Russia Shows Big Oil Who's Boss, But at What Cost?

“BP will do anything for people not to talk about the Gulf, and Rosneft will do anything for people not to talk about how it got all its assets”

That’s how Khodorkovsky lawyer Robert Amsterdam summed up the recent BP-Rosneft deal, which gives the disgraced oil giant drilling rights in the Russian arctic in partnership with the firm that took over his client’s assets.

What a change for BP’s new CEO Bob Dudley, who has gone from being forcibly thrown out of Russia during the TNK-BP affair to celebrating an epic deal with Putin himself.

But he’s not the only one: the BP deal shows just how far Russia has come in the last decade.

In the mid to late 90s, Yeltsin’s impoverished and incompetent government pimped out natural resources to foreign firms under the so called Production Sharing Agreements, which gave them large rewards for investing in and developing Russian energy fields. The “sharing” part of PSAs was massively skewed to favour the oil companies, which took advantage of Russia’s insolvency.

When he took over, Putin cracked down on the PSAs, and even scared foreign investors by renegotiating on such deals as Shell’s Sakhalin II fields.

But now, Russia has returned to PSAs. Only this time, the shoe is on the other foot: as BP is reeling from the Gulf disaster, Russia is the senior partner bossing around an oil giant as desperate for the deal as Russia was back in the 90s. The new PSA gives Russia’s state owned oil firm unprecedented access to BP.

Not surprisingly, we find the same countries that were once the most enthusiastic cheerleaders for PSAs denouncing the current deal on ecological and even national security grounds. Britain’s Ed Miliband is “pretty worried”; the Americans are threatening a Federal investigation.

The satisfaction of seeing the West impotently whine about the deal in a riot of hypocrisy should not, however, distract from a difficult point: while the new PSAs show Russia getting her own back, they are not much better for the country than their original incarnations.

Although the state, rather than the foreign firms, will keep more of the spoils, it is doubtful that they will not be  squandered. Moreover, the opening of the Arctic reserves will do nothing to help Russia diversify its economy away  from petroleum export. And lastly, but most importantly, the Arctic is a unique and pristine environment at major risk of disaster from any deep drilling (a risk taken much more seriously in the US than in Russia). If the government really wants to develop the Arctic, they should concentrate on shipping, not drilling.

In light of all this, Russia’s ‘victorious’ return to the PSA’s may end up doing much more harm than good.