Bold new frontier for BP already looks a steppe too far

BP has jumped straight from the frying pan of Deepwater Horizon into the fire of Russian corporate politics.

The next few weeks will determine whether the accident-prone oil company, in its search for a new growth strategy after last year's disaster in the Gulf of Mexico, which killed 11 people and led to widespread environmental damage off America's southern coast, will be able to pursue an alliance with the Russian state-owned oil company, Rosneft.

At the moment, the chances that the Russian deal will be the lifesaver imagined by its architect, BP's new chief executive Bob Dudley, look decidedly slim.

You can forgive Mr Dudley his enthusiasm for wanting to look outside the world's traditional oil exploration fields.

The opprobrium BP earned after Deepwater, and the company's clumsy attempts to deal both with the physical problem on the Gulf seabed and the reputational problem stoked by its then boss, Tony Hayward, meant Mr Dudley wanted to lessen BP's reliance on Gulf and deep offshore exploration.

That decision was given a new urgency just a month ago, when the Libyan uprising put paid to BP's plans to drill in the deep waters off the country's Mediterranean coast. BP's options were becoming increasingly limited.

However, the choice of Russia as the new focus for expansion showed a certain masochistic tendency on Mr Dudley's part.

The Mississippi-born executive had experienced a hard time in the country in 2008 when BP's first strategic alliance with a grouping of oligarchs had gone sour. In fact, he had to leave Russia to avoid more serious involvement with the country's legal system.

BP's partner then was a grouping called AAR, owned by Russian businessmen Mikhail Fridman, Viktor Vekselberg and German Khan. They were 50-50 partners in TNK-BP, the vehicle for BP's business in Russia.

All three trace their business origins to Russia's chaotic emergence from the Soviet era, when fortunes were amassed by a variety of means as ownership of state assets went up for grabs to the most ruthless bidder.

One of them, Mr Khan, is on record as admitting the US mafia film The Godfather was his "manual for life".

You do business with these people very carefully, and as remotely as possible.

After long-running disputes over dividend policy and other matters, AAR and BP eventually declared a truce and a "pragmatic" solution to the problems that had bedevilled their relationship. But the Rosneft deal, announced in January, opened up the old wounds again.

At first sight, it looked a great deal for BP. Through a US$16 billion (Dh58.77bn) share swap with the Russian oil company (whose own history demonstrates a disregard for normal western standards of corporate governance) BP got itself the biggest possible ally in the country, the government, and a deal to jointly develop the Arctic region, perhaps the greatest unexplored region left on Earth.

Cynical observers thought that BP, pessimistic of long-term peace with AAR, had decided to put itself under the protection of the Russian state; others said AAR's reaction to the deal showed they were never interested in peace anyway.

Whichever, the oligarchs immediately came out against the deal. They said they too should be allowed to participate in the Arctic bonanza, and argued that the deal with Rosneft broke the terms of their partnership with the British oil company in TNK-BP. Last week, a Swedish arbitration tribunal, to which both parties had applied for binding adjudication, decided AAR was in the right, and blocked the deal with Rosneft.

Mr Dudley is left with the option of proceeding with the share-swap element of the Rosneft deal, with no guarantee it will be part of whatever Arctic exploration pact is eventually agreed. That does not thrill BP shareholders, who would rather see $8bn of BP capital used in a more productive way than as a minority partner in a Russian state-owned company.

The share price, savaged by the events in the Gulf last year, had been slowly recovering, but has given up many of those gains since the Rosneft deal was announced. Shareholders will get their chance to grill Mr Dudley at his first annual meeting as chief executive in three weeks' time.

More environmentally minded investors might also question why BP ever wanted to be part of the Arctic bonanza, which many experts believe is an ecological disaster in the making.

The omens are not good that BP will emerge from this mess with any credit. To be caught between Mr Putin and the AAR troika seems to be a strategic error on a grand scale.