosneft's risk.

"The Swedish court came to some major decisions about Yukos that other courts may use as guiding principles," he says.

Still, that's unlikely to hurt business in Russia. Conventional wisdom has long said actions such as Khodorkovsky's arrest and the forced takeover of assets belonging to Yukos, BP and a host of other companies scare off western investors, depriving the country of desperately needed capital.

In fact, Western companies have clamored to invest because once in, those with the knowledge and power to operate in Russia face much less competition than elsewhere.

Political expert Stanislav Belkovsky says last week's deal is especially important for BP in the aftermath of its major oil spill in the Gulf of Mexico last summer, when the company first approached Russia for support.

"BP agreed to the deal, essentially legalizing the Yukos takeover," he says, "not least because it needs the cash to help solve its internal problems."

Blackened Reputation

The deal will give Rosneft crucial help extracting oil under extreme conditions in a region that environmental groups say could suffer without the development of safer technology.

It also fits a broad Kremlin strategy to boost its political influence abroad by signing lucrative deals with energy companies in countries across Europe.

"From the moment the deal goes into effect, all BP's lobbying power will be used to improve relations between Russia and Great Britain," Belkovsky says. "Although that doesn’t necessarily mean it will happen because the British elites are very wary of the Russian leadership."

The deal's ramifications aren't yet clear. U.S. diplomatic cables leaked on the Wikileaks website indicate Rosneft will soon take over BP's Russian joint venture, TNK-BP, that was at the center of BP's troubles two years ago. If true, it would give the Kremlin even more control over the country's oil industry.

For BP, last week's agreement will secure future growth after some questioned the company's very survival in the wake of the disastrous Gulf of Mexico spill. Whether the deal does anything to improve its blackened image is another matter.

By. Gregory Feifer

Source: RFE/RL 

Copyright (c) 2010. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

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