Robert Dudley, CEO of British Petroleum, and Igor Sechin, Russian Deputy Prime Minister and board chairman of Rosneft, announced a new mega-deal between BP and the state owned Russian oil company. Through a stock swap, BP acquires 10 percent of Rosneft in exchange for giving Rosneft 5 percent of BP. Together, the two companies will explore offshore tracts in Russia’s South Kara Sea. As a ten percent owner of Rosneft, BP, in theory, acquires over two billion barrels of oil reserves – enough to replace the reserves BP sold to help pay for its Gulf oil spill. The deal makes the Russian “national champion” oil company BP’s largest single shareholder. BP becomes one of Rosneft’s largest private shareholders (the state owns three quarters) along with Oligarchs Roman Abramovich and Oleg Deripaska. Deripaska, a survivor of Russian gang warfare over aluminum and nickel, has been banned from travel to the US due to his suspected ties with organized crime – an unlikely partner for the staid British company.
The BP-Rosneft deal reminds me of the Charlie Brown cartoon in which Lucy pulls the football away from Charlie Brown for the umpteenth time as he approaches to kick after solemnly promising that she will never do this again. Is this not the same Robert Dudley, the CEO of the TNK venture with Russian oligarchs, who was expelled from the country, was accused of violating Russian laws, whose employees were charged with espionage, and who saw a Russian oligarch appointed to his position – while Vladimir Putin looked on from the sidelines?
One news account of the deal points out understatedly that BP was able to acquire its ten percent share in Rosneft so cheaply due to the “political risk of investing in Russia,” reminding readers that Dudley himself had been expelled from Russia, that Shell was forced to cede its majority stake in its Sakhalin project, and that other foreign investors had been harassed out of Russia by the tax police or by threats from the prosecutor’s office.
What assurances does BP have that Russia will not again use its time-tested Lucy-Pulling-Away-the-Football trick? The BP announcement stresses that the deal was approved by Vladimir Putin himself. And none other than his trusted deputy, Igor Sechin (also board chairman of Rosneft), signed off. What greater guarantees could there be?
In Putin’s Russia, it makes little difference who signs and who approves! In the absence of a rule of law, a contract is what those in power say it is. Moreover, deals can always be scuttled in ways that leave those at the top who signed off blameless. Shell, which had a legal contract to produce in Sakhalin without a local partner, was deemed in violation of environmental regulations and was under immediate threat of losing its drilling rights. These same serious environmental violations disappeared overnight when Shell ceded majority interest in the project to Gazprom. Poor Putin, of course, was helpless. He could, not interfere in the legitimate work of his environmental protection agency. Similarly, Russian regulators used technicalities to abrogate ExxonMobil’s contractual right to market gas from its Sakhalin project outside of Gazprom’s export monopoly – another agreement approved at the highest levels of the Russian government.
The West has lectured Russia since 1991 on the importance of the rule of law. Actions, such as BP’s, tend to render these lectures hot air. No matter how badly Western energy concerns are treated, they (like the hapless Charlie Brown) will take another kick at the disappearing football.