BP's Arctic Dreams Hit By An Iceberg

Todd Shriber
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While not officially dead, BP's oft-criticized $16 billion share exchange with Russia's OAO Rosneft is now on life support, but at this point, someone close to BP CEO Bob Dudley might want to tell him to sign a ''do not resuscitate'' order because this effort by BP to get its hands on more Russian oil has really been bungled from the get go.

On the surface, BP's plans to sell 5% of itself to Rosneft, Russia's largest oil producer, for $7.8 billion made sense. BP needs the cash and an avenue to increase its production, which has been falling due to massive asset sales used to raise funds for costs tied to the Gulf of Mexico oil spill. BP and Rosneft planned to partner to explore part of Russia's Arctic region, an area that may hold up to 100 billion barrels of reserves, according to Bloomberg News. That is a lot of oil (and money).

Hindsight is always 20-20, but Dudley should have known this scheme would never get off the ground and his willingness to pursue it is indicative of the arrogance that many critics allege led to other problems for BP (BP). After all, Dudley was booted from Russia in 2008 by investors in TNK-BP, BP's 50-50 joint Russian venture.

Fast forward a few years and TNK-BP remains a thorn in Dudley's side. To put it simply, TNK-BP was successful in blocking the BP/Rosneft accord from moving forward and this is something BP should have seen coming. TNK-BP does exclusive rights to BP's Russian dealings and it appears the British company went over the heads of its Russian partners to cozy up to Rosneft.

Last week, BP said it would be willing to cede its interest in the Arctic alliance to TNK-BP to allow the share swap with Rosneft to move forward. Another bad idea and another situation where one could say BP is tone-deaf. Rosneft had already said multiple times it wanted no part of TNK-BP joining the Arctic venture because TNK-BP does not have Arctic drilling experience.

Sure, the press reports are saying BP and Rosneft may come back to the negotiating table and for the believers that the two will actually get this deal done, I have some oceanfront property in Arizona that it is for sale.

I do not know for sure, but I would bet Rosneft is pretty irked by all of this. They want and need the technological capabilities that Western oil majors possess to drill in the Arctic. Therefore, it is reasonable to assume Rosneft is tired of this dance to nowhere with BP and is, as has been reported today, looking at other options.

At the end of the day, the failure of BP's plans with Rosneft is a stinging repudiation of BP and its management team. The cherry on this sundae would be if Rosneft selected Royal Dutch Shell (RDS-A) to replace BP. Now that would really sting.

Todd Shriber