BP confirmed today that it’s swapping its 50% stake in TNK-BP (which provided about a quarter of the company’s global output) for cash and shares in Rosneft, the Russian state-controlled oil company, becoming a nearly 20% shareholder in it as a result. The two companies have been looking for ways to partner up to exploit Russian Arctic offshore reserves for a few years now, but apart from some stories on the Yukos takeover, Rosneft has had very little spotlight in English-language media. So, in case you were wondering what Rosneft was about, here’s a taster.

Note on referencing: most of the facts in this post are from Russian language sources and I have not included all the links – please get in touch if you want all the sources.

Russia’s least transparent state corporation…, according to Alexei Navalny, celebrity activist shareholder and blogger. As a minority shareholder, Navalny requested Rosneft’s Board minutes for 2009, as well as its contract for sales of oil to China. (Signed in 2009, this contract has Rosneft supplying oil to China for 20 years in exchange for a loan of $10 billion.)  The company refused the request, arguing that the size of Navalny’s holding did not merit the disclosure (i.e. some shareholders have more rights than others), that he did not vote in the 2010 AGM, and that he is known for his activist stance on corporate governance.  The court case went through several appeals, where the Federal Service for Financial Markets supported Navalny’s position, but Rosneft won in the 9th court of appeals in August 2012. By comparison, Gazprom and Surgutneftegaz disclosed their Board minutes to Navalny without going to court.

…and top oil polluter, according to a recent regulator report. This is based on figures on oil spills in Yugra (or Khanty-Mansiysk Autonomous District), the province responsible for 51% of Russia’s overall oil extraction,  and for 54% of Rosneft’s. Rosneft was responsible for 2,727 incidents of spills in Yugra in 2011, or 75% of the total number of spills. If this is compared to its share in the amounts of oil extracted, the picture is even more striking. Rosneft (or rather its subsidiary Yuganskneftegaz) is also the largest company in the region by volumes of extraction,  but with an overall share of only 25% (66.7 mln tonnes compared to 262.5 mln tonnes extracted in the region overall).

Pervasive culture of neglect for environmental safety. The Vedomosti newpaper, referencing an anonymous industry source, states that the main reason for Russia’s world record in terms of numbers of oil spills, is the worn out state of pipelines. The source states that companies are not incentivised to improve or replace the old equipment, as they receive no benefit for doing that, and the price of liability is practically negligible. I’ve recently been looking at Rosneft’s environmental liabilities on its projects around Sakhalin island, and the same pattern applies: firstly, the majority of leaks occurred due to worn out equipment. Secondly, where the regulator and/or the prosecutor did pursue liability for a breach, it often resulted in fines in the tens of thousands of roubles (hundreds of ££): a negligible amount for any company, particularly an oil major. And thirdly, a lot of the time the environmental damage documented by Sakhalin Environment Watch (a civil society group) got “reduced” or completely ignored by the authorities and the company. Authorities on a local and national level lack the power and perhaps the willingness to address this pervasive culture of neglect within Rosneft.

Worn out equipment and lots of debt. Rosneft is also responsible for 24,4% of the overall harmful emissions to the atmosphere in the oil processing industry, according to Ministry for Natural Resources statistics.  The company has lobbied to delay the implementation of a new fuel quality regulation in Russia that would outlaw Euro-2 fuel, the standard to which its refineries comply. Commenting on these facts, Nezavisimaya Gazeta suggests that at a time of high debts, the company is unwilling to invest in replacing outdated equipment. This is presumably not something BP will be happy about, or indeed willing to help fix, considering how much debt BP itself is still currently looking at following the Deepwater Horizon disaster.

The most worrying thing, from the point of view of BP, is that Rosneft might get privatised next year: the Russian Ministry for Economic Development has been publishing lists of state shares in corporations that it wants to sell off, and on the latest list are all but a single share of the state stake in Rosneft. Should this happen, whose hands will this company end up in? Will it still have access to the Arctic deposits BP is coveting? Or did BP get some assurances on this?

…from the point of view of environmental justice, the most worrying thing is that BP may be subscribing to fund some of the riskiest offshore oil extraction projects, run by one of the least transparent corporations in Russia, in places with little material and political infrastructure for ensuring accountability.