BP bites the Russian bullet
BP ANNOUNCED A momentous expansion into Russia last month. After a series of asset disposal it announced a $6.75bn investment in Russia, the scene of its most troubled investment in recent years and a commitment to invest more than $20bn over the next five years on five new global profit centres that it claims will more than offset declines in mature provinces, such as the UK North Sea.
The Russian deal will see BP and the alliance of Alfa Group and Access-Renova (AAR) to create the country's third-largest oil and gas business, in which BP and AAR will hold 50%. The new company will incorporate Tyumen Oil (TNK) and Sidanco, which, between them, produce around 1.2m barrels a day (b/d) of oil. Total reserves will amount to more than 5.2bn barrels, says BP.
It will also own significant exploration interests in Siberia and Sakhalin, together with a major downstream business that includes interests in five refineries and a retail network of more than 2,100 sites in Russia and Ukraine.
Under the terms of the deal, BP pays AAR $3bn in cash and three subsequent annual tranches of $1.25bn in BP shares, valued at market prices prior to each annual payment. BP says the deal will go through by the summer. The total value of the transaction is equivalent to around 2% of Russian GDP.
BP's involvement in Russia in the late 1990s, when it bought 10% of Sidanco just before the country's economic meltdown of 1997, left it and others reluctant to risk further exposure to the country. After failing to sell its stake and enduring a protracted battle with its Russian partners, BP eventually increased its holding in Sidanco to 25% in 2001.
The firm's chief executive, John Browne, acknowledged that BP's experience had been difficult. We had a tough time initially, but after the present management and ownership structure [of Sidanco] was established early in 2001 we gradually built an important, mutually beneficial relationship with the owners of AAR and learned a great deal about doing business in Russia.
He added that BP had conducted a very thorough examination of the assets involved and made extensive physical inspections. The company has also insisted on a system of governance that safeguards the interests of all parties, he said. These prudent measures, combined with Russia's greatly improved economic stability, improved legal system and increasing commitment to international rules of trade and business, have convinced BP that now is the time to deepen our partnership with AAR.
The new company will be governed by a 10-strong board, with members nominated equally by BP and AAR and decisions taken unanimously. AAR will nominate the chairman and BP will nominate the chief executive and provide management and technical resources to the new company. BP says the companies will apply Western principles of corporate governance.
BP's holding in Sidanco, its stake in Rusia Petroleum, its interest in the Sakhalin V exploration licence and its holding in the BP Moscow retail network will all become part of the new company. AAR is contributing its holdings in TNK and Sidanco, its share of Rusia Petroleum, its stake in the Rospan gasfield, in western Siberia, and its interest in the Sakhalin IV and V exploration licence.
Meanwhile, BP also plans to focus new investment on five new profit centres: the deep-water Gulf of Mexico, Trinidad, Angola, Azerbaijan and Asia-Pacific liquefied natural gas. The company said these were as significant in scale, capital and reserves for BP's future as had been its development of the North Sea and Alaska some 30 years ago.
The new centres will absorb some 50% of likely annual spend by BP's exploration and production business between now and 2007, with post-tax earnings and cash-flow per barrel expected to rise as output from the new areas increases, the company claims. Of total investment for 2003 of $14.2bn, upstream capital spend will be around $10bn this year, falling away to around $9bn a year after 2004.