It’s not just US Congressmen who are concerned about BP’s Global and Arctic Strategic Alliance with Rosneft.
BP’s partner in Russia is also worried.
From the FT:
BP’s landmark deal with Rosneft, the Russian state oil company, was on Sunday night facing a backlash from the billionaire shareholders in its other main venture in the country.
AAR, the consortium through which the shareholders hold their stake in TNK-BP, said it was examining whether the deal breaches their agreement which stipulates that BP can only pursue new opportunities in Russia via the venture.
And they have every reason to be concerned.
Friday’s deal could be the first step towards merging with TNK-BP with Rosneft, reckon analysts at Merrill Lynch:
Its Russian subsidiary TNK-BP has been a key contributor for BP over the past decade and we believe that the ROSN deal could change the medium term future of TNK. Considering recent indications that the Russian government appears open to reduce its stake in ROSN, we see scope to start considering a potential merger of TNK-BP and ROSN in the medium term.
Indeed, it’s sobering to reflect that around a quarter of BP’s expected production in 2011 will come from its TNK-BP venture, and once the Rosneft deal is completed, the Russian government will become its biggest shareholder.
That is bound to set alarm bells ringing in Washington given that BP is the largest supplier of fuels to the US military.
However, the Arctic alliance won’t be contributing to BP’s production in the near future. The first well in the South Kara Sea, which under Russia classifications is estimated to hold nearly 36bn barrels of oil and 10.3tcm of gas, will not be drilled until the end of 2015.
Moreover, it will be 10-15 years before production occurs, says JPMorgan, which is also taking the resources estimates with a large pinch of salt.
If the prospect map is so richly populated based on 2D seismic, why 4 years to the first well? Even allowing for short 3- month work window due to Arctic weather, Big Oil still moves far too slowly, in our view. There is a risk that the liquids content of the acreage is low, the gas content very high – this could leave the gas stranded behind the development of the Yamal Peninsular’s substantial discovered gas resources.
Cash flow dynamics the opposite of TNK-BP – BP may be ploughing cash in to the operating alliance for the next 10-15 years before production occurs, providing Rosneft with some unquantified carry in the early years. This is the complete opposite of TNK-BP which has paid handsome dividends since its inception in 2003.
And it’s not as if these equity-linked alliances have a great track record of delivering value for shareholders of Western oil companies:
Whilst we recognise the original, reciprocal nature of this specific equity alliance (BP has always led the industry M&A for ambition and transaction innovation), we are mindful of some very sterile one way equity-linked oil industry alliances – IPIC / OMV, Pemex / Repsol YPF, ConocoPhillips / Lukoil (being unwound) and Galp / Sonangol. We note that BP’s participation in Rosneft’s IPO in 2008 failed to encourage the Russian government to stop Alpha-Access- Renova from destabilising BP’s investment in TNK-BP. We also note that the IOC’s (Exxon Mobil, BP and RD Shell) that took stakes in the PR China NOCs (PetroChina, Sinopec, CNOOC) at privatisation do not really have much to show from those investments, most of which have been sold.
So the onus is on BP to prove this deal is different.
Still, BP has managed to get some sort of exposure to one of the largest undrilled frontier regions and it has shown the market that it does have material opportunities beyond the Gulf of Mexico.
And the reality is that the big integrated oil companies need to take greater geological, operational and financial risks to underpin growth, says Morgan Stanley.
Big Oil needs to take on more risk and radically overhaul the IOC model or face further multiple de-rating or possible extinction. We think the alliance between BP and Rosneft is not just symbolic, but ultimately shows willingness for change at BP that could be a template for the industry – to allow the majors to grow and create value, alongside national oil companies (NOCs) and resource holders.
Even if that means dealing with dodgy Russians.
The price action in BP shares on Monday morning:
Related links:
BP looks to Russia to rebuild reputation – FT
Putin’s ally delivers connects with the west – FT