Despite Politics, Oil Companies Are Lured by Russian Petroleum

Exxon Mobil once was poised to acquire a stake in Russia’s largest private oil company, only to have the deal fall apart when the Kremlin arrested the owner and the company went bankrupt.

A few years ago BPwas squeezed out by its Russian partners, and its top executive was forced into hiding.

BP chief executive Bob Dudley (R) exchange documents with Rosneft President Eduard Khudainatov during a ceremony on the sidelines of the World Economic Forum annual meeting on January 26, 2011 in Davos.
Fabrice Coffrini | Agence France-Presse | Getty Images
BP chief executive Bob Dudley (R) exchange documents with Rosneft President Eduard Khudainatov during a ceremony on the sidelines of the World Economic Forum annual meeting on January 26, 2011 in Davos.

Yet both Exxon and BP are back big in Russia. So are some other large oil companies, which find the allure of Russian petroleum too strong to resist, whatever the political risks of dealing with the government or becoming partners with the country’s notoriously tough billionaires.

On Thursday, Exxon Mobil, America’s largest oil company, signed a deal with the Russian state oil company, Rosneft, to explore offshore in the Black Sea. That came just two weeks after BP agreed to a share swap with Rosneft to form a joint venture to explore off the country’s ice-bound northern coast.

Russia being Russia, though, BP is already in trouble over the new deal. On Thursday, its wealthy Russian partners in a separate, private venture filed an injunction in a London court to block BP’s $16 billion Rosneft agreement.

Despite the risks, Russian oil is where the action is for the West. The country is now the world’s largest oil-producing nation, pumping about 10 million barrels a day. That is currently more than Saudi Arabia’s output, although the two countries frequently trade off for first place.

The bigger draw now, though, may be Russia’s willingness to engage in offshore exploration. Onshore oil reserves around the world are gradually being depleted. And new offshore drilling in environmentally attuned countries like the United States are currently off limits. But Russia is open to deepwater development. In Exxon Mobil’s case, that is in the Black Sea. With BP, it is even more on the cutting edge — off the Continental shelf in the Russian Arctic.

Another big oil company, Chevron also recently agreed to explore in Russia’s coastal waters. And Royal Dutch Shell — which in 2007 was forced to sell half of its $20 billion Sakhalin II oil and gas deepwater development to the state gas company, Gazprom — has been invited back by Russia to join the Sakhalin III and Sakhalin IV projects in the Pacific Ocean.

The country’s top energy official, Igor I. Sechin, at the signing ceremony with Exxon on Thursday, seemed eager to counter the lingering worry that Russia might nationalize its oil industry at any moment, saying it envisions its energy industry “as a part of an integrated global marketplace.” The signing was held in Davos, Switzerland, on the sidelines of the World Economic Forum.

At the ceremony, Rex W. Tillerson, the Exxon chief executive who punched his Russian oil card earlier in his career as a manager of the Sakhalin I development during the 1990s, praised his company’s work with Rosneft as a “successful relationship.”

The new deal-making by Rosneft is a matter of necessity, Valery Nesterov, oil and gas analyst at Troika Dialog investment bank in Moscow, said in a telephone interview. Russian law grants Rosneft exclusive rights to potentially rich offshore deposits. But it lacks the technology to develop them.

“The only option is to cooperate with foreign companies,” Mr. Nesterov said.

Western executives are betting this time that their technical knowledge may insulate them from Russia’s political and business vagaries.

The Exxon-Rosneft agreement commits Exxon to spend about $1 billion looking for oil off Russia’s Black Sea coast, and holds the promise of sharing in the prize if it is discovered.

But Russian authorities have reneged on deals with Exxon in the past. Desperate for investments when oil prices sank in the 1990s, Russia agreed to give Exxon generous terms that exempted it from most taxes and allowed it to sell much of the oil it prospected. But in recent years, local authorities have interfered in operations.

In the early 2000s, Exxon was intent on acquiring a large stake in Yukos, once Russia’s largest private oil company. But those efforts fell apart in 2003 when the Kremlin arrested Yukos’s main shareholder, Mikhail B. Khodorkovsky, in what has been viewed as a politically motivated effort to transfer Yukos assets to the state oil company, Rosneft.

BP is now trying to do business with the state-owned Rosneft over the protests of its private Russian partners in a joint venture known as TNK-BP.

BP’s arctic deal with Rosneft, announced late on Jan. 14, would give BP as much offshore acreage as lies in the British sector of the North Sea. But BP’s partners in the TNK-BP joint venture say the Rosneft deal violates their shareholder agreement.

According to the TNK partners, BP should have provided the joint venture’s management with a detailed and written description of its arctic exploration plans before reaching the agreement with Rosneft. The venture has a right of first refusal for all BP work in the country, they say.

The partners also said BP trampled on their rights by forging a strategic alliance with another company in Russia. The TNK venture, they said, was supposed to be the British company’s only major partner in the country.

“BP appears to have closed its eyes to its obligations to TNK-BP,” the partners contend in their 28-page court filing in London, seeking an injunction against the Rosfneft deal.

A BP spokesman said the company was aware of the injunction filing, but thought that it had not violated the shareholder agreement with the partners.

It was unclear whether the legal action in London might be swiftly resolved, or whether this signified the opening moves in the type of protracted fight with TNK partners that plagued BP in Russia in 2008. Before that dispute, BP had signed a strategic cooperation agreement with another state energy giant, Gazprom, but that proved no help in what became a drawn-out battle with the BP’s partners.

That dispute was resolved only when BP effectively surrendered management control of its Russian assets, while retaining the equity ownership in TNK-BP.

In that earlier fight, Robert Dudley, the current chief executive of BP, had served as head of TNK-BP before BP lost control of the company. He was compelled to flee Russia and went into hiding for several months after his work visa was revoked.

Julia Werdigier contributed reporting from London, and Clifford Krauss from Houston.