BP, Russia and Rosneft
Vivian Lewis is a top expert on international investing; here, the editor of Global Investing reviews a leading U.K.-based -- and U.S.-listed -- energy player with a large stake in the speculative Russian oil sector.
BP plc (BP) – my oil patch favorite -- just lost the bidding against other major oil companies for Mexican deepwater concessions. It may have been hindered by memories of the 2010 Deepwater Horizon disaster in US Gulf waters.
But in other parts of the globe, notably Russia, BP is sitting pretty. It offered a 4% royalty plus $606 million and won the Trion field.
Making a big bet on both oil and Vladimir Putin’s Russia, Glencore (London: GLEN) and its shareholder, the Qatari sovereign wealth fund (QSWF), will jointly pay $11.3 billion for a 19.5% stake in Rosneft, the Russian state-controlled oil company run by a Putin pal, Igor Sechin.
BP is in the catbird seat. Glencore got a cheap price for buying into the world's largest oil company by production. BP, however, paid considerably less net for a marginally larger stake.
BP has a 19.75% stake in Rosneft for which it paid net $1.5 billion. It also has a direct 20% stake in the Taal-Yuryach Neftegaz field in eastern Siberia which it nabbed in mid-2015.
Rosneft couldn't fund exploration in this promising area for further oil and gas without a foreign partner and Sechin – a former spy -- was subject to sanctions over the Russian invasion of Ukraine and seizure of Yalta, so BP was the only partner available.
BP also last summer picked up similar sized stakes in two other Siberian areas, Yermak and Yenisey-Khatanga where exploration permits have now been received, and where work will begin next year. Rosneft will own 51% of these, with BP at 49%.
BP also arranged for advanced seismic land search contracts with wellhead exploration giant Schlumberger Ltd. (SLB) for Rosneft sites in the Russian Far East.
The two companies also jointly operate refineries and petrochemical plants in Russia and outside it. It also provided help to the Russians with technology for producing from mature fields and learning western management practices.
The BP stake in Rosneft goes back to an alliance formed by its former CEO about 20 years ago. The idea was—and is—that Rosneft needs a link to oil industry majors, which BP is positioned to provide.
During Putin's first two terms, Sechin was Putin's chief of staff-gatekeeper, and then energy advisor; when Putin became president again Sechin took the reins as CEO at Rosneft.
You do not want to own Rosneft directly, no matter how cheap its oilfields look compared to rivals. This is Russia and the Czar in place can do what he wants.
However, BP is a key player and while you wait for a gusher it pays over 6.6% interest. We rate BP as a strong buy.
By Vivian Lewis, Editor of Global Investing