The biggest news of the last couple of days is the announcement of the BP-Rosneft agreement. Under the agreement, the firms exchange stakes, and will undertake a joint venture (theoretically) to produce oil in Russia’s Arctic.
The BP move smacks of desperation. The company reminds me of a gambler who has lost several big hands in a row, and figures that his luck just has to change. The most recent big loss, of course, was in the Gulf of Mexico. But it has also suffered major losses in Russia. These include the effective expropriation of the Kovytka gas project; Gazprom refused to provide transportation from the field, the company was at risk of losing its license which required it to produce (which it couldn’t do because it couldn’t transport and sell), so it ceded the stake to Gazprom. The other big loss involved BP’s current CEO, Robert Dudley, who was run out of Russia–literally–in a battle between BP and its Russian partners for control over the TNK-BP joint venture.
And of course other western majors have had bad experiences in Russia. Shell over Sakhalin II. Exxon over Sakhalin I. This is why despite the fact that there is oil in Russia, other majors are not rushing out to do deals there even though they, like BP, are intent on finding new reserves. As an example, Chevron Conoco-Phillips just sold its stake in Lukoil.
But BP has had its successes in Russia.
It would be one thing if BP had proven its ability to navigate Russia’s treacherous energy politics, but it hasn’t. Indeed, it has been very clumsy. It was outmaneuvered continually in the TNK-BP saga. Its attempts to rescue its Kovytka stake were tragicomic. They approached Igor Sechin–former intelligence operative, deputy prime minister, chairman of Rosneft, thug, and head of a Rosneft-centered clan that was a mortal rival of the Gazprom-centered clan–for help in dealing with Gazprom. This was about as bright as approaching the Tagliattas to intermediate with the Corleones.
In one sense, you have to cut the company some slack for its past experiences: they are not alone. No supermajor has had anything but headaches–and worse. All the advantages are with the Russian state. They have many levers that they can pull. Everything from environmental and licensing rules to taxes to guns.
But that means that it is hard to cut the company slack about its current decision. How could it possibly think that this time it will be different?
The nature of the oil business makes this problem particularly acute, and the risks of opportunism are particularly acute in the BP-Rosneft JV. Rosneft needs technology to exploit the offshore opportunities in the Arctic. BP has the technology and expertise. BP understands that its ability to utilize that expertise in other areas, most notably the US Gulf, are doubtful at best as a result of the Horizon disaster. So, in some sense, there is economic sense to the deal, in that each party has something the other wants and needs.
But deals have to be enforceable, and here the problem is one of asynchronous performance that creates extreme hazards in enforcing any deal. BP has to commit its technology and expertise and capital at the front end. It does so in the expectation that when the oil flows, it will profit accordingly. But once it has sunk its capital and technology into the frozen Russian wastes–once it has incurred massive costs–its bargaining position vis a vis Rosneft and the Russian state declines dramatically. The Russian state can then start playing its tricks to squeeze BP.
And it almost surely will. It is really almost impossible to fathom how BP believes that it can avoid this problem. Asynchronous performance is inherent in the proposed JV. Russia has a demonstrated track record of acting opportunistically, especially in the energy sector. Reputation has clearly not kept Russia from acting opportunistically in the past. There are no legal protections to speak of: indeed, in Russia, the legal system is the sword of the state, rather than a shield for private capital. This means that BP will run extreme legal and political risks in attempting to collect on its commitment of capital and technology.
When thinking about this deal, remember one of the sources of dispute between TNK and BP: the former –the Russian partners–wanted to invest more outside of Russia. That’s pretty telling, if Russia is where the best oil prospects are–physically, anyways.
Maybe BP knows something that isn’t immediately apparent that has convinced it that this time it will be different. But it almost never is.
Hope springs eternal. But to me, the more appropriate aphorism is: fools rush in where angels fear to tread.