The Bear's Atlas For Blowout Bob

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By John Helmer, Moscow

At the gentlemen’s club bar, within stone’s throw of BP headquarters in St. James’s, the world famous investor confessed to having a tighter grasp on his gin and tonic than on the benefits he can count from BP’s deal with Rosneft, at least for shareholders of the former company.

There might be, he conjectured, $63 million or so in 2010 dividends which BP has this week proposed to issue its shareholders, and which will be owing to the Kremlin through its newly minted 5% Rosneft stake, now that BP has announced resumption of such payments after conserving cash against its Gulf of Mexico blowout liabilities. But even that dividend may have to be curtailed by the $900 million Mikhail Fridman and the TNK-BP shareholding partners have decided not to pay in dividends owed to BP from last year’s TNK-BP fourth- quarter profit.

The sentiment around the club bar was that not even the huge crude oil reserve numbers BP would like to book from the Kara Sea prospects it will drill with Rosneft could be added to BP’s reserves valuation until after they have been found, tested, proven, and then counted by Russia’s State Reserves Committee. The time required for that, another of the Club members guessed, would be not less than a decade, and possibly as long as 25 years. Unless, he added, BP has already been given bookable reserves data which Rosneft is keeping secret from its shareholders and the State Reserves Committee.

What of the risk of seismic shifts on the seafloor, cracking open pipes, well containments and platform foundations, triggering well blowouts, vessel loading spills, and the like – the famous investor asked? Is it possible that BP would contemplate such risks in the unknown drilling conditions of the Kara Sea — unless there were indemnities from Rosneft and the Kremlin? Why wouldn’t BP chief executive Bob Dudley demand the same secret indemnities from Russian state liability, which were included in BP’s joint venture agreement of 2003 with TNK-BP to cover tax claims? How could Dudley get BP board approval for drilling in the Kara Sea unless he was categorical in assuring the board that BP would enjoy better protection from liability than it has ever enjoyed in the US, or anywhere else for that matter?

The first Russian response to that is in the form of a large map and a short report, issued today by the Moscow office of the World Wildlife Federation (WWF). The report can be read in Russian only.

The map, with English translation, shows that the three prospecting areas, East-Prinovozemelsky-1, 2, and 3, which BP and Rosneft have agreed to develop, are within easy spill distance of the Russian Arctic National Park, , two statute-defined “state biological reserve territories”, and an official conservation area of the South Kara Sea, west of Dikson. The national park at the tip of Novaya Zemlya, was put into law by Prime Minister Vladimir Putrin in June of 2009 – eighteen months before the federal government resource licensing authority, Rosnedr, awarded the three prospecting areas to Rosneft without auction, tender, or public competition.

The Nenets and Yamal protected territories marked on the map were put into law in 2006 and 2008, respectively.

The government decrees and applicable statutes ban mining or mineral prospecting if it may cause direct or indirect harm to the defined and protected areas. Secret indemnities between Rosneft and BP may be illegal, according to the Russian law.

According to the WWF report, the Novaya Zemlya park is one of the most important breeding areas in the entire Kara and Barents Sea region for polar bears and walruses. In the Kara Sea waters covered by the oil prospecting licences also live the rare narwhal and bowhead whale. Ashore, there are rare types of reindeer, and up to 25% of the world’s population of white seagulls, plus the only Russian rookery for the Atlantic black goose.

One of the authors of the WWF report, Alexei Knizhnikov, said: “We have two general objections to the shelf drilling project. First, it is too early to begin oil extraction at all. There is an insufficient level of scientific knowledge about the Arctic ecosystem, about the polar bear population in the Kara Sea area, for instance. There are no technologies for oil spill prevention in the Arctic. Over five thousand ships in total were used for the operation in the Gulf of Mexico, and we don’t have that many ice-class ships to work in Arctic conditions, if there to be a spill there. Also, Russia lacks an adequate legal framework that would deal with [liability and cost recovery] in maritime oil spill situations. The President has been promoting a special law for sea oil spills, but it hasn’t been adopted yet.

“Secondly, the two companies which are going to develop the shelf project arouse serious distrust. Rosneft has had over twelve thousand emergency situations over the past year and has a very bad oil spill record in Western Siberia and on Sakhalin. BP just caused the terrible natural catastrophe in the Gulf of Mexico; it has been excluded from the Dow Jones Sustainability Index. There can be no confidence in these two companies.

“Rosneft, according to environmentalists, also has low environmental safety indicators: one of the lowest rates of utilization of associated gas, constant oil spills in many regions, including Sakhalin and the Yamalo-Nenets Autonomous District. In 2008 in the Krasnodar Territory the company could not plug an emergency leak for over two months. WWF has analysed Rosneft’s 2009 report and found that the majority of specific environmental performance indicators of the company have a negative trend. In the event of a new disaster [in the Kara Sea], the consequences will be a lot worse than the spill in the Gulf of Mexico, and it will take centuries to eliminate them”.

In its January 14 deal announcement, BP said that “in January 2006, BP and Rosneft launched a scientific research study to evaluate the Russian Arctic.” The release added in what appears to have been a translation from Rosneft’s Russian text: “BP and Rosneft have also agreed to establish an Arctic technology centre in Russia which will work with leading Russian and international research institutes, design bureaus and universities to develop technologies and engineering practices for the safe extraction of hydrocarbon resources from the Arctic shelf. The technology centre will build on BP’s deep offshore experience and learnings [sic] with full emphasis on safety, environmental integrity and emergency spill response capability.”

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