BP boss Bob Dudley has come under fire after an Arctic exploration deal with Russian group Rosneft was blocked by the British oil company's partners in joint venture TNK-BP.
An arbitration panel ruling prevents BP and state-controlled Rosneft, Russia's largest oil company, jointly exploring for oil in the country's Arctic region and from executing a $16 billion share swap.
That potentially opened the door for a rival to step in and replace BP as Rosneft's partner.
Given his (Dudley's) past relationship in Russia, how difficult it has been, he should have been a bit more appreciative of how tricky it can be operating in Russia, Arbuthnot Securities analyst Dougie Youngson said on Friday.
Thursday's ruling handed a major victory to BP's billionaire partners in TNK-BP. Alfa-Access-Renova (AAR), which represents their half of TNK-BP, had said the BP and Rosneft alliance violated their right of refusal on deals in Russia.
AAR said BP was now prohibited from entering into any future share arrangement with Rosneft that has any kind of strategic component.
This raised the prospect Rosneft would look elsewhere for the expertise it needs to get oil out of Russia's Arctic region.
Rosneft head Eduard Khudaynatov said in January the group was awash with proposals from foreign companies for exploring in the Arctic, and Royal Dutch Shell, BP's arch rival, has already confirmed its interest.
The cleanest thing for Rosneft, if it wants to start developing its offshore acreage and resource potential, is to choose a different partner, Sanford C. Bernstein analyst Oswald Clint said, adding TNK-BP lacked the necessary know-how.
TNK-BP shareholders said earlier this month it could supplant BP in the share swap with Ronseft.
This was rejected by Rosneft, which recently struck deals with U.S. oil majors Chevron and Exxon Mobil to explore in the Black Sea.
BP shares were down 0.4 percent at 1030 GMT, with analysts saying many had not priced the Rosneft deal into estimates because of uncertainty about it from the start.
We had never put in any increase in our share price when the original deal was announced because the actual exploration activity is a long way ahead ... but for us no big change in where we stand on the valuation perspective, the analyst said.
Rosneft shares were 0.25 percent lower.
BP's embarrassment was compounded by the fact chief executive Dudley had been seen as more plugged into the complexities of Russian oil than most.
He was in charge of TNK-BP before being forced to leave Russia in 2008 due to what he said was a campaign of harassment by the joint venture's co-owners.
People will be a bit surprised that they ended up getting themselves into this pickle particularly because he (Dudley) has got so much experience in dealing with the AAR partners,said an analyst who declined to be named.
As well as bad news for Dudley, who took over as CEO last year following BP's disastrous Gulf of Mexico oil spill, the decision was a blow for the Russian government, which has struck a string of deals this year with energy majors to tap new oil and gas regions to sustain long-term output.
On Thursday, Dudley played down the impact in an internal memo, saying: BP's long history in Russia demonstrates progress and growth is not always straightforward. But it has consistently been successful over the long term.
Dudley said BP will seek a ruling on whether the share swap under which it would exchange 5 percent of its own stock for a 10 percent holding in Rosneft -- may proceed on its own.
Few expected a quick resolution to the stand-off.
This was always going to be a tricky situation trying to balance a relationship with Rosneft and TNK. So, I think this is going to run for much longer than BP has been letting on, Youngson at Arbuthnot Securities said.
(Additional reporting by Douglas Busvine and Olesya Astakhova in MOSCOW and Stephen Jewkes in MILAN; Writing by Alexander Smith; Editing by Dan Lalor)