BP-Rosneft Arctic deal breaks the ice

The share-swap between British oil giant BP and Rosneft and the agreement to jointly develop Russia's largest oil producer's three licensed blocks in the Kara Sea, north of Siberia, is a game changer, opening up Arctic fields for exploration.

“Everybody was speaking about Arctic but there was no serious effort to begin real production. Now I think that all big companies can be more active,” Konstantin Simonov, the general director of the Russian National Energy Security Fund, told New Europe by phone on 20 January. “We have such hope that this cooperation can give a serious impact to the development of the Arctic,” Simonov said, adding that BP and Rosneft have also agreed to establish an Arctic Technology Center in Russia to develop new practices for safe extraction of hydrocarbon resources from the Arctic shelf. But he noted that it would take five to seven years to organize the new geophysical studies. “We don’t really know what the real resource base is for these three blocks ... so the production in this Kara Sea is a question of 2015-2020,” he said.

The three licenses were awarded to Rosneft in 2010 and the Russian company hopes that this partnership with BP will allow it tap into experiences and technology. For BP, following the Gulf of Mexico disaster, it could use the good news of this partnership to increase its own capitalization, Simonov said.

But the BP-Rosneft deal could also help the development of Russia's huge Shtokman gas project - operated by Gazprom, Total and Statoil - in the Arctic. There is no final investment decision on Shtokman and it is expected in the first quarter. “If there will not be an FID in the first quarter there will be a lot of questions. Is Shtokman a realistic project? Or Gazprom, Total and Statoil want to prolong this project and forget about it?” Simonov said. “With the help of this BP-Rosneft deal we can have progress in the Shtokman deal because Statoil and Total can be more active because they see that their ‘rival’ BP has also a strong interest in this Arctic zone,” he added.

The BP-Rosneft deal also raises the prospect that Rosneft may acquire the Kovykta gas deposit in the Far East when it is auctioned off in mid February as part of the bankruptcy of Russia Petroleum, Chris Weafer, chief analyst at Uralsib bank in Moscow, wrote in an e-mailed note to investors. “BP is the operator of that deposit and a JV between the two to further develop the project is very likely. That would then raise the question as to whether Rosneft can steal the China gas export contract from Gazprom, further boosting and diversifying its business base. China is known to prefer a dedicated gas reservoir and direct pipeline link (as it has in Turkmenistan and Kazakhstan) rather than plugging into the Gazprom grid,” Weafer wrote.

“If TNK-BP gives the license of Kovykta to Rosneft it will be a serious revolution,” Simonov told New Europe, adding that that Rosneft and its chairman, Igor Sechin, can lobby the idea to build the pipeline from Kovykta to China, upsetting negotiations between Russia’s Gazprom and China on the formula of gas price.

By Kostis Geropoulos

New Europe, January 23, 2011