BP: Back to Petroleum

January 24, 2011 | 00:00

BP: Back to Petroleum

BP’s deal with Russia's Rosneft is indeed, as it is claimed to be, "a groundbreaking strategic global alliance", for lots of reasons, not just those advanced by the two companies. It is also a deal fraught with ironies and shadows of the past. In the view of our energy editor at large, Chris Cragg, who happened to work for BP for a number of years, it means above all that BP is returning to its core business after having strayed "beyond petroleum". Russia is probably the only place where it can now do what it is best at: offshore and often deep-water exploration and drilling!

The alliance between BP and Russia is the first ever equity-linked partnership between a national and an international oil company, although this is perhaps less important than it looks. For 5% of BP's ordinary shares, in return for 9.5% of Rosneft's ordinary shares, BP gets to explore and develop three Russian Arctic licences roughly the size of the North Sea. It is the beginning of the opening out of the Russian northern offshore. Yet only a few years ago, it might have seemed utterly off limits, for the story is full of irony.

Consider, for example, that in those halcyon days of the pre-Deepwater Horizon disaster back in July 2008, Robert Dudley, then Chief Executive Officer of the company's Russian venture, TNK-BP, was leaping on a plane to get out of Russia to flee away from the attentions of Access and Renova's (AAR) Russian billionaire shareholders in that very same venture. The conflict involved raids on offices, accusations of industrial espionage, the demand that Dudley be fired and writs in the High Court of London. BP's then Chief Executive Officer, Tony Hayward, pledged his full support and Dudley remained CEO of the Russian operation, although doing so outside the country.

It was none too quietly pointed out that TNK-BP had paid out more than $70 billion in tax and duties to the Russian Government, plus $20 billion to its recalcitrant shareholders. It was, so BP said: "the most successful Russian oil company on most measures used by investors." Hayward threatened to defend BP's interest as a 50% TNK-BP shareholder and recover from AAR any "losses suffered by BP as a result of their violations of the terms of our shareholders agreement". There was much shaking of heads about the dangers of doing business in Russia and TNK-BP's imminent demise, but it did not happen. Peace was apparently restored by Hayward with a five page memorandum of understanding.

Source of embarrassment

Scroll on down the years and the Deepwater Horizon disaster prompts a sudden change of hats. It is Tony Hayward who is now getting used to Aeroflot and Dudley who as the new CEO has taken over from Hayward the handling of the Deepwater Horizon. Hayward did not exactly handle the Gulf of Mexico tragedy very well. His appointment, before the tragedy, of a former editor of the Financial Times as new Director of Communications had not helped the company's usually highly effective public relations operation. Hayward is of course a rather shy Brit, whereas Dudley is an American, and even better, spent his childhood in Hattiesburg, Mississippi and is thus a good old southern boy.

Since President Obama could hardly say the phrase "British Petroleum" during the Mexican Gulf crisis without having a quick spit and looking in need of mouthwash, he had accidentally put his finger on something the company has been trying to avoid mentioning for the past two decades. After all, the

It is a curious fact that under the Soviet Union and since, Russia has developed very little offshore expertise at all
British end of the Petroleum tag had been a source of embarrassment for many years, not least after the company had finally lost its British government shareholder back in the days of Margaret Thatcher. It had evolved into BP and even for a time 'Beyond Petroleum' in the years of CEO John Browne and an enthusiasm for solar power, the odd wind turbine and some biofuels. Besides, what was unfair about Obama’s colonial nametag was that having taken over the engineering expertise of Amoco and ARCO, there were more Americans involved in the company than British.

Indeed, if John Browne had a particular genius in creating 'mergers' of large oil companies at a time of low oil prices just as they were rising – ARCO was acquired in the year its profits were the highest ever, but only after the deal was done – the corporate mood of 'beyond petroleum' did not always sit too happily with the new arrivals. At the time, many people in the workforce felt that the senior executives needed to be reminded that BP-Amoco-ARCO was, to be frank, "just another (expletive deleted) oil company!"

Reputation

After Browne's departure, the new regime took some notice of this mood. They retreated from the wider shores of 'greenery' and started to concentrate on the core business again. However, if the new brooms under Hayward marched back into that core business, they neglected to recognise the worldwide impact of the previous years of sincere environmental 'cleaner and greener than thou' pretensions, with its extremely expensive new green sunshine logo.

These would remain the hangover that set them up for a gigantic fall when the Deepwater Horizon blew up, not merely with a tragic loss of life, but with the obliteration of any remaining pretensions to being - somehow - 'greener' than anybody else. They were seen and remain to be seen as just 'another (expletive deleted) oil company' with a worse reputation than most. Had they been Exxon or Chevron, things might have been different, but being in Obama’s perception 'British' and having painted themselves splendidly environmentally friendly in previous years, the company had accumulated US enemies like mosquitoes in a swamp.

