From Russia With Greed: British Petroleum’s Other Crisis

No matter what settlements British Petroleum eventually pays for the 2010 oil spill, BP’s problems in the US seem a mere skirmish compared to the losing war it has been waging in Russia for the last several years. In 2007, a BP executive admonished me for telling an audience that Russia would seize the company’s Kovykta gas field. Allegedly BP’s negotiations with the Russian government were truly serious and progressing well. I replied that having studied Russia for thirty years I knew my market. Two weeks later, BP announced it was surrendering Kovykta to a new firm created out of TNK-BP, its joint venture with Moscow. In 2008, the British head of TNK-BP, Robert Dudley, now CEO of BP, had to flee Moscow lest he be arrested after Russian police raided the company and arrested an analyst on charges of industrial espionage. Thus Mikhail Khodorkovsky’s travails, though more serious, are hardly uncommon; nor is Russia’s theft of his Yukos Corporation unusual. Rather these cases are of a piece with Russia’s never-ending game with BP, and the predatory personality this conflict reveals. Russia wins, but the price of victory is high: despotism, backwardness, underinvestment, capital flight, and the discrediting of President Medvedev’s calls for reform.

In 2007 and 2008, Moscow forced BP to give up majority ownership of TNK-BP and Kovykta to ensure that only Gazprom and Rosneft, its favored companies, controlled Russian gas exports. Gazprom then shelved plans to export Kovykta gas to China, claiming that the gas should go to the domestic market. Consequently Russia still has no gas pipeline to China or East Asia. Subsequently Kovykta, through a complex series of machinations, was passed to Rusia Petroleum, the OGK-3 regional electricity-generating company owned by Norilsk Nickel, and TNK-BP, which remains a major stockholder. Early in 2010, Russia’s Natural Environment Inspectorate, notorious for expropriating foreign investors on alleged ecological grounds, recommended stripping TNK-BP of the Kovykta field. In June 2010, Rusia Petroleum filed for bankruptcy. Russian law states that if a license-holding company declares bankruptcy, it should pass to the buyer of its immobile property. But since Kovykta is a strategic mineral company, no foreign firm may hold ownership. Consequently BP will probably be forced out of Kovykta. Indeed, Gazprom’s leadership recently announced that there is no need to develop Kovykta anytime soon since gas production in the Yamal-Nenets Autonomous Area will soon start to decline.

Meanwhile Medvedev called BP a partner and said that he wanted to protect the interests of BP’s Russian partners even if BP lost a lot of money in 2010. Indeed, Russia even seemed ready to lighten BP’s burden of having to compensate the victims of its operations in the Gulf of Mexico. Thus Moscow welcomed BP’s former CEO, Tony Hayward, onto TNK-BP’s board, allowed BP to explore the Arctic waters off Russia’s coast, and refrained from criticizing BP throughout the entire US crisis. But Moscow’s motives for riding to BP’s rescue have nothing to do with charity, and BP’s acceptance of its help has nothing to do with appreciation.

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BP’s Russian assets represent eight hundred and forty thousand barrels per day, almost one-third of BP’s global output. TNK-BP also netted BP $1.7 billion in 2009 for its share of dividends and lets BP claim vast reserves of oil on its books. BP, too, has sometimes been very helpful to Russia, such as when it agreed to facilitate Gazprom’s 2007 foreign acquisitions well before other majors and governments agreed to do so. In return, Gazprom was supposed to help BP in its Russia business, buying back a major Siberian gas field that risked having its license revoked due to Moscow’s usual predatory tactics. Gazprom would then sell back twenty-five percent of the field to BP.

Thus Russia’s earlier “rescue” of BP essentially and typically resembled a sophisticated version of a protection racket—and the shakedown continued outside Russia. To cover expected costs following the Gulf of Mexico spill—approximately $32.2 billion—BP could not avoid selling some of its assets abroad, which Russia clearly coveted. TNK-BP negotiated exclusively with Russia to sell its fields in Venezuela and Vietnam, where Russia was already deeply invested, before showing them to others. Then, in October 2010, it sold Russia these fields for $1.8 billion, giving TNK-BP and Moscow a long-sought international exposure, even though the oil being produced there amounts to only forty to fifty-five thousand barrels of oil equivalent (BOE) a day and some two hundred and sixty million BOE on a net entitlement basis.

