January 17, 2011 9:02 pm

Investors weigh Rosneft’s BP tie-up

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Rosneft worker turns a valve at the Yuganskneftegaz oil production station©Reuters

A worker turns a valve at a Siberian plant run by Rosneft, the main beneficiary of the Yukos breakup

Investors in BP gave a cautious welcome to its tie-up with Rosneft, the Russian state oil group, but warned that it could damage the UK group’s relations in the US where its reputation remains battered in the wake of the Gulf of Mexico oil spill.

Shares in BP traded up 2.5 per cent in London on Monday before paring gains to close up 0.2 per cent at 500.70p. Shares in Rosneft rose 5.4 per cent to Rbs244.87 in Moscow, its biggest gain since last May.

One top 10 shareholder warned he was concerned about the deal’s implications for BP in the US.

“We are broadly positive. Even though there will be initial earnings dilution for this year, this is offset strategically over the longer term by the exploration prospects,” he said.

“However, one thing that worries us is the reaction in Washington DC. The deal is not very helpful from a timing point of view. Could this deal cloud the legal judgment about whether BP was grossly negligent or negligent over the Gulf of Mexico accident?” he said.

BP still faces multiple claims and potential fines in the US from the accident on April 20 last year. The National Commission report into the disaster set up by Barack Obama, the US president, last week blamed a “failure of management” and legal experts have warned it potentially raises the prospect of BP facing criminal charges.

The Obama administration has so far not commented on the deal with Rosneft but two US politicians have called for it to be analysed for national security reasons. BP is a significant supplier of petroleum to the US military.

Other investors said that separate news on Monday that BP had won rights to explore for oil and gas in deep water off Australia signalled that the company was regaining its credibility as an operator.

Analysts said the deal’s long-term strategic focus on the riches of the South Kara Sea in Russia made sense. Jon Rigby, at UBS, said it was “a major coup in terms of strategic positioning”.

He added: “One of the key dangers for BP was that in the aftermath of the Gulf of Mexico spill it would either be nervous about doing deals, or that it would simply be blocked because of reputational issues. Neither appears to be the case.”

The deal, however, faces continued scrutiny from AAR, which represents the billionaire shareholders who own 50 per cent of TNK-BP, BP’s other main Russian venture. According to AAR, the shareholders’ agreement stipulates that TNK-BP should have the right of first refusal to executive opportunities identified by BP or AAR in Russia or Ukraine. “This relates both to individual projects and strategic equity investments,” said Stan Polovets, chief executive of AAR.

“Both types of investments, whether individual projects or strategic equity investments, should be forwarded to the TNK-BP board first,” he added.

“Making strategic equity investments falls under the exclusivity provisions.”

One industry expert said AAR would not likely take on Igor Sechin, the deputy prime minister and Rosneft chairman who has backed the tie-up with BP, by blocking it. “Do they feel big enough to go up against Sechin? There’s a Scottish expression: have a go if you think you’re big enough. I am sure [BP] has carefully judged the situation and thought through the politics of what can happen. If AAR want a part of it they can buy into the deal. They could put up their share of the exploration and appraisal expenditure. This deal won’t peak out for 10 to 15 years ... They would have to put up a lot of exploration funds up front and that’s not what AAR does.”

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