End of the affair

BP’s lucrative but loveless Russian marriage appears headed for divorce. But, there may still be time for Chief Executive Bob Dudley to salvage his Russia strategy. If state-owned Rosneft bought BP’s 50 per cent stake in its troublesome TNK-BP joint venture, the oil major could end up with a desirable mix of cash and Arctic access. The trick is getting the prices — and the Kremlinology — right.

Rosneftegaz, the 75 per cent owner of Rosneft, has approached BP about a potential deal. That should be attractive to BP. The breakdown in relations between the UK major and AAR, its partner, has rendered TNK-BP all but ungovernable. Yet, exiting Russia altogether would leave BP shut out of an important growth market. Swapping TNK-BP for cash plus access to promising new fields in the Russian Arctic would be an elegant way around that problem.

Igor Sechin’s recent appointment as Rosneft chief executive suggests such a deal may be possible. The longtime Vladimir Putin confidant brokered the 2011 share swap and Arctic exploration deal between BP and Rosneft that foundered after a legal challenge by AAR. His elevation to Rosneft’s CEO suite suggests he remains as powerful as ever as Putin enters a third term as Russian president.

Rosneft is hungry for reserves and needs cash flows to fund new investments. TNK-BP ticks both those boxes. BP could crystalise significant gains on its original TNK-BP investment while getting the Arctic access it has been coveting. It would also be well positioned to participate in an eventual full privatisation of Rosneft.

The expectations of BP shareholders are being conditioned by an emerging consensus among analysts that BP’s stake is worth at least $25 billion. Investors would probably want most of that value realised in cash or perhaps in Rosneft shares: Rosneft was willing to issue 9.5 per cent of itself to BP in the previous proposed share swap.

But the strategic value would be negotiating a new Arctic deal. While rival Western oil firms have already bagged what may be the most promising prospects, the opportunity is unlikely to have been exhausted.

The key to will be convincing the right people in Moscow that it’s in their interest to keep BP as a major exploration partner. It’s a critical test for Dudley. Sadly, his Kremlinology has failed him before.