BP and Rosneft to Swap Shares

Posted by

Jan. 17 – BP Plc and Russian state oil producer OAO Rosneft signed a share swap agreement in London last Friday. BP agreed to swap a US$7.8 billion stake in the company for a 9.5 percent share of Rosneft to develop three massive offshore exploration blocks Rosneft owns in the Arctic Circle.

BP Plc’s US$7.8 billion share swap will replace almost all the reserves it sold to pay for the Gulf of Mexico spill at less than half price, Bloomberg News has reported.

Some analysts are optimistic this tie-up will be profitable.

“They are buying at cheaper prices than the assets they’ve just been selling, and they are paying with a devalued currency” in their own shares, said Christine Tiscareno, an equity analyst at Standard & Poor’s in London.

“The agreement may be deep value, but it looks a strategically positive move,” Jason Kenney, oil analyst at ING, said to Reuters.

The agreement with Russia’s largest oil producer opens up Arctic fields in an area the size of the U.K.’s North Sea that may hold about 100 billion barrels of crude oil.

“We’re thinking decades ahead,” BP chief executive officer Robert Dudley said in an interview at BP’s London headquarters after the signing ceremony in London on January 14.

Simultaneously, BP is moving on from its disaster on the Gulf of Mexico.

Rosneft can take advantage of BP’s expertise and experience, including what it has learned from the Gulf spill, to ensure safety and environmental protection, Russia’s deputy prime minister and state-run producer chairman, Igor Sechin, said on Russia Today’s website yesterday.

BP and Rosneft plan to drill in the Kara Sea in the Arctic Circle off Russia’s north coast. The companies will develop three blocks known as East Prinovozemelsk-1, 2 and 3. They agreed to invest US$1.4 billion to US$2 billion in the project through a venture in which Rosneft will hold 67 percent and BP 33 percent.

BP says Russian oil taxes — which give the government 90 percent of the upside on oil prices above US$30/barrel — makes developments in Russia’s Arctic waters unprofitable.

The Russian government has said it will review taxes to foster investment, which is key to avoiding a big drop in Russian oil and gas production.

The new partnership has the backing of both governments, showing London and Moscow are not letting diplomatic tensions interfere with business.

Only last month Britain said it had expelled a diplomat from Russia’s embassy in London for espionage and that Russia had responded in kind.

Russia also resents Britain granting refugee status to several high-profile Kremlin critics.

Despite the problems, British energy secretary Chris Huhne said on Friday “this initiative … is good news for Europe, for the UK’s energy security and worldwide.”

According to data compiled by Bloomberg, Rosneft’s market value prices its oil and gas reserves at US$5.33 a barrel. That’s 60 percent below the US$13.20 average price BP got for fields sold last year holding 1.7 billion barrels, according to bank DnB NOR ASA.

One reason for state-owned Rosneft’s lower valuation may be the political risk of investing in Russia. Royal Dutch Shell Plc agreed to cede its majority stake in its Sakhalin project to OAO Gazprom in 2006 after months of government pressure. Robert Dudley himself was ousted as head of BP’s Russian venture TNK-BP in 2008 during a dispute with the company’s billionaire partners.

TNK-BP has been unable to fully develop its largest gas field, Kovykta, due to opposition from state-controlled gas export monopoly Gazprom.

TNK-BP has also highlighted other risks of doing business in Russia. In 2008, BP and the oligarchs fell out, with BP accusing its partners of being corporate raiders who were trying to grab control of the venture while the Kremlin stood idly by.

Leave a Reply

Your email address will not be published. Required fields are marked *