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BP CEO Defends Russian Share Swap Deal

Just three months into the job and Bob Dudley, the BP CEO who replaced embattled Tony Hayward following the Gulf of Mexico oil spill, arranged a press ‘event’ on a Friday night at short notice in London.

Bob Dudley, the Executive Director of BP, arrives at their headquarters in St James's Square on July 26, 2010 in London, England.
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Bob Dudley, the Executive Director of BP, arrives at their headquarters in St James's Square on July 26, 2010 in London, England.

What was going on?, asked the media outside BP’s London head quarters as they rang loved ones to let them know plans for Friday night would need to be scrapped. Was there a major announcement on a settlement of the Gulf of Mexico disaster or had there been another problem in Alaska?

Then Russian TV crews began to arrive and reports filtered through of a major deal with Rosneft, the Russian state-owned oil giant. The British media outlets groaned, for this we have been dragged out on a rainy Friday night?

The deal that had been signed though was indeed worth braving the rain for. BP, just months after nearly going into bankruptcy as President Obama and the American public furiously reacted to the disaster in the Gulf of Mexico, had decided to get back into Russia in a big way.

Gaining access to the untapped fields in the areas in the South Kara Sea in the Arctic proved too big a chance to turn down for Dudley, a man who less than 3 years ago had been run out of Russia amid trouble with BP’s Russian joint venture, TNK-BP.

“This area in the Arctic, it is one of the last great unexplored hydro carbon basins in world. The area is roughly size of UK North Sea," Dudley said in an interview with CNBC.

"You don't have to be geologist to look at trends in west Siberia and see that there's high prospectivity. It's a very good thing for BP, there's a unique period of time where both companies are undervalued and it's a chance to align our interests in a way that's actually fairly unusual,” he explained.

In Shareholders' Interest

The share swap had shocked the seasoned BP watchers in attendance at that press conference, who questioned whether this deal was a hasty, ill-thought-through response to BP’s problems in America.

Dudley dismissed these concerns and said the deal will not impact BP’s commitment to the US market or its resolve to pay for the impact of the Gulf of Mexico spill and was surprised by the anger it had created in the US and from Congressman Ed Markey in particular.

“I haven't read the comments (from Markey) in detail but I find some of that unusual, I mean BP is a large global company and has for a long time had a quarter of its production in US, 23,000 employees... half a million independent shareholders in US," Dudley said.

"This is a value-neutral deal between two companies and reflects both companies being somewhat undervalued for their potential, but I don't think this will have any impact on any settlements, which we will of course make in the US." -CEO, BP, Bob Dudley

"We always operate in interest of shareholders and employees, I think BP is huge contributor to the US economy, and the success of BP is in interest of US,” he added.

Dudley dismissed suggestions that the Russian deal would impact BP’s ability to meet its obligations in the US or be blocked by US lawmakers.

“I don't think it will have any impact, we will meet our commitments in the US, we are still spending large amounts on remediation of gulf coast and the payment of fines," he said.

"This is a value-neutral deal between two companies and reflects both companies being somewhat undervalued for their potential, but I don't think this will have any impact on any settlements, which we will of course make in the US,” he added.

Risks and Rewards

BP’s problems in Russia with TNK-BP where not unique; Shell ran into trouble with Russian authorities who changed the terms of a major deal. Investors have been very nervous about the rule of law and their ability to trust contracts of leases for some time, but Dudley believes this deal is a win-win for Russia and BP.

“BP has been operating in Russia for over 20 years. We have a large joint venture in Russia with TNK-BP, it is very successful. It is an endorsement by BP in the Russian investment climate and we can back that up with the success we've had in Russia,” he said.

Dudley said his personal experience of being barred from Russia while running TNK-BP was not personal, just business - or the Russian version of business.

“I always knew what was happening was never personal, it was business, there was an unusual governance arrangement with the 50-50 shareholding and an unusual way of resolving that dispute, so I took myself out of that dispute and shareholders reached a good resolution,” he said.

“BP has an excellent relationship with our shareholders in Russia and I have spent a lot of time in Russia and I find that if you (are) in oil and gas business, it is the largest oil producing nation in world, BP is a large oil company and it was never personal with me. I have warm feelings about Russia,” Dudley added.

Once Bitten

The CEO of BP made clear that the deal he signed on Friday points the way for the oil majors who are increasingly finding it difficult to get access to reserves.

“If you look at trends 40 years back where large oil held 90 percent of reserves, today that number is probably 9 percent; the international oil companies have to provide technology, take risk in what some would say are frontiers markets, in order to bring value to national oil companies that don't have that experience”

Vladimir Putin, the Russian prime minister, is reported to have told Dudley that someone who has been bitten once is worth two people who have not.

The comments indicate the Kremlin is confident the very difficult drilling the Rosneft deal will see BP doing in the Arctic will not lead to a repeat of the Gulf of Mexico disaster.

“Our emphasis on safety is absolutely at heart of what we do, it was always there but when you have a terrible tragedy it shakes you to the core," Dudley said.

"We know development of the Arctic will come with great responsibility and care for environment. We're going to work with Russia, take the learning set up with spill response, and make sure it's spread around wherever we operate.”