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BP and Russia in Arctic oil deal

2011-01-16 10:31:29

BP has signed a joint venture with Russian energy firm Rosneft to exploit

potentially huge deposits of oil and gas in Russia's Arctic shelf.

The "strategic global alliance" will see the firms exchange expertise in

exploring the region.

As part of the deal Rosneft will take 5% of BP's shares in exchange for

approximately 9.5% of Rosneft's shares.

It is BP's first deal since the Deepwater Horizon spill last year, which cost

it billions.

The BP shares stake is worth just under $8bn ( 5bn).

"BP executives see this as the first piece of good news since that disastrous

oil spill in the Gulf of Mexico last April," said the BBC's business editor

Robert Peston.

But he said the deal was a controversial one, with Russia not seen as an

entirely transparent society nor as as a stable place to do business.

'Historic'

"This unique agreement underlines our long-term, strategic and deepening links

with the world's largest hydrocarbon-producing nation," said BP's chief

executive Bob Dudley.

Continue reading the main story

Analysis

image of Robert Peston Robert Peston Business editor, BBC News

For BP executives it's a hugely exciting moment - the first bit of what they

see as seriously good news since that devastating oil spill in the Gulf of

Mexico last April.

For BP what matters is that the area of the Russian Arctic to be explored has

the potential to produce as much oil as the North Sea in its heyday.

But the deal will be hugely contentious.

First Russia is widely viewed as not a desperately stable environment for

Western businesses.

Second it involves Rosneft, Russia's biggest oil company, taking a 5% stake in

BP worth just under 5bn.

Rosneft is 75% owned by the Russian government.

So it will look to many as though the Russian government is taking a 5% stake

in a company with strategically important oil reserves all over the world,

including - of course - the US.

He said the "historic" deal would "create value, deliver growth, and meet the

world's demand for energy".

Mr Dudley said the agreement would meet the needs of consumers, shareholders

and governments.

The firms will explore in three areas - known as EPNZ 1,2,3 - on the Russian

Arctic continental shelf.

The areas covers 125,000 square kilometres in an area of the South Kara Sea.

"Our future joint venture will utilize the experience and expertise of BP, one

of the leaders in the global oil and gas industry," said Rosneft's President,

Eduard Khudainatov.

"This project is unique in its complexity and scale both for Russia and the

global oil and gas industry. We see it as the next step in developing our

relations with BP."

'Unexplored'

Referring to the Deepwater Horizon blast Mr Dudley said that the firm had

"learned many lessons over the past year".

He also said the Russian deal had not been precipitated by the backlash it had

experienced in the US because of the Gulf of Mexico spill.

Start Quote

We are creating an entirely new strategic alliance between what I know are two

great companies

End Quote Bob Dudley BP chief executive

Since the rig disaster in the US Gulf of Mexico BP has been disposing of

assets.

Mr Dudley is the former chief executive of Russian joint venture TNK-BP, and

was forced out of the country in 2008 after falling out with other

shareholders.

But he said he was pleased to now be working with Rosneft in "one of the

world's last remaining unexplored basins".

"We are today building a relationship between BP and Rosneft that has been

forged over 12 years but going far beyond anything that has gone before," he

said.

"We are creating an entirely new strategic alliance between what I know are two

great companies."

Joint research

UK Energy Secretary Chris Huhne: ''It's a ground-breaking deal''

BP and Rosneft have also agreed to set-up an Arctic technology centre in Russia

which will work with Russian and international research institutes to develop

technologies for the extraction of hydrocarbon resources from the Arctic shelf.

UK Energy Secretary Chris Huhne hailed the agreement as a groundbreaking

development.

"From what we know, it sounds like it's potentially good for BP," said Phil

Weiss, analyst at New York equities firm Argus Research.

"BP gets access to resources, Rosneft gets access to expertise and knowledge."

However in the US Congressman Edward Markey, who is leading Democrat on the

House Natural Resources Committee, called for a review of the deal by US

regulators.

Return to profit

BP had a terrible 2010 with the Gulf of Mexico spill, which is going to cost

them at least $40bn.

But in November BP announced it was back in profit in the three months to

September after last quarter' s record loss.

The firm said its replacement cost profit for the period was $1.85bn ( 1.15bn),

as against the $17bn loss recorded from April to June.

The previous loss reflected the massive costs of the Gulf of Mexico oil spill

crisis.