EDITORIAL: BP Wins Coveted Russian Prize, To Fury Of Rivals And Opponents

BP's new Russian deal will be regarded with envious eyes by rival oil giants. All of them have been maneuvering for access to the rich virgin exploration territory of Russia's Arctic seas.

This is a prize that any of them would sell their grandmother to get.

But for BP's enemies, the deal is like a waking nightmare and is already provoking a storm of criticism that could pose a threat to the company. The ink wasn't even dry on the accord between the two companies before Democratic U.S. Congressman Edward Markey was denouncing it.

"BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum," he said in what was a typically hostile response to the deal.

With BP still very much weakened from the Gulf of Mexico oil spill last year, such political rhetoric should not be taken lightly. In exchange for the long-term payoff from Arctic hydrocarbon riches, the company faces some potentially significant short-term risks.

BP's commercial motivation for the deal is obvious. It gets access to 125,000 square kilometers of the South Kara Sea that, by Russian estimates, could contain around 35 billion barrels of oil and 10 trillion cubic feet of natural gas.

"A major [oil company's] growth potential in increasingly defined by its ability to penetrate national oil company turf," said analysts at Bernstein Research in a note. BP just did this in spades.

So what's in it for Russia?

Rosneft will benefit because most of its existing oil production comes from declining regions in West Siberia and the Urals, but it lacks, "both the know-how and the financial clout to open up the Arctic's vast riches," said Bernstein.

BP has the technological savvy, the project management skills and the financial clout that Rosneft is seeking. The hard-nosed Russians also seem to appreciate that BP has been through the crucible of the Deepwater Horizon disaster and lived to tell the tale.

BP's experience in the Gulf of Mexico, "provided the company with one of its competitive advantages, which we will rely upon as we develop offshore," said Igor Sechin, Russia's deputy prime minister and chairman of Rosneft, Friday.

Russia's prime minister, Vladimir Putin, expressed the same sentiment in typically sardonic fashion by quoting the old Russian proverb: "One beaten is worth two unbeaten."

There is also a financial advantage stemming from BP's recent beating. Its shares are still around 25% below their pre-spill price, a level at which most analysts say the company is seriously undervalued. Rosneft's share swap gets a lot more bang for its buck than it would with BP's rivals.

So the deal has a sound long-term basis, but also brings its risks--principally in the reaction of the U.S. authorities.

The predictable knee-jerk response of Congressman Markey, who became BP-basher in chief last summer, should not be given too much weight. However, more BP-friendly Republicans who now control the House Energy and Commerce Committee also expressed doubts.

"The national security implications of BP America being involved with the Russian company--that does require scrutiny by the Committee of Foreign Investment," said Republican Congressman Michael Burgess, who sits on that committee. BP's status as one of the largest suppliers of fuel to the U.S. military and operator of strategically important U.S. energy infrastructure makes the deal a particular concern, he added.

The U.S. is far more important to BP than Russia, and will remain so for many years despite the Rosneft deal. It's ability to return to normal operations in the wake of the Gulf oil spill will depend greatly on the goodwill of U.S. politicians and regulators, so BP would do well not to anger them by cozying up to Putin.

Critics of the deal also point out that the promised rewards may never materialize, given the troubled history of international oil companies operating in Russia. For companies like BP and Shell, life in Russia has been one headache after another.

However, all the anguish has been a price worth paying. BP's Russian joint venture, TNK-BP, is a big contributor to the group's bottom line. The same is true for Shell's Sakhalin-2 project.

Furthermore, the power struggles over these two projects appear to have reached a manageable status quo--international companies are welcome to produce oil and make money, so long as their Russian partners are in the driving seat. France's Total and Norway's Statoil joined with Russia's other state-controlled energy giant, Gazprom, in the huge Shtokman gas project on this basis.

BP's deal with Rosneft further solidifies the precedent.

So to characterize this deal as a final roll of the dice for desperate BP is incorrect. There are many risks--geological, political, financial, regulatory--but managing this stuff is what companies like BP do.