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Putin Proverb Seals BP’s Arctic Deal After Hayward Woos Russia

Russia's Prime Minister Vladimir Putin
Putin proverb seals BP’s Arctic deal after Hayward woos Russia. Photographer: Jochen Eckel/Bloomberg

Vladimir Putin used a Russian proverb to explain why he’s granting BP Plc access to 125,000 square kilometers (48,000 square miles) of Arctic water: the man who’s been beaten is worth two who haven’t.

The Russian prime minister is betting that BP has learned from the trauma of last year’s Gulf of Mexico oil spill and won’t repeat the same mistake. The Jan. 14 meeting with Chief Executive Officer Bob Dudley in a ceremonial room at Putin’s country retreat sealed an agreement to swap BP shares for a holding in OAO Rosneft, Russia’s largest oil producer.

The summit ended negotiations that started when Dudley’s ill-fated predecessor Tony Hayward visited Russia to seek support as the Gulf of Mexico oil spill threatened to destroy the London-based company. Talks gained pace after Dudley took the helm at the start of October, and over hundreds of meetings the agreement that puts BP at the center of Russian oil exploration took shape, people involved in the deal said.

“This gives us an important leg in Russia’s oil growth for the next decades,” said David Peattie, BP’s head of Russia. “It’s one of the last remaining very prospective basins of planet, one that a company the size of BP is able to bring a lot to. We have a track record of opening basins.”

The exchange of a 5 percent stake in BP for a 9.5 percent holding in Russia’s biggest oil producer is the first of its kind between a state-owned company and an international oil producer. BP and Rosneft will search for oil in the Kara Sea off Russia’s north coast.

Replacing Reserves

While Dudley, 55, said last week the deal has nothing to do with the Gulf spill, for BP the holding in Rosneft is equivalent to replacing almost all the reserves sold off to pay for it. Rosneft can take advantage of BP’s Arctic expertise, gained at Alaska’s North Slope fields, as well as benefit from the drop in the U.K. company’s shares since the accident.

“BP’s experience will be invaluable as we move into this next phase of our development,” Rosneft Vice President Peter O’Brien said on a call with analysts, after describing BP’s offshore expertise and experience working in Russia. “We also share an enthusiasm for a broader strategic alliance underpinned by the share swap.”

Igor Sechin, Rosneft chairman and Russian deputy prime minister, brought up the idea of a share swap in a meeting with Hayward in Moscow in the middle of last year, when BP had lost about half its value, according to a person at the talks who didn’t want to be identified because they were private.

World Tour

Hayward had embarked on a world tour of countries where BP had major operations -- Russia, Angola, Azerbaijan and Abu Dhabi -- to reassure partner governments and rally support for his embattled company. Sechin, 50, is a close ally of Russia’s prime minister who has worked with Putin since the early 1990s, when he was deputy mayor of St. Petersburg. He is now responsible for policy in the world’s largest oil and gas producing country.

At about the same time, Rosneft and BP were deepening their relationship through negotiations for the Russian company to enter Ruhr Oel GmbH, a refining venture in Germany. That $1.6 billion deal was announced in October, two weeks after Dudley replaced Hayward.

The broad outline of the share swap and Arctic exploration agreement became clear at a December meeting in Moscow where the two sides were led by Dudley and Sechin, people said. From then on, the talks, code-named ``Taiga'' after the Arctic forests, were constant through Christmas and the New Year. BP’s board approved the swap on Jan. 12, two days before the meeting at Putin’s Novo-Ogaryovo residence.

Dudley’s biggest deal since taking the helm at BP comes more than two years after he was forced to leave Russia, where he was head of the TNK-BP joint venture because of a dispute between BP and its Russian partners.

Fridman Meeting

Dudley met with Mikhail Fridman, the billionaire chairman of TNK-BP who was one of his opponents in 2008, the day before his summit with Putin to explain the deal. Fridman’s response was positive, Dudley said yesterday on a call with analysts.

When the Putin meeting finished just after lunchtime Moscow time, the Russian delegation and Dudley’s team boarded separate private jets for the four hour flight to London.

Dudley and his Rosneft counterpart Eduard Khudainatov signed the agreement at BP’s headquarters on St. James’s Square just off Piccadilly at about 9:20 p.m. Looking on were Sechin, U.K. Energy Minister Chris Huhne and BP Chairman Carl-Henric Svanberg.

After speaking with reporters, Dudley shared canapes and champagne with both teams and left the building after midnight.

Before they start drilling, the two companies will make plans to carry out more seismic surveys across an area the size of the U.K. part of the North Sea. BP executive said on yesterday’s analyst call it will be at least 2015 before the first well is drilled. Exploration will cost at least $1 billion and no oil production is expected before 2020.

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