After the crisis in the Gulf of Mexico caused by the Deepwater Horizon explosion, BP sought a partnership with Russian oil giant Rosneft for joint exploration in the Arctic.
Like Deepwater Horizon,the prospect of BP pulling a mega deal out of the hat certainly caught the headlines and the imagination of investors.
Unfortunately for BP, it could not broker a deal with its partner, Alfa Access Renova (AAR) and with TNK-BP, a 50-50 joint venture, both having significant Russian billionaire ownership.
Powerful owners of both AAR and TNK-BP were concerned the BP-Rosneft agreement would compromise their own competitive position and sought to block it.
As the clock ticked down to a deadline, BP and Rosneft tried to buy the other half of TNK-BP but failed, leaving BP, once again, facing unpalatable headlines. BP said talks will continue but it is difficult to see this particular deal scenario occurring again anytime soon.
A sting in the tail for BP after failed Rosneft deal?
It is also possible that BP’s attempt with Rosneft could yet have another sting in the tail. A recent Russian court ruling in favour of minority shareholders of TNK-BP could, according to reported comments from their firm of lawyers, Liniya Prava, open up BP to possibly paying out US$5bn-US$10bn in damages should a legal action be successful.
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“We believe that the OJSC TNK-BP Holding suffered significant losses as a consequence of actions by Peter Anthony Cherow and Richard Scott Sloan, who made it impossible for the TNK-BP Holding to participate in the strategic alliance with Rosneft,” said Dmitriy Chepurenko, a partner of Liniya Prava, in response to the court’s ruling.
“According to preliminary estimates, the company’s losses could amount to several billion US dollars. The documents, which we had to demand through the court, are necessary to determine the exact amount with assistance from professional appraisers and prepare the lawsuit.”
BP posts profits of more than $5.3bn despite controversy
While the BP-Rosneft situation looks set to rumble on in the Russian courts, BP has posted what to many would seem to be pretty good profits at more than US$5.3bn for the second quarter.
BP has been boosted by high oil prices and conversely also affected by a drop of production by 11%, some of which can be attributed to the Deepwater Horizon incident.
Analysts reportedly are disappointed with BP’s results, with HSBC analysts being reported as saying BP has lost US$77bn of its value compared to other European energy companies post Deepwater Horizon.
There is also media speculation that BP may be broken up amidst a market perceived lack of direction and BP chief Bob Dudley seems to be in a heat that may only get hotter.
There is one missing from that list and indeed one that has also been rumoured to be a possible candidate for buying BP, or elements of it – Royal Dutch Shell (Shell).
According to recent media reports, Shell chief executive Peter Voser confirmed the company was in early discussions with both the Russian government and Rosneft about further opportunities, while adding the Arctic is a key area of interest for the company. Further significant developments with Shell and Rosneft would not be a surprise.
What next for the Arctic oil?
It is clear that as both the easy and relatively difficult conventional fuel targets diminish then energy companies must go for unconventional resources and/or the really challenging conventional sources.
The Arctic certainly qualifies as the latter.
It is not known, yet, just how much offshore oil and gas lies beneath the frigid ocean, but already there are thought to be more than 130 billion barrels of oil equivalent (bboe) in the discoveries made so far with the majority being natural gas.
If the global economy is to continue in its present state then Arctic resources must become part of energy company’s strategies, as climate change opens up opportunities for exploration.
The Arctic is not likely to be a region for the juniors however.
It is the majors with deep pockets, which they may need in the event of a major spill, that have to get the job done and there are other difficulties that go with the territory.
Cairn Energy (Cairn) has been drilling off Greenland and has had to come with terms with media savvy Greenpeace protesters. Cairn has had to go to the lengths of obtaining an injunction after demonstrators wearing polar bear suits entered its headquarters in Edinburgh and asked to see the company’s oil spill plan.
Like the oil sands in Canada, the Arctic is a region that will always attract protesters and it is the company’s job to ensure protestors never get the chance to say, ‘I told you so.’ The spotlight will always be on them.
Unexplored reserves just the tip of the iceberg for Arctic oil potential
Cooperation between competing nations that all want a piece, or perhaps more, of the Arctic’s energy bounty takes time. A case in point is a recently declared treaty between Norway and Russia that was enacted on July 7, 2011, after almost 40 years of negotiation.
In essence, both nations will now be able to explore for oil and gas on the Arctic continental shelf with the Russian state owned news agency, RIA Novosti saying the Arctic region could hold up to 13% of unexplored oil reserves and 30% of unexplored natural gas.
Russia continues to attempt to state it is entitled to extend its rights, if it can prove that its continental shelf exceeds the 200 mile limit.
Given the urgency, especially for oil, it appears unlikely such treaties can or indeed afford to take 40 years in the making again. The Arctic oil and gas claims will have to be settled more quickly and governments and companies may have to move faster to bring the resources onshore.
There are dangers in this; the first company to make a major mistake or simply just have the bad luck to be at the centre of a major incident in the Arctic may fare much worse than BP.