Russia's move to open up its prized Arctic reserves to oil major BP (BP.L) is driven by the Kremlin's desire to avoid a fall in production and remain the world's leading oil nation.
Analysts and bankers told Reuters that the deal, in which BP agreed to a multi-billion-dollar share swap with state major Rosneft (ROSN.MM), is a boost to Russia's investment climate, though any stocks rally would be capped by political and oil tax regimes uncertainties.
The deal gives BP a direct line to powerful Prime Minister Vladimir Putin and access to new reserves as it emerges from its Gulf of Mexico spill disaster. But it also locks BP into a partnership with any Kremlin regime for the decades to come.
"For Russia to maintain production at or above 10 million barrels per day, the investments required are huge. Decline rates in West Siberia are very steep and projects in East Siberia are fairly limited," said Amrita Sen, a commodity analyst at Barclays.
The deal, under which BP and Rosneft will explore for offshore oil in the Kara Sea, is a departure from Kremlin policies which had made offshore fields unavailable for foreigners.
"The lessons on how to prevent an environmental catastrophe similar to the tragic Macondo spill are as important for the Russians as BP's offshore drilling technology," said Kirill Pyshkin, who manages over 1.1 billion euros in the Aviva Investors Global Equity Income and Global High Yield Equity funds, including BP shares.
"As for BP, this opportunity to explore the Russian Arctic previously off limits to foreign firms is a clear win," added Pyshkin. Ecologists say an Arctic spill would be far harder to clean up than the Gulf of Mexico spill.
YUKOS AND TNK-BP
Both Pyshkin and Andrew Moorfield, head of the oil and gas division at banking group Lloyds, agree expertise in offshore deepwater drilling is important for Russia, the world's top oil producer ahead of Saudi Arabia, as new discoveries of large, conventional and easy oil are rare.
"The challenge for BP is to transform this well manufactured opportunity into future reserves growth and cash flow, whilst managing any political and environmental tension and technical risks," said Moorfield.
The challenges and risks are huge.
In 2008, BP chief Bob Dudley saw risks soaring himself when he had to flee Russia amid a row with the billionaire partners in BP's TNK-BP venture, where he was the CEO at the time.
On Friday, Dudley got a blessing for the Rosneft deal from Putin and his deputy and Russian oil tsar, Igor Sechin. But in 2003, when BP and TNK formed the venture, Putin also gave it his personal blessing, which didn't help Dudley in 2008.
Russia's image abroad is at its low after the latest sentencing of Mikhail Khodorkovsky, owner of YUKOS, whose assets make up the bulk of today's Rosneft.
Some U.S. politician have already branded BP "Bolshoi Petroleum" and a U.S. congressman has called for greater scrutiny of the deal, citing security concerns as BP is one of the key suppliers of the U.S. military.
Shareholders of defunct YUKOS are seeking $98 billion from Russia in a European Court of Human Rights suit.
"BP shareholders should be concerned that once again the company has invested in a deal with Rosneft in assets over which there is a significant question as to security of Rosneft's ownership," said YUKOS spokeswoman Claire Davidson.
About a quarter of BP's reserves and output come from TNK-BP and it is unclear how it can co-exist with the Rosneft venture.
With oil prices near $100 a barrel, Russian resource nationalism could be on the rise after a few quiet years.
"Not many majors in the world would allow a Russian state proxy to hold a big stake in it like BP did. For the Kremlin it is a very important symbolic move," said an investment banker who asked not to be named.
He said TNK and Rosneft could peacefully co-exist. But speculation about a buyout of billionaires from TNK-BP by BP or Rosneft to form a true oil titan would inevitably increase, as was the case when gas group Gazprom (GAZP.MM) studied the idea in 2008.
The banker also said oil tax uncertainty would continue to deter some major investors from Russian oil stocks, a view not shared by all observers.
"When BP made their 2003 investment it helped kick off a rally, as people realized Russia was undervalued. So this is a very big event for Russia," an equity sales trader at a Western investment bank in Moscow said on condition of anonymity.