BP Invests In Russian Oil: Russia Friendly For Foreign Investment?

BP has committed to invest $6.75 billion in a new Russian oil company, the largest foreign investment ever in Russia. This investment, with two Russian partners, will create Russia’s third largest oil company, and will complement BP’s planned investment over the next five years:

more than $20 billion developing projects in the U.S. Gulf of Mexico, Trinidad, Angola, Azerbaijan and Asia, in a bid to compensate for a decline at aging developments such as in the U.K. North Sea.

Note that none of these countries is either in OPEC or in the Persian Gulf. Azerbaijan is the historical cradle of the Caspian oil industry, and holds a lot of potential to break OPEC’s ability to restrict output to raise world oil prices. Gotta love cartel instability!

According to Jason Kenney, an analyst at ING Barings Charterhouse Securities in Edinburgh, Scotland interviewd for this AP story,

“BP’s made a very bold move with this deal. It’s got a lot of opportunities, but I do think it’s long term,” … Kenney compared the deal to the pioneering efforts of oil companies in Europe’s North Sea in the 1970s. BP would enjoy advantages and face the risks of being a “first mover” in a country that many foreign oil companies still view as a frontier for investment.

I cannot emphasize how important a move this is. It opens the door to foreign investment in Russian oil by investors who are more risk averse, if the BP venture goes well. Putin’s legal reforms in Russia have been geared toward precisely this kind of investment — foreign investment that does not necessarily enrich the domestic oil oligarchs (BP’s partners in this venture are not these folks).