The stealth announcement to the markets that the British and Russian Energy giants, BP and Rosneft, are officially getting into bed together by way of a share swap has much more to do with tectonic shifts in geopolitics than with oil. This is a game of political chess. While analysts and investors will pour over the numbers trying to decide if the stocks are a buy, sell or hold, or if their fund is overweight or underweight, for BP and/or Rosneft, the political ramifications of this deal are enormous. This deal has been blessed by both the Russian and British governments, and derided by U.S. lawmakers.
The special relationship between the United States and Britain is special no more. After the $20 billion plus shakedown of BP by the U.S. administration last year over the Gulf of Mexico oil spill, BP and the British government were left in no uncertain terms as to where they stood when it came to dealing with the Americans. BP was left staring into the abyss, with the real possibility of the company going under or being bought out. It should be remembered that BP is one of the most financial of all the oil companies, which means it acts as a kind of bank to the oil industry. BP partners receive favorable credit terms for doing business with the oil giant and, in some cases, BP actually loans them the money itself. Therefore, the heightened pressure on BP’s share price put a strain on the company’s credit rating and if BP had failed last year, it would have caused a mini financial crisis in the oil industry, as the knock on effects of a BP failure would have been significant.
U.S. oil giant Exxon Mobil was interested in helping solve the situation by buying BP. This of course did not happen. It should also be remembered that Exxon also thought it was going to buy a majority stake in Yukos Sibneft from Mikhail Khodorkovsky. Some believe Khodorkovsky was jailed because he agreed to sell a majority of the merged Yukos Sibneft to Exxon, without informing the Kremlin. The irony of course is that most of Yukos’s assets went to Rosneft, and now BP and Rosneft are partners.
The Rosneft-BP deal is a geopolitical paradigm shift. It is not necessarily about what BP and Rosneft can do together inside Russia, but what they can do together outside Russia. The BP-Rosneft partnership is about political and economic interdependence, and taking this new paradigm to regions that need it, like the Middle East and Africa. Russian oil companies are eager to spread their wings and integrate into the global oil market, especially Iraq, Iran (for gas), and of course North Africa. The BP-Rosneft deal marks the beginning of a multilateral trade ethos, rather than a unilateral one. Remember, China will like this deal, as a good portion of Rosneft production goes to China. Rosneft will gain access to BP’s technology, which it needs, and BP and the British will benefit from Russia’s political good will in the Middle East and Africa, especially Iran. As Russia is now the world’s biggest oil producer, and has the world’s largest reserves of gas, followed by Iran and Qatar, the Middle East and oil producing nations will integrate and co-operate more with Russia going forward, not less.
As a measure of how politically important and strategic this share swap deal is, BP has decided that the rewards far outweigh the risks. Those risks are not insubstantial. The most obvious is Yukos. Rosneft acquired most of Yukos’s assets, and there remains a risk that Yukos will pursue Rosneft in the future. Secondly, BP North America provides large quantities of hydrocarbons to the United States, and most notably to the U.S. military, and already some U.S. lawmakers are trying to play the old “cold war” card, calling BP “Bolshevik Petroleum” and invoking “national security’’ ideals against it. There is potential for BP to run into trouble with U.S. agencies and law makers. But, in case they missed it, they should remember that the cold war is over.
The United States will clearly have its nose out of joint over the BP-Rosneft share swap, not least because it is not involved. That is not to say, however, that they cannot get involved in the future. The likelihood that we see more partnerships of this nature in the energy sector is high, and the United States is not going to want to miss out again. The game has changed, and it seems to be much more about mutual interests than mutual exclusions. It seems that, despite all the risks of a BP-Rosneft deal, the benefits of political and economic interdependence will in the long run certainly pay dividends for producers and consumers alike.
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.