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Financial Times: Shrewd move puts BP in winning position

By Ed Crooks
Published: March 24 2007 02:00 | Last updated: March 24 2007 02:00

When Lord Browne, BP’s chief executive, met Vladimir Putin in Moscow yesterday, it was an occasion for pleasantries and formalities, not hard bargaining.

Lord Browne was introducing his successor Tony Hayward, who takes over at the beginning of August, and turning on the charm for the man who controls the world’s biggest oil and gas reserves.

The atmosphere of the meeting will have been helped by the announcement yesterday morning from TNK-BP, BP’s 50 per cent-owned Russian joint venture, that it was prepared to pay $7.5bn (£3.8bn) or more for a 9.44 per cent stake in Rosneft, the state-controlled oil company. The stake, one of the assets of the bankrupt Yukos group, is going up for auction next Tuesday.

The offer is a shrewd move by BP. If it succeeds in getting the stake in Rosneft, it binds itself tighter to Russia’s biggest oil company by market capitalisation. If it fails – which appears likely – it will have performeda helpful service to the Kremlin, in legitimising the controversial auction of Yukos assets. Without TNK-BP’s bid, it was possible that the sale of the Rosneft stake next Tuesday would have been an auction with only one bidder.

Russia is a very important country for BP, arguably the most important. It is the single biggest source of BP’s oil, for instance. Last year, BP’s share of TNK-BP’s output was 60 per cent higher than its total US production.

It also holds many of BP’s hopes for the future. It provided much of BP’s booked replacement of its oil and gas reserves last year. Analysts at Citigroup estimate that about a third of BP’s total oil and gas resources that are not yet booked to its proven reserves are in Russia.

Following the squeeze on Royal Dutch Shell over its $22bn Sakhalin-2 project, which levered Gazprom, the state-controlled gas company, into a majority stake at the end of last year, that might seem an uncomfortable position for BP.

TNK-BP is coming under pressure over Kovykta, a gas field in eastern Siberia that is an important prospect for the next decade, where the authorities are threatening to take the field away.

However, investors’ hopes are still alive that BP can avoid that fate.

In a week in which BP was again savaged for the 2005 explosion at its Texas City refinery, which killed 15 people, this time in a report from the US Chemical Safety and Hazard Investigation Board, its shares rose by almost 6 per cent, to close at 541½p, yesterday. One of the principal reasons for that rise was increased optimism over its position in Russia.

Some of that optimism may have been misplaced. There has been a fresh round of speculation that BP’s partners in TNK-BP, the Alfa Access Renova group, owned by Russian tycoons, may be prepared to sell their 50 per cent stake to Gazprom.

If that happens, it would cement the partnership with Gazprom without diluting BP’s interest and make it more likely that Kovykta could be exploited on favourable terms.

Robert Dudley, TNK-BP’s chief executive, tried to squash that speculation onTuesday, saying: “I feel it necessary to explain again that all speculation about a possible change of TNK-BP’s shareholding structure is not true.”

But the speculation persists that eventually BP’s Russian partners will sell out – perhaps to Gazprom, perhaps even to Rosneft.

More immediately, it can only be encouraging that relations between BP and the Kremlin are still cordial; and the gesture over the Rosneft stake will not have hurt at all.

Copyright The Financial Times Limited 2007

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