BP Plc (BP) and Russia’s state-operated oil company, Rosneft, entered into a share-swap agreement, which allows the two companies to jointly explore and develop parts of the Siberian Artic, a highly prospective region. The deal is likely to close shortly pending certain listing approvals and completion of some administrative prerequisites.
Under the agreement, the U.K. oil giant will offer 5% of its ordinary shares, valued at $7.8 billion, in exchange for 9.5% of Rosneft’s shares. In the initial exploration phase, the companies are expected to spend around $1.4 billion to $2 billion on seismic tests and drilling wells. Notably, while Rosneft will benefit from BP’s technology, the latter should gain access to significant upstream reserves.
The alliance will finally allow BP access to explore hydrocarbon reserves in the remote Arctic belt of Russia. The deal includes three license blocks, EPNZ 1, 2, 3, covering approximately 125,000 square kilometers in a prolific area of the South Kara Sea, part of the Arctic Ocean off the northern coast of Siberia. The region is also expected to match UK’s North Sea with respect to size and prospectivity.
Russia, with a daily output of more than 10 million barrels of oil, holds the world’s top position. The Artic region, by itself, is expected to have a reserve potential of 51 billion tons of oil, enough to cover worldwide oil demand for four years or more. Consequently, the deal enables BP, which already owns 1% of Rosneft, to strengthen its position in the Russian hydrocarbon reserve, which was previously off limits to foreign companies.
We see this latest deal as BP’s yet another endeavor to fight the oil spill aftermath. BP already holds an advantageous position in Russia as compared with other western oil companies like Chevron Corp. (CVX) or ExxonMobil Corp. (XOM), through its 50-50 joint venture, TNK-BP, with a group of Russian billionaire businessmen. Russia already represents around a quarter of BP’s total production.
In the wake of rising global oil demand, we see the UK oil major as benefiting from this long-term, strategic alliance with the world’s largest hydrocarbon-producing nation. But the deal is attracting some negative responses from the U.S. political field, with a few members of Congress raising national security concerns. It remains to be seen if those initial concerns would translate into more scrutiny of the deal.
We are maintaining our long-term Neutral recommendation on the stock. BP currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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