Caution sets in after BP-Rosneft deal

LONDON Mon Jan 17, 2011 4:13pm EST

BP chairman Carl-Henric Svanberg (L) shakes hands with Rosneft president Eduard Khudainatov at BP headquarters in London January 14, 2011. REUTERS/Luke MacGregor

BP chairman Carl-Henric Svanberg (L) shakes hands with Rosneft president Eduard Khudainatov at BP headquarters in London January 14, 2011.

Credit: Reuters/Luke MacGregor

LONDON (Reuters) - Investors and analysts gave a cautious welcome to BP's (BP.L) share swap and Arctic exploration deal with Russia's Rosneft (ROSN.MM), saying that any return is likely a long way off.

Shares in BP traded up 0.5 percent at 1448 GMT on Monday, outperforming a 0.1 percent rise in the STOXX Europe 600 Oil and Gas index .SXEP.

BP agreed on Friday to form a joint venture with state-controlled Rosneft to develop three of Rosneft's offshore exploration blocks in northern Russia, which the companies said could hold as much oil and gas as the UK North Sea, implying a 60 billion barrel prize.

"It is deals like this that will have to secure the long- term growth of large oil companies," Stephen Adams, head of UK equities at Aegon Asset Management, a top-20 investor in BP.

BP is already the biggest foreign player in Russia's oil and gas industry via TNK-BP TNBPI.RTS, its 50-50 joint venture with a group of billionaire oligarchs.

The chief executive of AAR, the group that holds the oligarchs' stake, told Reuters he hoped that BP would make the Arctic investment via TNK-BP, Russia's third-largest oil company.

As part of the TNK-BP partnership agreement, BP must seek its partners approval before entering any new agreements in Russia, Polovets said.

However, he stopped short of confirming UK newspaper reports suggesting the partners may seek to block the deal.

Svetlana Grizan, oil analyst at VTB, said hopes that BP would use TNK-BP as its vehicle for the Arctic investment drove a 3.4 percent rise in a Moscow-listed unit.

A BP spokesman said its partners had been "kept in the loop" about developments and that BP Chief Executive Bob Dudley had met one of the oligarchs on Thursday to discuss the deal.

Dudley, who had to flee Russia in 2008 amid a row with TNK-BP's partners when he was CEO of the venture, said the leading oligarch in AAR, Mikhail Fridman, had been supportive of the Rosneft deal.

BP's share rise on Monday was a more muted reaction than the initial excitement that greeted early rumors of the deal, which led BP's New York-listed American Depositary Receipts to close up 3.6 percent on Friday.

"We think there will be some people that don't like the political risk of doing a deal with Russia," a London-based trader said.

DEEP VALUE PLAY

Rosneft shares traded up percent 4.2 percent on hopes that BP's offshore technology will enable it to tap reserves that analysts say it does not have the skills to access alone.

Analysts said while the deal offered the potential of big reserves additions, it did not solve all the problems facing BP, such as falling production and big cash demands, after its Gulf of Mexico oil spill - the worst in United States' history.

"While this deal is a good long-term opportunity, it does little to address the lack of short-term growth," analysts at Bernstein said in a research note.

BP has been forced to sell oil fields to pay for the spill and investors fear the company will face regulatory delays in developing its remaining fields in the U.S. - home to 40 percent of its assets.

As part of the deal, BP will swap a 5 percent stake in itself for a 9.5 percent stake in Rosneft.

Gordon Gray, analyst at Collins Stewart, said that since Rosneft paid a much lower dividend that BP did, the share issue would be dilutive to BP's earnings.

The transaction has also revived criticism surrounding assets seized from YUKOS and later bought, via a knock-down government auction, by Rosneft.

Shareholders of YUKOS are seeking $98 billion from Russia in a European Court of Human Rights suit and a spokeswoman said BP faced legal risks.

A U.S. congressman has also called for greater scrutiny of the deal, citing security concerns as BP is one of the key fuel suppliers to the U.S. military.

Dudley said BP didn't need U.S. approval for the deal.

ZEAL FOR A DEAL REMAINS

Analysts said the deal showed that BP's ability to take risks had survived the oil spill disaster.

"One of the key dangers for BP is that, in the aftermath of the spill, it would either be nervous about doing deals, or that it would simply be blocked because of reputational issues. Neither appears to be the case," analysts at UBS said in a research note.

Australia said on Monday it had awarded BP four offshore licenses in another sign that governments are not barring the oil major from offshore exploration following the oil spill.

Full financial terms of the deal have not yet been concluded but it is clear the joint venture will not own the Arctic oil blocks but merely a right to develop them.

This echoes a structure Gazprom agreed with France's Total SA (TOTF.PA) and Norway's Statoil (STL.OL) for the development of the Shtokman gas field.

Yet little progress has been made on Shtokman, which sits in the Barents Sea, since the deal was signed in February 2008, partly due to weak gas prices.

UNPOPULAR DEAL STRUCTURE

Oil companies traditionally dislike structures that deny them ownership of reserves as it limits the upside from high oil and gas prices. Nonetheless, BP's track record suggests it can make a success of them, even where others think otherwise.

When Iraq offered eight licenses to develop oil fields under tight economic terms in 2009, BP was the only western oil major to sign a deal. The company then spent months haggling for the removal of a layer of taxation which analysts later said doubled the margins on the contract.

Under the new terms, BP's rivals returned to the bidding table and snapped up the remaining licenses.

(Editing by David Holmes and Erica Billingham)

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Comments (1)
txgadfly wrote:
Russia’s recent history provides the caution that foreigners are permitted to invest and to lose money, but not permitted to actually make a profit. So why are western companies investing there? Remember Shell.

Jan 17, 2011 1:01pm EST  --  Report as abuse
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