So what was BP to do next? It does not take a genius to realise that what has happened in the Gulf has not helped the company reach to the top of the list in terms of desired future partners in such exploration and development. Less noticed is that the disaster has also forced BP to dispose of many marginally less important assets around the world to help pay compensation to those affected.

Last August, it must have cost Hayward a considerable lump in the throat to say goodbye to BP's assets in Colombia to Ecopetrol and Talisman for $1.9 billion cash. He may have been delighted by the price,

What precisely was it that BP was good at? The short answer was: offshore and often deep-water exploration and drilling!
but he had spent a considerable period of his life building up the assets concerned. Pan-American Energy in Argentina went to Bridas for $7.06 billion in November. Four mature fields in the US Gulf of Mexico went to Marubeni for $650 million in October. Goodbye went the upstream in Pakistan and goodbye went Southern African Marketing, but who cared? Money was needed and the figure put at $30 billion.

Less noticed amongst the sales was the $1.4 billion divestment of Vietnamese and Venezuelan assets to TNK-BP. While Venezuela's President Chavez may or may not look with greater charity on the Anglo-Russian oil company than the capitalist beast BP alone, the deal at least showed that better relations have been established inside TNK-BP than two years ago.

Huge margin

However, this forced retreat into the core business demanded that senior executives re-examine what this core actually was. If the 'beyond petroleum' route was an embarrassment and the model of the fully integrated multinational oil company went out of style decades ago, what precisely was it that BP was good at? The short answer was: offshore and often deep-water exploration and drilling!

This may seem an odd conclusion, following as it does from the worst ever offshore deep-water drilling accident in history on BP’s watch, but it is true nonetheless. Exploration and Production profitability has long dwarfed that from refining by a huge margin. Historically, BP has always seen itself as somehow bolder on the exploration front than its rivals, regardless of whether this was true.

Drilling through overlying rock formations towards a hydrocarbon reservoir (artist's impression BP)
The core business consequently has to be the search for and production of oil and gas. The problem was where to go next. This, given the general geopolitics of oil these days with the dominance of the national companies on land, meant offshore. Certainly there was Iraq, where the company has been successful in redeveloping the Rumaila field, but Iraq is about security, not about technical difficulty. And frankly, would you mortgage your company's future on Iraq, even if you were allowed to? BP has been kicked out of Iraq once already.

And there remains, of course, the US Gulf of Mexico. In its Annual Review for 2009, BP proudly boasted: "BP is the leading operator in the deepwater Gulf of Mexico. We are the biggest producer, the leading resource holder and have the largest exploration acreage position… we are exceptionally well placed to sustain our success in the deepwater Gulf of Mexico over the long term." Er, um, well perhaps maybe. Needless to say there is no suggestion that BP would or could pull out of the Gulf, but it hardly represents the brand new beginning so beloved by senior executives after a major crisis.

Russia, by contrast, undoubtedly does. For it is a curious fact that under the Soviet Union and since, Russia has developed very little offshore expertise at all. True enough, the Russians did create some of the very first offshore platforms in the Caspian, some of them made largely of wood. But then, the Soviet Union didn’t really need to go offshore. It had the huge Siberian land-mass to explore.

Ironies start to fly

Now however matters are different. While Russia remains the world's largest oil producer and produced a post-Soviet record in 2009, the country is no less focused on the issue of peak oil than everybody else. Furthermore, in the light of the search for oil in more and more distant places, it is keen to establish its rights to explore in the Arctic regions in more than mere words. Hence its submarine adventure in planting its flag on the ocean floor somewhere underneath the north pole.

In this regard, BP represents a remarkable fit. For not only does it have offshore deepwater expertise - regardless of the Deepwater Horizon tragedy - but it also has Arctic expertise, most notably in Alaska. The Russians need BP, hence the announcement of the establishment of a Russian Arctic Technology Centre to examine the safe extraction of hydrocarbons from the region, one of whose tasks will be to create an emergency response capability.

It is here that the ironies start to fly in battalions and environmentalists throw up their hands. How come, they say, do you give the job of developing an emergency response capability for the Arctic - where you

The Russians need BP, hence the announcement of the establishment of a Russian Arctic Technology Centre to examine the safe extraction of hydrocarbons from the region
should not be drilling at all - to a company which has had the worst ever offshore deepwater accident in history? Equally, if BP's experience of drilling in the Arctic comes down to its experience in Alaska, just look at its track record of law suits and fines for actions in that region.

