BP Plc and Russia's state-controlled Rosneft agreed to a share swap under which they plan to jointly explore for offshore oil and gas in a deal that gives the UK company access to areas of the Arctic previously reserved for Russian oil companies.
BP, recovering from its Gulf of Mexico oil spill disaster, will swap 5% of its shares, valued at $7.8 billion, for 9.5% of Rosneft in an agreement that immediately raised concerns about US economic security from at least two American lawmakers and criticism from environmentalists.
The deal covers huge areas of the South Kara Sea in the Arctic that BP said that could contain billions of barrels of oil and gas and had been previously off limits to foreign companies.
The pact, which is expected to be completed in a few weeks, highlights a rebound in relations with Moscow both for BP and its chief executive Bob Dudley, who was forced to flee Russia in 2008 after heading BP's Russian joint venture, TNK-BP, which is half-owned by BP.
Dudley said that the deal was the first significant cross-shareholding between a nationally owned oil company and an international oil company and called it "a new template for how business can be done in our industry."
Dudley had been the boss for TNK-BP's formation in 2003 and was forced to leave due to what he described as a campaign of harassment by BP-TNK's billionaire oligarch co-owners.
The issue has since been resolved and Dudley returned to Moscow for the first time this summer, following his
appointment as CEO of BP, to be warmly welcomed by officials.
"It has turned from a fistfight into a lovefest," said Cliff Kupchan, a director at Eurasia Group in Washington.
Russia is a key part of BP's global operation, providing the company with a quarter of its reserves before the US oil spill, so it is vital for Dudley to establish a good working relationship with the world's largest oil exporting nation.
US Congressman Edward Markey, who is the top Democrat on the House Natural Resources Committee, immediately called for a review of the deal by US regulators to see whether it affects the national and economic security of the United States. He noted that in 2009 BP was the top petroleum supplier to the US military.
And Republican Congressman Michael Burgess, who is on the House Energy and Commerce Committee, also said the deal "deserves some analysis and scrutiny" by the government's Committee on Foreign Investment in the United States given BP's ownership of critical oil assets in the US.
The US Treasury said that it is forbidden by law to comment on investigations, planned or under way, by the committee.
Environmental group Greenpeace, noting the fragility of the Arctic, also lashed out.
"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," Charlie Kronick of Greenpeace said in a statement.
BP has a market capitalization of $150 billion US dollars, while Rosneft is valued at about $83 billion.
The venture underscores Europe's dependence on Russia for a rising share of its energy needs - particularly for clean -burning natural gas. Russia holds one-fifth of the world's reserves of natural gas.
Chris Huhne, British Secretary of State for Energy and Climate Change, welcomed the "groundbreaking" deal and called it "good news for Europe, for the UK's energy security and worldwide."
BP's deal with Rosneft gives BP access to highly sought after reserves of oil and natural gas in Russia's remote Arctic region.
"It tells the world how important the Arctic is to the future of natural resource production, and while the US dillydallies and resists efforts by US companies to push forward into the Arctic, others are moving on, leaving the US behind," said John Hofmeister, the former CEO of Shell Oil Co and founder of the group Citizens for Affordable Energy.
Russia, the world's top oil producer with output of more than 10 million barrels of oil per day (bpd), estimates that its Arctic zone holds about 51 billion tonnes of oil, or enough to fully meet global oil demand for more than four years.
BP is seen filling a skills and technology gap for Rosneft as it seeks to develop the Arctic region.
"Rosneft is well aware that its ability to do deepwater Arctic work alone is very limited," said Kupchan. "They have been looking for ways to bring in companies with the technology and especially management skills needed to pull off deepwater Arctic work."
Russia wants to encourage oil exploration and production in its icy Arctic waters, but in the wake of BP's Gulf spill, Russian officials and experts warn that a similar accident in the Arctic could turn out far worse.
The BP-Rosneft discussions "are ones that have happened over a number of months and are not in reaction to anything in the United States," said Dudley at a London new conference. "This is part of BP's strategic direction of access to large hydrocarbon basins and we have had a strong relationship with Rosneft for a long time."
Russia has increasingly been looking to raise its influence on the global financial stage, with major companies -- including state-controlled ones -- seeking foreign acquisitions.
Some deals have come under fierce opposition in the countries involved, such as Surgutneftegas's purchase of a stake in Hungary's MOL. Others, like Sberbank's bid for German carmaker Opel, collapsed.
Prime Minister Vladimir Putin's government has also pledged to ease investors' access into Russia as it looks to foreigners to play a key role in helping to modernize the economy -- including through taking part in a big privatization drive starting this year.
Britain's new coalition government has attempted to improve relations with Moscow -- tense since the murder of ex-KGB agent Alexander Litvinenko in 2006 -- although tensions resurfaced last month with the expulsion of a Russian diplomat from London.
US-listed shares of BP, which had been trading higher, fell slightly to $49.00 in post-market trading. The stock had closed up 3.6% at $49.25 on the New York Stock Exchange.