WEEKEND READ: BP's uncertain future

The security of BP's energy assets in the Caspian region are in doubt as questions are raised about the longer term ramifications of the Russian show of force in Georgia.

As humanitarian supplies begin to roll in, it appears that the Russo-Georgian war might be winding down. But the war’s effects on regional energy politics have only just begun. The biggest loser will be British energy supermajor BP, the global energy company most heavily invested in the former Soviet Union. But BP’s woes do not stop in Georgia, as it also faces losing control over exploration, extraction and pipeline investments in Azerbaijan.

To begin with, BP shut down two of its three major pipelines running through the Caucasus as a precaution and a reaction to the war – the Baku-Supsa oil pipeline and the South Caucasus Pipeline (SCP), which transports natural gas to Turkey and was reopened August 14. BP has also halted operations at the Shah Deniz natural gas field off the coast of Azerbaijan. The 1,118-mile Baku-Tbilisi-Ceyhan (BTC) oil pipeline, with a capacity of 1 million barrels per day, was already shut down due to an explosion that occurred in the week prior to the war.

Though BP used prudence in closing the pipelines, it is clear the firm is somewhat at a loss as to what will happen to its infrastructure in Georgia after the war. Stratfor sources have indicated that BP even cancelled its postwar meeting with the State Oil Company of Azerbaijan Republic (SOCAR) because both firms – particularly BP – are reeling from the development. It is thus unclear when the remaining pipelines will start up again, and it is even more uncertain under what conditions the Russians will allow BP to operate in the Caspian in the future.

BP has a long (and rather sordid) history with Russia. BP is the only supermajor that has bet heavily on former Soviet states after the fall of the Soviet Union. During the heydays of investment in the late 1990s and early 2000s, this worked relatively well. During this time BP formed an intimate relationship with the Kremlin and Russian energy companies, and it managed to cut a number of deals with the Russian government.

The most important of these deals was a merger with Russian energy company TNK to form the joint venture TNK-BP. To date, BP has invested about $10 billion into the company. The merger was blessed by the Kremlin at the time, but the risks were high. Once Russia started its energy consolidation, TNK-BP held out for a few years but eventually became a target like so many other firms.

In particular, Russian state-owned natural gas monopoly Gazprom has had its eye on TNK-BP – and not just for the firm’s natural gas assets. Gazprom has already stripped TNK-BP of its crown jewel – the Kovykta natural gas field – in a deal that left BP with a mere quarter stake in the field. But this did not satisfy Gazprom, which has long been positioning itself to take over the entire company, a move that would double Gazprom’s oil holdings.

In gaining control over TNK-BP, Gazprom would get a leg up in its ongoing competition with rival Russian energy company Rosneft. And despite Russian Prime Minister Vladimir Putin’s long-standing efforts to keep the rival companies balanced, TNK was bound to be absorbed eventually. With former Gazprom CEO Dmitri Medvedev currently serving as Russia’s president, Gazprom’s positioning to take over TNK could not be better – but it is not a done deal, and TNK might be bequeathed to Russian oligarchs.

But it is not just BP’s Russian investments that are at risk. With the war in Georgia, Russia has asserted itself unequivocally as the power to be reckoned with in its near abroad. This will mean that energy projects in Central Asia and the Caucasus will have to answer to Russia should Russia decide to intervene in the energy firms’ business.

Georgia itself has no significant energy deposits, but it does serve as an important transshipment point for Central Asian and Caspian energy. BP invested about $1.6 billion in Georgian infrastructure projects between 2004 and 2007. The most important of these investments has been the BTC pipeline. The was designed to bypass Russian territory in bringing Caspian oil to the European and world markets — making it a veritable thorn in Russia’s side that Moscow now has the chance to control.

On the other side of the Caspian, BP investments in Kazakhastan are relatively limited; they amount to only about $741 million and are related to the Caspian Pipeline Consortium (CPC), in which BP owns a 6.62 percent stake. As the only independent pipeline system in Russia, the CPC project has long irked the Kremlin. Russian state-controlled oil transport company Transneft has already boosted its stake in the project, and BP is considering selling its stake.

But the real prize — and the location of most of BP’s Caspian region investments — is Azerbaijan. BP has significant investments in both Azerbaijani transport and exploration/production. Total investments since 2003 top $22 billion, including several billion dollars worth of investments in pipelines. A whopping $19.7 billion is tied up in exploration and extraction investments in the underwater Shah Deniz and Azeri-Chirag-Gunashli deposits. For Azerbaijan, the only way to get energy exports to the global market is to go through Russia or Georgia. With Georgia under increased Russian influence, Azerbaijan’s and BP’s only option for a transport partner appears to be Russia.

If Russia decides to go after foreign energy investments in the former Soviet Union, BP will effectively be a sitting duck. With over $24 billion worth of capital expenditure already sunk into Azerbaijan, Georgia and Kazakhstan — not to mention the potential future revenue streams that could have been earned if regional politics and host government fickleness had not interrupted business — BP has a lot on the line. BP’s loss of TNK-BP is nearly a foregone conclusion, but with Russia’s decision to upend the geopolitics of the region, the rest of BP’s investments are at risk as well.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.

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