Surely, runs the argument, BP should be the very last choice for such an assignment. In addition, how neat for BP that it should be able to retreat from the blaze of media publicity in the Gulf of Mexico to a new frontier, miles from civilization and public scrutiny behind Novaya Zemlya in the Kara Sea. After all, the islands are sufficiently far from population centres that they were a particularly notorious Gulag in the Stalin era and used for underground nuclear testing in the 1950s. What happens if there is another blow-out?

Past mistakes

There may be some merit in this argument, but there are some counterarguments to be made as well. First of all, very few places on the planet that have the kind of seaborne emergency capability that is

If it is true that BP had the worst accident in history in deepwater drilling, it can at least say that it has experienced it and has had the opportunity to learn from it
available in the Gulf of Mexico. A major offshore oil disaster in, say, Nigeria, could certainly not summon help at the speed available in the Gulf. However, the Kara Sea is not quite as remote as it at first appears. The new exploration zones start about 100 km north of the Yamal Peninsular, which is Russia’s primary natural gas producing area with all infrastructure that that implies.

Second, if BP's track record in the Alaskan Arctic leaves something to be desired, this is largely because most of the other companies don't have anything like its level of activity there. In spite of the fact that Alyeska, the company that runs the Trans-Alaskan pipeline, is also owned by Conoco and Exxon, it is BP as operator that gets the environmental flak, just as it was Exxon that suffered over the Alyeska-chartered Exxon Valdez.

Third, if it is true that BP, for all its expertise in the offshore deepwater, had the worst such accident in history, it can at least say that it has experienced it and has had the opportunity to learn from it. For corporations do learn from experience, just as the North Sea operators learnt from Piper Alpha, and the Norwegians learnt from the capsize of the Alexander Keilland. At least one of the surprises of the Deepwater Horizon disaster may be particularly relevant to the Kara Sea in this respect, namely the sudden and unexpected arrival of methane hydrates blocking the first attempt to siphon off the undersea oil. Equally relevant is likely to be the behavior of remotely operated vehicles in deep water.

In fact the Russian Deputy Prime Minister and Rosneft Chairman, Igor Sechin made the point that it was BP's experience with the Deepwater Horizon disaster that made the company particularly suitable for the joint venture. It had paid the highest price for its past mistakes. Whether this is correct remains to be seen. Besides, the question is, do the Russians really care? They are hardly without blemish, either in

The real objection to the deal has to be the decision to drill in Russian Arctic waters at all
environmental terms or in terms of good corporate governance. It was the same Igor Sechin who played a crucial role in sending Mikhail Khodorkovsky off to a Siberian prison and then gobbling up the assets of Yukos for his company Rosneft. Incidentally, it remains somewhat disconcerting that these considerations seem to play no role whatever in BP's London headquarters, despite all the talk of good governance and "sustainability".

Thick black cloud

Finally, of course, the real objection to the deal has to be the decision to drill in Russian Arctic waters at all. This is not in fact anything to do with either BP or Rosneft but largely a matter of principle. As such, it is likely to be one of the great dilemmas of the century. If such exploration is to be banned, then the global economy will very shortly have to seek out much higher levels of alternative types of energy than it has so far found, if it is to avoid economic catastrophe. For it means that much of the world's remaining potential hydrocarbon-bearing areas is off-limits. The age of oil may be passing, but as it fades away it is giving the world a chance to adapt to its departure. Arctic drilling is both a symptom and a part of that process.

The new deal has not created many new friends for BP in the US. Congressman Michael Burgess, predictably from Texas, has demanded an enquiry on the grounds of national security and the fact that BP supplies the US military with fuel. Presumably, he feels that the 5% now owned by Rosneft will water-down the jet kerosene.

Probably the biggest threat to the new arrangement comes not from the US, but from the billionaire shareholders who own 50% of TNK-BP. Given the murky past history of commercial dealings in the

The age of oil may be passing, but as it fades away it is giving the world a chance to adapt to its departure
Russian oil industry, their fear has to be twofold. Either they will see Rosneft gradually claw its way into a more commanding height within BP and thus within TNK-BP, or alternatively, they will miss out on the grand oil bonanza in the Arctic as BP concentrates its activities and capital on the joint venture with Rosneft.

Elsewhere however the deal has been warmly welcomed. It takes a western multinational company into the heart of the Russian establishment and drags that establishment just a few inches closer to Europe. If they do find significant oil province off the windswept coast of Novaya Zemlya, they will reduce the steep upward curve of global oil prices for another decade or so.

Meanwhile, the new BP arrivals at Rosneft might have a quiet word about their new partner's logo. Put next to BP's 'beyond petroleum' green and yellow shiny sun, the Rosneft trade-mark looks like nothing so much as a thick black cloud emerging from a flare stack.

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