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Putin's BFF at Rosneft Cuddles Up With Exxon, BP

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In aggregate, Igor Sechin's initiatives signal a significant shift for Rosneft and for Russia amid the perceived stasis of Putin's third presidential term.

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Who would want to do business with one of Vladimir Putin's best friends? Plenty of people, starting with BP (NYSE:BP) and Exxon Mobil (NYSE:XOM) -- if that friend happens to be Igor Sechin, chief executive of Russian state-owned oil company Rosneft (PINK:RNFTF).

Sechin is a famous Bad Guy in the Russian hierarchy. An old KGB mate of Putin's, he is supposed to have engineered the dismantling of private oil power Yukos after the arrest of its boss Mikhail Khodorkovsky in 2003. Rosneft absorbed most of Yukos' production assets.

Sechin was rewarded with a promotion to deputy prime minister in charge of energy, and the chairmanship of Rosneft. Brush-cut and truculent, he once told pensioners getting vocal at a shareholders meeting to "sit down and calm down." He emerged as unofficial lynchpin of the reactionary, statist faction in Putin's entourage. The British press, which is even more anti-Russian than American media, christened him Darth Vader of the Kremlin.

But a funny thing happened when the 52 year-old Sechin left government and took the president's chair at Rosneft last spring. He became Big Global Oil's most energetic wheeler-dealer. And Rosneft is big. It will be the largest oil producer with traded shares in the world (that is to say the largest this side of Saudi Aramco) once its huge acquisition of TNK-BP (PINK:TNKBF) is complete later this year, leapfrogging Exxon to pump more than 4.5 million barrels per day. That is more than the entire output of Iran, which is No. 4 among the world's petronations.

No less important is the fact that the $55 billion acquisition brings Rosneft into an intimate partnership with BP, which will own 20% of the Russian company and get two seats on its board. Sechin publicly invited his BP counterpart Robert Dudley to take one of them last month.

BP is just one front in Sechin's charm offensive. Rosneft's flirtation with Exxon, which started in 2011 with a vague commitment to explore together in the Arctic, grew much more serious last week. The commitments are still vague, but the territory pegged for joint drilling expanded sixfold in a fresh protocol with the US megamajor. Work could start as early as next year in the South Kara Sea, one of two Arctic zones tagged as most hydrocarbon-rich by the US Geological Survey.

In between, Sechin signed Arctic cooperation agreements with two European heavy-hitters: Italy's Eni (BIT:ENI) and Norway's Statoil (NYSE:STO). As we speak, Sechin is on tour in East Asia, trawling for production partners in Japan and pledging to increase exports to China, though how and through what pipeline remains a mystery.

(Also see: The High Price of China's Fight With Corruption.)

The recast Darth Vader has quietly internationalized Rosneft's executive suite as well. The company's head of offshore projects is now an Alaska native who spent the previous 15 years working for Exxon, the commercial director is a Belgian poached from TNK-BP, and the vice-president in charge of finance is a Russian with a long career at Deutsche Bank and Morgan Stanley.

Sechin meanwhile ousted Russian oil trader Gunvor (headed, interestingly by fellow Putin insider Gennady Timchenko) as Rosneft's chief sales agent, replacing it with multinational players Vitol and Glencore (LON:GLEN). Not to mention the $32 billion Rosneft may borrow from global banks who have tripped over each other to pledge credit for the TNK-BP acquisition.

Earlier this month, Sechin came out for ending the natural gas export monopoly of Gazprom (PINK:OGZPY), which has been dithering over its own longstanding Arctic shelf projects and niggling with China for years over a multi-decade gas supply agreement. Breaking the monopoly is essential for Rosneft's Arctic expansion, as the richest reserves in the region are gas, not oil. It is also important for Russia, which is lagging in the global race to provide liquefied natural gas (LNG) thanks to Gazprom's lassitude.

Taken singly, none of Sechin's initiatives except the TNK-BP acquisition is a game-changer. The company's shares did nothing on news of the expanded pact with Exxon. (They did jump 20% in November and December as the market digested the huge new purchase.) But in aggregate, they signal a significant shift for Rosneft and for Russia amid the perceived stasis of Putin's third presidential term.

The country is at last laying serious plans to maintain its oil and gas dominance for another generation, as shale and LNG chip away at Gazprom's pipeline-based gas hegemony, and the workhorse oil fields of West Siberia decline rapidly. (A new tax regime lowering levies on hard-to-capture "tight oil" is also a key element.) Multinational capital – oil majors strapped for new reserves, banks strapped for decent returns -- will be more than happy to help.

Exxon needs the Russian Arctic to deliver nearly as badly as Rosneft does. Production by the Houston-based colossus has been falling since 2007, and slipped another 7.5% last year. Russia is one of the few plays out there that might arrest this depressing trend.
Political growling between Capitol Hill and the Kremlin over Sergei Magnitsky and Russian orphans is a side show as far as investors are concerned. Follow the oil.

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No positions in stocks mentioned.

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