BP's share swap and arctic exploration deal with Rosneft show the London-based oil major is ready to take commercial risks rivals might shun even after its battering from the Gulf of Mexico oil spill.
BP agreed on Friday to form a joint venture with Russia's largest oil producer, state-controlled Rosneft, to develop three massive offshore exploration blocks Rosneft owns in northern Russia.
As part of the deal, which comes four months after BP plugged a blown-out well in the Gulf of Mexico that caused the United States' worst ever oil spill, BP will swap a 5 percent stake in itself for a 9.5 percent stake in Rosneft.
BP's shares are expected to open higher on Monday, on investor hopes that the agreement may, in time, add billions of barrels of oil and gas reserves to BP's balance sheet.
Full financial terms have not yet been concluded and drilling is years off, but BP has a track record of making a success of deals that other companies have baulked at, so some analysts are optimistic this tie-up will be profitable.
"The agreement may be deep value, but it looks a strategically positive move," Jason Kenney, oil analyst at ING, said.
The joint venture will not own the oil blocks but merely a right to develop them, echoing a structure Gazprom agreed with France's Total SA and Norway's Statoil for the development of the Shtokman gas field.
Yet little progress has been made on Shtokman, which sits in the Barents Sea, since the deal was signed in Feb. 2008, partly due to weak gas prices.
Oil companies traditionally dislike structures that deny them ownership of reserves as it limits the upside from high oil and gas prices. Nonetheless, BP's track record suggests it can make a success of them, even where others think otherwise.
When Iraq offered eight licenses to develop oil fields under tight economic terms in 2009, BP was the only western oil major to sign a deal. The company then spent months haggling for the removal of a layer of taxation which analysts later said doubled the margins on the contract.
Under the new terms, BP's rivals returned to the bidding table and snapped up the remaining licenses.
Such negotiating skills are a reflection of BP's focus on commercial nous and are the reason its investors tend to give it the benefit of the doubt on new ventures.
After the official investigation blamed bad management by BP and its partners for the U.S. oil spill, analysts predict BP's opportunities for growth in the United States, its largest market, will be more limited in future.
Rumours of the tie-up lifted BP's New York-listed American Depositary receipts late on Friday.
"BP is moving on from its disaster to take care of the larger interests of the group. This is a substantive step," said John Hofmeister, author and former CEO of Royal Dutch Shell's U.S. unit.
BP says Russian oil taxes -- which give the government 90 percent of the upside on oil prices above $30/barrel -- makes developments in Russia's Arctic waters uneconomic.
The government has said it will review taxes to foster investment, which is key to avoiding a big drop in Russian oil and gas production and a subsequent fall in government revenue.
BP must also agree detailed terms for the joint venture it is forming to explore Rosneft's Kara Sea blocks. The companies said these are the size and have the prospectivity of the UK North Sea, implying a 60 billion barrel prize.
Dudley, who will be grilled on the deal by analysts at a presentation on Monday, said the deal could pave the way for further opportunities in the Russian Arctic and for downstream co-operation in European refining.
The latter could provide BP with the opportunity to further scale back its interests in the European refining industry, which faces a tough future due to falling oil demand.
While Dudley said the tie-up was not a reaction to the oil spill, the issuance of new shares to Rosneft will bolster BP's balance sheet at a time when it faces tens of billions of dollars in spill liabilities.
Yet, in the short term, the deal will sap BP's cashflow.
BP will pump up to $2 billion into the venture and is expected to announce a return to paying dividends next month.
Analysts predict a payout of 7 cents/quarter, suggesting BP will pay Rosneft $277 million a year, while its 9.5 percent stake in Russia's largest oil producer will only bring in dividends of around $60 million, a spokesman said.
BP will also open itself to earnings volatility by being forced to mark to market the value of its Rosneft stake.
In 2008, BP took a $517 million writedown on a stake of around 1 percent it then held in Rosneft.
BP's reputation in the United States could also be further damaged by the deal. It has already been questioned by U.S. congressmen. And its experience in Russia shows deals often do not offer the upside envisaged.
Its existing Russian joint venture, TNK-BP, which will operate separately from the Rosneft venture, has been a financial success but has not won access to new projects to the extent BP hoped when TNK-BP was formed in 2003.
Indeed, TNK-BP, Russia's third largest oil producer and half-owned by a group of Russia-connected billionaires, has been unable to fully develop its largest gas field, Kovykta, due to opposition from state-controlled gas export monopoly Gazprom.
TNK-BP has also highlighted other risks of doing business in Russia. In 2008, BP and the oligarchs fell out, with BP accusing its partners of being corporate raiders who were trying to grab control of the venture while the Kremlin stood idly by.
Dudley was chief executive of TNK-BP at the time and fled the country, with BP citing a campaign of harassment. On Friday he dismissed that dispute as "an extended business discussion."
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