Moscow also clearly wants BP’s assets in Algeria and in the Caspian basin. In October 2010, TNK-BP announced its interest in BP’s Algerian holdings, worth $3 billion. Medvedev also proposed buying these holdings during his 2010 state visit to Algeria. TNK-BP even offered Sonatrach, Algeria’s national gas company, assets in exchange for these BP assets. But despite an initial show of interest, Algeria and Sonatrach reversed course and decided to resist Russia. Still, Russia’s interest in acquiring Algerian energy assets is quite straightforward. Whatever leverage it gains in Algerian oil and gas can be used to encircle Western Europe, where Moscow faces stagnant if not declining demand and the arrival of competition from liquefied natural gas (LNG) and shale gas.

Meanwhile, Moscow has used its acquisition of BP’s Venezuela holdings and strong ties with Hugo Chávez (who needs cash due to his improvident domestic policies) to exploit BP’s inability to gain strategic holdings in Germany. Chávez and a BP delegation, headed by new CEO Robert Dudley, paid back-to-back visits to Moscow in mid-October 2010. The Chávez visit resulted in handing over Venezuela’s fifty-percent stake in Germany’s largest oil-refining conglomerate, Ruhr Oel, to Russia’s Rosneft at a deeply discounted price. BP, the other fifty-percent stakeholder in Ruhr Oel, had the preemptive right to buy Venezuela’s stake, but could not do so because of the need to raise cash for oil-spill damage compensation in the US.

As Russia watcher Vladimir Socor wrote, “Moscow regards the asset transfers just agreed with BP and Chávez as a complex form of cross-investment, the favored means to create long-term dependencies. Meanwhile, BP’s own experience in Russia illustrates the risks of such dependencies.” Clearly Russia seeks a lasting strategic foothold in Germany’s energy industry that it can then use to increase Russian economic and political influence there and across Europe. Finally, TNK-BP intends to buy out BP’s remaining holdings in Russia, even as BP looks to work on Russia’s Arctic shelf. In September 2010, Igor Sechin, Putin’s right-hand man and boss of Rosneft, announced that Moscow would support any BP sales of its Russian assets to local firms since its cooperation with BP was so good.

Moscow also covets BP’s Caspian holdings. But BP has not offered to sell any of them to Lukoil, Russia’s premier oil company. Here too Russia’s predatory government and energy giants have precipitated the bankruptcy of one major BP project and threatened its holdings in the Caspian. So while the velvet glove has been offered, an iron fist remains inside.

For years Russia has aimed to expel foreigners from owning Russian energy properties and replace them with state-owned companies (often directed by Putin’s insiders), and also to exclude foreign producers or governments from Caspian energy projects. In pursuing these goals, Moscow frequently played hardball, even jailing independent owners like Khodorkovsky on phony charges and driving out foreign owners like BP, Shell, Mitsui, and Mitsubishi by extortionate tactics.

Russia uses several basic approaches to eliminate the independence of Caspian energy producers. First, by controlling either the pipelines they must use or the prices they receive for their product. Second, by preventing them from turning to alternative buyers, producers, or funding sources like China or BP, who can develop their energy holdings, help build alternative pipelines for them, and find other markets for their product. Third, by battling with the EU to prevent it from building the Nabucco pipeline, which would provide Europe with Central Asian gas using a pipeline from Central Asia to Azerbaijan, Turkey, and Eastern and Central Europe, thereby undermining Russian chances to dominate the energy, economics, and politics of states in the Caspian basin.

If Russia cannot dominate Caspian energy, the alternative would seem to be a reform of its own domestic energy and overall economy because it will no longer be able to subsidize its wastefulness and inefficiency. But rather than invest in energy assets and infrastructure at home or undertake liberalizing reforms, the country’s energy giants would rather pursue predatory, neo-colonial policies abroad, buying foreign upstream and downstream assets where they can then insinuate themselves and the Russian government into influential positions of economic-political decisionmaking abroad. This explains the employment of predatory tactics like those used against BP and Khodorkovsky to sustain the domestic status quo. It also explains in part the unrelenting Russian drive for a neo-imperial domination of the countries on its borders, even in the face of the Obama administration’s reset policy.   

