Rosneft extends foreign tie-ups
By Robert M Cutler
MONTREAL - Until very recently, the Russian energy firm Rosneft had been a bit of an anomaly in the country's energy "fitness landscape" (a business concept for evaluating what attributes of an organization are necessary for surviving and thriving, in biology also called "evolutionary optimization").
With occasional exceptions such as its participation in the natural gas development Sakhalin-1, the company had not really engaged in large-scale projects with major Western firms. (A joint venture with Shell owns 7.5% of the Caspian Pipeline Consortium, which conducts crude oil from the Tengiz deposit in northwest Kazakhstan across southern Russia to the Black
Sea port of Novorossiisk, not far from Tuapse.)
All that changed last month, when Rosneft signed an agreement with the US firm ExxonMobil on exploration and development of an area in the Black Sea offshore called the Tuapse Trough, just days after agreeing with BP on a strategic partnership to develop the Russian continental shelf in the Arctic.
The BP-Rosneft agreement specifically concerns the Vostochno-Prinovozemelskoe field in the Kara Sea, not far from the Novaya Zemlya archipelago, where the USSR carried out a large number of atomic bomb tests during the Cold War.
Earlier in the month, Rosneft had exchanged 9.5% of its shares to BP in return for a 5% share in the latter. This double-stroke by Rosneft not only opens it up to profit from Western technology to explore deposits that it would be unable to develop on its own, but also provides further legal cover for the guarantee of its own assets against any claim of illegitimacy.
That is because Rosneft was founded upon the despoliation of Mikhail Khodorkovsky's firm Yukos by Russian state officials in the middle of the last decade. As is well known, Khodorkovsky was recently sentenced to a second term in jail on charges that were in contradiction with the charges for which he was first convicted in 2005. He is scheduled to be released in 2017, ie, after the end of the term of the next Russian president (whoever that may be), who will serve from 2012 through 2016.
The exchange of shares with BP that preceded Rosneft's deal with the company will buy the latter additional protection, in the form of BP's legal department, against any eventual claim by any party against the manner in which Rosneft acquired its Yukos-originated assets.
In an ironic twist, the Russian consortium AAR, which holds the half of BP's TNK-BP venture that BP does not itself hold, has succeeded in blocking, at least temporarily, the Rosneft-BP tie-up via an injunction granted by the High Court in London. AAR wishes that TNK-BP remains the principal vehicle for BP's operations in Russia and therefore is naturally disappointed with BP's move to link up with Rosneft. (In a sidebar, the government of Ukraine, where TNK-BP also has operations, has decided to allow the joint venture to develop shale gas in the country to help reduce its dependence on energy imports.)
In accordance with the court order, BP has entered into arbitration with the AAR main partners Alfa Petroleum and OGIP Ventures in order to decide the questions at issue. The arbitration will be expedited, and the share swap with Rosneft is on hold until its successful conclusion.
It is noteworthy that, given a choice between the US and Russia, BP appears to have cast its lot with the latter, following its problems with the Deepwater Horizon blowout in the Gulf of Mexico last year. Unless you are a lawyer, litigation in American courts is just not as interesting as drilling new holes in the sea floor. Responding to the immediate criticism that the deal received from environmental groups, Russian Prime Minister Vladimir Putin opined to the press that he is confident that BP has learnt from its mistakes in the Gulf.
On the Black Sea front, Rosneft already owns an oil refinery in Tuapse itself, which is about 200 kilometers from the border of Abkhazia, part of the territory that Russia still holds following its August 2008 invasion of Georgia. The Black Sea offshore of Abkhazia itself has long been rumored, on the basis of surveys conducted during the Soviet era, to hold important hydrocarbon deposits. The leadership of Abkhazia has confirmed to the Russian newspaper Moskovskoe Novosti that Rosneft is engaged in the extraction of oil off the Black Sea coast over which Abkhazia claims exclusive economic jurisdiction.
According to Exxon, which has agreed to finance entirely the exploration phase of the Tuapse Trough project at an estimated cost of US$1 billion, the two firms will most likely create a joint venture to operate the project, to be two-thirds owned by Rosneft. The two companies already have some experience working together to develop the Sakhalin-1 natural gas deposit. Two subsidiaries of Rosneft together have a 20% stake in Sakhalin while ExxonMobil, the project operator, has 30%.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.