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Rosneft-BP Arctic Deal Is Smart -- And Unpopular

BP's deal with Russia's state-owned oil company Rosneft isn't some knee-jerk survival tactic in its post-Gulf oil spill history. The deal, which gives BP access to the Arctic, has been in the works for years. And BP's decision to move on it now proves it's willing to risk a backlash in the U.S. and tremors in its venture with another Russian partner TNK-BP, to break into new oil and gas frontiers.

BP's tarnished reputation last summer may have forced it to scrap plans to drill offshore Greenland, but it had no intention of shutting the door on the Arctic for good. BP surely understood that U.S. lawmakers and environmentalists would protest any attempts to explore in the Arctic -- and that pushback is already flowing in from both groups. But the company obviously feels safer now and, taking a long view, went forward with the share-swap deal with Rosneft anyway.

WikiLeaks reveal a tough, savvy BP

Opponents on several sides will try to make this more complicated for BP. Environmentalists don't like the idea of BP leading any project, let alone offshore exploration in the Arctic. U.S. lawmakers, including Republicans, have expressed discomfort with the deal. Texas Republican Michael Burgess is pushing for the deal to be reviewed by the Committee on Foreign Investment, an inter-agency committee led by the U.S. Treasury Department.

Meanwhile, TNK-BP, the 50-50 joint venture between BP and Russian-oligarch controlled AAR, has not only protested the deal, but also threatened that it could split up their union.

As it turns out, there may be a good reason for BP to opt for a relationship with the Kremlin-backed Rosneft, even if the deal threatens its TNK-BP joint venture. According to a U.S. embassy cable released by WikiLeaks, BP's top exec in Russia predicted Rosneft would take over TNK-BP and carve it up by the end of the year, the Guardian reported.

Why it makes sense for BP
The Rosneft-BP share swap, announced late Friday, will give BP exclusive access to 125,000 square kilometers of the South Kara Sea, an Arctic region the size of the North Sea that holds an estimated 35 billion barrels of oil and gas and 10 trillion cubic feet of natural gas. Rosneft, in turn, gets BP's technical expertise and financial strength, critical to exploring in the inhospitable and complex offshore region. Despite BP's damaged image, it does have greater offshore technical ability and resources than Rosneft.

The U.S. is hugely important for BP. The company is one of the largest leaseholders in the Gulf of Mexico, owns five refineries here and operates some 10,000 miles of pipeline. But BP's future here is far murkier than it was a year ago. Any expansion -- especially in the Gulf -- will face strict regulatory scrutiny and BP's exploration business here will has already slowed as a result. That doesn't mean BP is turning its back on the U.S. On the contrary, BP will forge ahead here.

The company knows it will take a decade or more -- and some $2 billion of initial investment -- before it realizes the benefits of exploration in the Arctic. That mounting regulatory pressure in the U.S. is just one more reason to move forward now.

Photo from BP

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