BP's Dudley under fire after tie-up with Rosneft turns sour

It looked like a masterstroke from BP's chief executive, but the tie-up with Russia's Rosneft has descended into a shambles, leaving Bob Dudley facing questions about his judgment for the first time since he took over in October.

The plan was nothing short of re-making the British oil giant in the aftermath of the Deepwater Horizon disaster last spring which unleashed the worst oil spill in history and left the group's reputation - and share price - in tatters.

The company is selling US$30 billion ($40 billion) of assets to pay for the slick.

Dudley used the necessity as an opportunity to pare back non-core assets, thoroughly remodel the group's vast refining and marketing operations, including the sale of two major refineries in the US, and refocus on the highly technical exploration and production areas that are BP's big selling point.

Where better to start than in Russia, with January's US$8 billion deal to swap shares and explore Arctic zones with Rosneft, the state-backed oil giant?

Barely more than a month later, BP clinched a US$7.2 billion deal with Reliance Industries, giving it a 30 per cent stake in 23 exploration blocks in India.

BP needs access to new deposits to replace declining production elsewhere. But by the time of the Reliance deal, the cracks were starting to show in the Russian proposals. And last week the venture sank altogether - leaving Dudley's reputation shaken.

"The collapse of the Rosneft deal showed a major error of judgment by Bob Dudley, even if it was with the best of intentions," one senior BP-watcher said.

Dudley of all people should have seen it coming. As the chief executive of TNK-BP - the oil giant's 50/50 Russian joint venture with the Alfa-Access-Renova (AAR) consortium - Dudley bore the brunt of a year-long dispute between the two sides in 2008 that led to him fleeing the country.

But it was the four billionaire oligarchs of AAR - led by Mikhail Fridman - who scuppered the Rosneft tie-up. Claiming the deal violated the TNK-BP shareholder agreement that all operations in Russia go through the group, AAR filed an injunction. Last week the London tribunal ruled it must remain in force, leaving BP unable to pursue exploration projects with Rosneft unless TNK-BP agrees.

BP may yet try to salvage the share-swap element of the deal at a follow-up tribunal meeting.

"If Rosneft is the lead oil company in Russia, and Russia is one of the fastest-growing oil provinces in the world, then an investment would likely see above-market performance," David Hart, at Westhouse Securities, said. "But that is a fund manager's point of view and BP is an exploration company, not an investment fund."

On the basis that BP cannot be prevented from buying stock where it chooses, a share swap-only proposal may well be waved through by the tribunal. And it will at least ensure that BP remains independent.

- Independent