Russia’s main interest in attempting to buy out BP’s Eurasian holdings is not profit so much as power. Indeed, all the recent projects it has announced with Central Asia for both oil and gas are essentially “stuck in neutral” and marking time. Certainly Russia is a highly inefficient producer of oil and gas and has not invested the huge energy profits of 1999–2008 in its energy infrastructure. Thus it now faces the risks of declining oil and gas production. Moreover, its methods of energy extraction, due to corruption, the topography of Siberia and the Russian Far East, huge labor costs, and lack of foreign technology and investment, are wasteful and excessively costly. Furthermore, Central Asian gas, as Mikhail Khodorkovsky told a US audience in 2002, is of better quality than Russian gas, making the latter less competitive.                   

Therefore Moscow’s offers to BP represent its intention to claw back as much of this monopoly as possible and to force Central Asia, Azerbaijan, and Europe into a position of economic and political dependency. Russia’s predatory tactics in Kovykta show us what we could expect elsewhere if it did obtain a monopoly on Caspian basin gas going to Europe. That monopoly would then compromise the political independence of Caspian basin states, and remove the bargaining power of East European consumers of Caspian gas and oil.

During 2010, Moscow planted stories in Azerbaijan’s press that BP was selling its shares, leading BP not just to deny those reports but also to say that it was expanding its operations in Azerbaijan. These reports of projected BP sales also hinted that Russian companies like Lukoil might buy part or all of BP’s shares. Clearly Moscow sought to cripple Azerbaijan’s ability to supply Nabucco or act as an independent supplier to Europe. However, Azerbaijan successfully concluded a thirty-year, fifty-fifty deal with BP, expanding its own standing as an energy supplier and calling for BP to develop the huge Caspian Sea gas field Shafaq-Asiman, which holds an estimated five hundred million cubic meters of gas. Understanding Moscow’s game, Azerbaijan has also diversified its options, securing a deal with Georgia, Romania, and Hungary for an Interconnector pipeline that would transmit LNG to Europe (known as AGRI, for Azerbaijan-Georgia-Romania Interconnector) and further opening up the Baku-Ceyhan pipeline to Central Asian oil. It has improved ties with Turkmenistan to encourage Ashgabat to ship its gas and oil through Azerbaijani pipelines and signed a deal with Turkey to double the expected Turkish imports of Azeri gas from the Shah Deniz gas fields by 2019. This also enhances Nabucco’s chances for becoming a reality and checks Russian designs on the CIS and Europe.

This BP-Azerbaijan deal allows Azerbaijan to continue its diversification policy and enhance its already growing status in the energy business. It also relieves pressure on Azerbaijan to develop its gas reserves exclusively for Russia’s benefit. The new Shafaq-Asiman field is quite large and enables Azerbaijan to meet its commitments to Moscow, to its AGRI partners, and potentially to other European consumers if Nabucco gets off the ground. Certainly it increases Turkey and Azerbaijan’s interest in building Nabucco and showing its feasibility, as Azerbaijan evidently can contribute the required amount of gas to Nabucco should it be built.

This is BP’s first new deal since the disaster in the Gulf of Mexico and also suggests that the company has Eurasian options beyond Russia and can check—if not checkmate—Russia’s ability to dominate the energy business in and around Azerbaijan. Opening up this new field also justifies continued work to build substantial gas pipelines like Nabucco’s from the Caspian to Europe. This deal could have ramifications beyond Azerbaijan, as it may convince or at least help nudge Kazakhstan and Turkmenistan to believe in Nabucco’s feasibility and that they can participate in it without undue fear for their security.

While Moscow’s deals with BP in Vietnam, Venezuela, and Algeria show clearly that despite overtures of friendship to Europe the predatory and great-power instincts that drive Russian policy still flourish and that partnerships with Moscow such as the one BP has attempted to maintain are inherently dangerous, as long as Russia has abundant, undiscovered supplies of energy, companies like BP will continue to act like a moth to the flame in pursuing these riches despite Moscow’s rapacious tactics. “Do unto others before they can do unto you” will continue to be the golden rule in Russia’s energy game.

Stephen Blank is a professor at the Strategic Studies Institute of the US Army War College. The opinions expressed are his own.

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