- BP has been operating in Russia through a joint venture called TNK-BP since 2003 and is nearing the completion of its $55 billion sale to Rosneft, where BP will receive a 20% equity stake and a board seat.
- The deal allows BP to secure a firmer foothold in Russia’s oil rich Arctic region and generate the cash necessary for making compensatory payments for the Deepwater Horizon Spill of 2010.
In 2003, BP (NYSE:BP) announced the merger of its Russian assets with a consortium of Russian oil oligarchs called AAR to form TNK-BP. BP held 50% of the company’s shares, while AAR held the other half. In late 2012, a Russian state-owned oil and gas giant Rosneft announced that it would entirely acquire TNK-BP in a deal worth around $55 billion. While AAR would be compensated entirely in cash, BP would receive a mix of Rosneft equity and cash for its half of the company.
In this article, we take a look at the events that unfolded between the two announcements – BP CEO Bob Dudley’s exit from Russia, a major oil spill in the Gulf of Mexico and the company’s failed attempts at exploring the Arctic. We will particularly look at what the sale of TNK-BP means for BP’s investors, and why the company is better off without AAR’s interference in its Russian operations.
TNK-BP: The Success Story
TNK-BP seemed a success story at the outset. BP had initially invested $8 billion in the venture – a sum it recovered several times over in dividend payments as TNK-BP quickly became Russia’s third largest oil company. The company’s oil production increased steadily under the leadership of Bob Dudley, who was appointed as BP’s Chief Executive for TNK-BP in 2003.
Deal Turns Sour
The relationship between BP and AAR became increasingly tense. While AAR demanded that the profits being generated be paid out as dividends, Bob Dudley wanted to reinvest the cash into TNK-BP for expanding operations – primarily into the promising oil-rich fields in Russia’s Arctic regions. This conflict reached its peak in 2008, when Bob Dudley had to leave Russia after his visa was denied renewal. He claimed constant harassment at the part of his Russian partners and the government as the key reasons behind his forced departure. Meanwhile, the company’s Arctic ambitions seemed to be fading quickly, as TNK-BP’s internal troubles allowed rival Exxon Mobil (NYSE:XOM) to enter into an Arctic exploration partnership with Rosneft. BP, desperate for key assets in the region, decided to completely bypass AAR in 2011 and approach Rosneft directly. This led AAR to file an injunction to stop BP from proceeding with a direct $10 billion partnership with Rosneft.
Meanwhile, BP’s Deepwater Horizon disaster in the Gulf of Mexico in 2010 had left the company strapped for cash. In light of this, selling its Russian asset made perfect sense, since it would free money for compensatory payments while getting rid of BP’s dependency on AAR in the region. The deal not only provides BP with the required liquidity (around $12 billion in cash), but also provides it with a 20% stake in the Russian oil giant. With such a major stake in the state-owned Rosneft, BP practically has guaranteed access to Russia’s oil reserves in the Arctic regions.
Also, Bob Dudley, now CEO of BP, has been nominated as a state representative for the board of directors of Rosneft. This deal will also limit rival Exxon to out beat BP in terms of Arctic exploration. Rosneft’s Arctic assets boast of nearly 21.5 billion tonne of fossil fuels, and with the deal expected to be completed by April this year, we have reasons to hope for resurgence in BP’s total upstream production. However, it should be noted that Arctic oil exploration is a risky and long drawn process, and with BP’s recent patchy history of various accidents and disasters, a cautiously optimistic, long-term approach would make more sense.
Our Trefis price estimate for BP is $43, which is slightly above the current market price.
Disclosure: No positions.