A year ago this week, BP went from corporate champion to pariah when its Macondo well in the Gulf of Mexico ruptured, creating America's biggest oil spill. The British oil giant, under new management, is now engaged in a monster bun fight with some of Russia's richest and most aggressive oligarchs, and they are winning.
So much for BP's comeback effort. While off their bottom, BP shares trade at one-third less then their pre-spill value. The company in February reported an annual loss of $4.9-billion (U.S.) as a result of the $40.9-billion pretax charge related to the spill. The dividend, suspended last year, is back, but only at half of its old level.
Now its operations in Russia, where its greatest growth potential lies, are under threat. Rival oil companies, known as the supermajors, may privately gloat about BP's stunning run of bad luck and apparent incompetence, but there but for the grace of god go they. BP may no longer be the model supermajor oil company, but in many ways it is becoming a typical one.
To replenish their reserves, let alone add to them, all the supermajors are taking greater geopolitical, geological and financial risk. BP pinned its future on deepwater drilling in the Gulf of Mexico, with disastrous results. Its Russian adventure is falling apart. The other biggies - Exxon, Chevron, Total, Eni, Repsol, Royal Dutch Shell among them - will have to take similar leaps into the unknown.
Some have made shareholders happy by taking big risks. Exxon's extensive deepwater drilling projects have been successes so far. Others are stepping on land mines. Eni, Italy's biggest oil company, is in danger of losing its production operations in Libya, where it was the biggest foreign investor. Revolutions and oil profits don't always mix.
BP is the classic case of supermajor evolution. In most of the post Second World War era, they owned the oil market and the pickings were easy. They had the best technology, best access to capital and best contacts. They were welcomed in many developing countries (as long as their governments back home had good relationships with the target countries).
In recent years, their competitive advantages have waned. For that, they can blame the remarkable rise of the national oil companies, from Saudi Aramco, the world's biggest oil company, to Malaysia's Petronas. Many of them, having locked up their domestic markets, are expanding overseas and paying top prices for oil assets everywhere.
At last count, the supermajors controlled a mere 4 per cent of known oil and gas reserves. Fourteen of the top 20 oil companies, measured by reserves, are national oil companies. In a few years, they could own all 20 spots.
As the commercial oil companies get boxed in, they are going into non-traditional areas. Some went to the Alberta oil sands, where they had to learn to mine oil. More recently, shale gas has triggered a land grab. BP decided that deepwater drilling in the Gulf of Mexico was the way to go. It also plunged into Russia, where many companies fear to tread because of its reputation for corruption.
Russia is one of the last great oil frontiers and BP knew it had to be there if it were to be a growth story as well as dividend play. In 2003, it formed an oil partnership in Russia and Ukraine with a group of wealthy Russian investors. Called TNK-BP, it is equally owned by BP and Alfa-Access-Renova, the consortium of Russian investors. TNK-BP has been a gusher for BP. It accounts for roughly a quarter of the company's production, a fifth of its reserves and a 10th of its profits.
But it has been a management nightmare. In 2008, Bob Dudley, who was then chief executive officer of TNK-BP, was forced to flee Russia when a dispute between the two owners turned ugly. When Mr. Dudley replaced the hapless Tony Hayward as BP's CEO in October, he bravely turned his attentions back to Russia. The new deal: A $16-billion share swap with Rosneft, the Russian state oil giant. The strategic alliance would give BP exploration access to the Russian Arctic, which is thought to contain vast quantities of oil and gas.
The Rosneft deal too has turned ugly. TNK-BP's Russian partners, including Mikhail Fridman, Russia's third-richest man, said BP's Rosneft alliance breached BP's shareholder agreement with TNK-BP. They argued that BP is obligated to use TNK-BP to pursue any new oil opportunities in Russia. The Russians have since won an injunction in London's High Court to block BP's Rosneft deal.
Mr. Dudley clearly underestimated his Russian partners. Instead of rebuilding BP after the Macondo catastrophe, it looks like he is adding to the body of evidence that BP can do little right.
You can't blame him for trying. While BP has landed in the borscht in Russia, the company is doing what the supermajors have to do in an oil market dominated by national oil companies, that is, taking extraordinary risks to boost reserves. BP's rivals will have to do the same to avoid a slow-motion suicide. Some of the efforts will work. Many others won't. It's not easy being a big Western oil company any more.
Eric Reguly