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BP remains committed to Russia’s Rosneft investment

Precise takes a look at BP's presence in Russia and the effect that recent events have taken on the country's industry.

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It should come as no surprise to learn this week that the CEO of BP has reaffirmed the oil major’s commitment to its investments in Russia, despite Western sanctions against the country – and more threatened following the breakdown of the ceasefire in eastern Ukraine. Restrictions now hit three of Russia’s oil producers – Rosneft, Gazpromneft and Tarnsneft – and the combination of this along with a continued fall in oil prices weighs heavily on the economy of the world’s biggest energy exporter.

Some international firms have re-evaluated their dealing with Russia in the wake of the sanctions. McDonald’s – which counts Russia among its top seven global markets, closed all three of its branches in Crimea – an act which led one nationalist politician to call for all its fast food restaurants to be shut down in the country.

However the reason behind BP’s closeness with Moscow is its stake of almost 20% in the energy giant Rosneft. However fresh sanctions leaves it unable to take part in exploration and production in deep-water projects and Russia’s vast shale basin and it’s also prevented from accessing loans and vitally needed technology. While existing projects are largely unaffected, Russia faces serious consequences in the next five to ten years over plans to exploit new oil fields in the Artic and Siberia shale basin. One of the victims could be Exxon’s $3.2bn joint venture in the Artic with Rosneft.

One silver lining for BP is the continued protection of the gas technology from inclusion on any list. This is wholly the result of Europe’s dependency on Russian gas. Robery Dudley, BP’s chief executive, sits on Rosneft’s board and says he will continue to do so – even though Rosneft’s chairman, Igor Sechin, was put on a sanctions list earlier this year. Dudley insists it is business as usual, “We remain long-term partners. We will not do anything to violate sanctions but sanctions don’t include doing business in Russia.

Of immediate concern to Russia is the continued decline in oil prices. Analyst Tim Ash form Standard Bank says this matters more than sanctions. “ Each $1 fall in the price cuts the revenues of the Russian state by $2.8bn. This matters more than sanctions right now. Russia is hit brutally by the oil channel. If prices drop to $80, they will be in very big trouble.”

Despite this drop in prices – of almost 30% since June – OPEC shows no signs of cutting production. The next meeting is November 27.

There have been moves towards China to buttress the economy. In May President Putin agreed a $400bn deal on a gas pipeline, and to open the country’s oil fields to Chinese investors for the first time. However those deals have cost Moscow, with Beijing driving very hard bargains, and observers such as Ian Bond at the Centre for European Reform say it’s unlikely that relationship will become permanent. He says “Putin needs China for his domestic political narrative, but those in the business know Russia has few alternatives to the West.” .