Russian state-owned oil giant Rosneft buys 5% of BP in Arctic drilling deal

NOVO-OGARYOVO, Russia -- Russian Prime Minister Vladimir Putin says London-based oil giant BP and Russia's largest oil company Rosneft will work together to develop Russia's energy-rich continental shelf. Deal with Russians worth $18bn hands BP chance to explore for oil in Arctic

BP last night unveiled a risky gamble to build a new future for itself in the Russian Arctic by agreeing an $18bn exchange of shares with the Kremlin's favourite oil company.

The deal to transfer 5% of BP ownership to Rosneft immediately came under attack in America – currently its most important market – with one congressman describing BP as "Bolshoi Petroleum".

The tie-up, which also gives BP a 9% stake in Rosneft, will also be controversial because the two companies are to concentrate on developing reserves in the pristine waters of the Russian Arctic.

BP is having to look east after a damaging run of accidents in the US, most notably the Deepwater Horizon disaster, for which it has been bitterly criticised for lax standards.

Bob Dudley, the new BP chief executive brought in to clean up the business after the Gulf of Mexico spill, said the move was "not any reaction to anything happening in the US". He declined to comment on adverse reactions to the Russian deal in America and said the lessons learned from the Macondo well blowout left it well-placed to work in the Arctic.

The political nature of the deal was underlined by the presence of Britain's energy secretary, Chris Huhne, and Igor Sechin, Russia's deputy prime minister, who attended the signing in London with Dudley.

Shares in BP rose 4% last night just before the close of trading on Wall Street as details of the deal leaked out.

Dudley said he was delighted with the deal despite his own difficult experiences in Moscow when he was chief executive of a second joint venture, TNK-BP. He was hounded out of Russia due to a bitter row with the Russian shareholders in the venture.

"We are very pleased to welcome Rosneft as a strategic partner and major shareholder in the BP group," he said last night.

Sechin said the arrangement showed "global capital and Russian companies are clearly ready to invest in world class projects in Russia; and Russian companies are quickly emerging at the forefront of the global energy industry."

Rosneft, of which BP will now own 9.5%, is looking to expand beyond Russia. Just over 75% of Rosneft's shares are in the hands of the Russian government.

While Barack Obama promised to "keep his boot on the neck of BP" as he kept up a tide of anti-BP rhetoric during the height of the crisis last summer, in contrast, Putin has been supportive of BP over the Gulf of Mexico crisis. Sources close to former chief executive Tony Hayward said that the Kremlin was angry at the company's treatment in the US following the spill.

BP already owned a 1.2% stake in Rosneft, which listed in London in 2006. Its stock market valuation is $83bn (£52bn), compared with BP's $150bn.

Rosneft's listing was controversial because it acquired many of its assets from Yukos, the former Russian oil giant which jailed oligarch Mikhail Khodorkovsky had run, for a knockdown price in 2004.

BP has a target to raise about $30bn in asset sales to help pay all the costs associated with the Gulf of Mexico spill, but it has already netted over $20bn.

The deal will further strengthen BP's recovery from last April's fatal explosion of its Deepwater Horizon rig in the Gulf of Mexico, which resulted in the death of 11 workers and the world's largest-ever accidental offshore oil spill.

Obama's national commission, set up to investigate the causes of the disaster, while heavily critical of BP, also blamed a complacent industry and inadequate regulation. Analysts said that this made it easier for BP to escape the charge of gross negligence, which some analysts believe would result in a bill of $79bn.

Greenpeace said last night: "The Arctic is the world's most fragile environment for oil exploration, while its ice sheet is melting rapidly due to climate change. Any company that drills for oil there forfeits any claim to environmental responsibility. BP has done little to address the issues raised by the Deepwater Horizon disaster, while last year the Greenland government refused to grant drilling concessions to the company because it wasn't convinced BP has rigorous enough safety protocols. Now BP has bought its way into the Arctic by the back door. It seems the company learned nothing last year in the Gulf of Mexico."