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BP’s Russian Defeat Brings Arctic Oil Trove Back in Play for Shell, Exxon

By Anna Shiryaevskaya and Kari Lundgren – May 18, 2011 12:00 AM GMT+0100

The collapse of BP Plc (BP/)’s alliance with Russia’s state-run oil company brings one of the world’s largest untapped drilling opportunities back onto the market.

Royal Dutch Shell Plc (RDSA), Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are potential candidates should OAO Rosneft look for a new partner to explore the Kara Sea in Russia’s Arctic, a person with knowledge of the company’s plans said, declining to be named because the matter is private. Rosneft will start talks with replacements immediately, another person said yesterday.

BP’s four-month battle to salvage the Rosneft deal, which included a $7.8 billion share swap, was driven by the chance to unlock as much as 15 billion barrels of oil, equal to more than five years of U.S. crude production. The biggest oil companies are competing for a diminishing number of drill sites as foreign governments deny access to resources and existing fields are depleted.

“It isn’t difficult to find partners for the Arctic,” said Valery Nesterov, an oil industry analyst at Troika Dialog in Moscow. “There is competition.”

Russia, the world’s largest crude oil producer, has sought deals with international oil companies to exploit offshore fields that require more technology and capital to drill than deposits on the Siberian mainland.

Offshore Drilling

Rosneft would probably favor U.S. and European companies over Asian peers because of their experience in offshore drilling and superior technology and personnel, said Brian Gallagher, an analyst at Dolmen Securities Ltd. in Dublin.

“It has to be a supermajor because you have to bring a certain amount of political clout,” he said. “You need to have enough capital to operate in these waters, and not that many companies have the experience.”

A Rosneft spokesman said the company is studying the situation and will make a choice in the near future.

Shell Chief Executive Officer Peter Voser said yesterday his company, which already has projects with Russian gas exporter OAO Gazprom, is interested in expanding in Russia. He declined to comment specifically on the Kara Sea.

Exxon and Chevron have both reached offshore deals with Rosneft in the past year. Exxon agreed on Jan. 27 to explore the deepwater Tuapse Trough in the Black Sea, where Chevron signed an accord last year for a separate area.

“Chevron continues to work with Rosneft on opportunities to collaborate in business ventures,” Kurt Glaubitz, a spokesman for the San Ramon, California-based company said in a telephone interview. Glaubitz declined to specify what prospects, assets or locations within Russia are under discussion.

Patrick McGinn, an Exxon Mobil spokesman, sent an e-mailed statement declining to comment on commercial matters.

West Siberia

BP and Rosneft had agreed to explore 125,000 square kilometers (48,000 square miles) of the Kara Sea, north from Russia’s largest developed fields in West Siberia. The area may have as much as 50 billion barrels of oil in place, of which 12 billion to 15 billion is recoverable, a person with knowledge of the matter said in January when the BP deal was signed.

Under the January accord between BP and Rosneft, the exploration venture was to be two-thirds held by the Russian company and one-third by BP, which agreed to carry the first $1 billion of exploration costs. BP would have been able to book reserves from any discoveries made.

The two companies still have an agreement to explore off Sakhalin Island in Russia’s Far East and are partners in a German oil refining venture.

Legal Challenge

BP’s deal with Rosneft collapsed after the U.K. producer’s billionaire partners in its existing TNK-BP venture used a legal challenge to block the alliance. TNK-BP is Russia’s third- largest oil company, and BP’s 50 percent share in 1.7 million barrels a day of production makes it the biggest foreign producer in the country. BP agreed it would cede its place in the Arctic venture to TNK-BP. Rosneft declined, saying TNK-BP didn’t have the knowhow.

While BP said in a statement yesterday talks will continue with Rosneft and its billionaire partners, the failure of a deal blessed by Prime Minister Vladimir Putin risks weakening its position in the country. It also damages CEO Bob Dudley, who took the helm last October, charged with leading BP’s recovery from the Gulf of Mexico oil spill.

“The market perception of Bob Dudley’s personal credibility could have likely been damaged by the situation,” Credit Suisse Group AG analyst Kim Fustier said in a note to clients. BP “should have been fully aware of the provisions in the TNK-BP shareholder agreement.”

To secure a new deal, Rosneft may have to abandon the idea of a share swap. Chevron CEO John Watson has rejected the idea of adopting the structure of the BP-Rosneft deal.

“I don’t think you will see us taking on any sort of share swap,” Watson said in a March 14 meeting with analysts and investors in New York.

To contact the reporters on this story: Anna Shiryaevskaya in Moscow at [email protected]; Kari Lundgren in London at [email protected].

To contact the editor responsible for this story: Will Kennedy at [email protected].

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