BP, Alfa Group, Access-Renova create new Russian company

Feb. 11, 2003
BP PLC Monday announced plans to invest $6.75 billion in a partnership with two other companies to create the third biggest oil and natural gas company in Russia.

By OGJ editors

HOUSTON, Feb. 11 -- BP PLC Monday announced plans to invest $6.75 billion in a partnership with two other companies to create the third biggest oil and natural gas company in Russia.

BP will have a 50% stake while Russian partners Alfa Group and Access-Renova (AAR) will share a 50% stake. The deal, subject to regulatory approval in Russia and the European Union, represents one of the largest investments by a Western company in post-Communist Russia.

The new company will incorporate Tyumen Oil Co. (TNK) and Sidanco Oil Co., which together produce 1.2 million b/d of oil. It also will own significant exploration interests in Siberia and Sakhalin, together with a major downstream business including interest in five refineries and a retail network of more than 2,100 retail outlets in Russia and the Ukraine.

For its 50% stake, BP will pay AAR $3 billion in cash on completion of the deal and three subsequent payments of $1.25 billion/year in BP shares, valued at market prices before each annual payment.

The transaction is scheduled for completion in the summer and will be effective retroactive to Jan. 1. Last year, BP completed a transaction with AAR to increase its stake in Sidanco (OGJ, Apr. 29, 2002, p. 37).

BP said the deal would be immediately accretive to cash flow, earnings/share, and return on capital employed, and it expected to improve performance significantly over the next 4 years through synergies, cost reductions, and output growth.

Chief Executive John Browne described the transaction as "a major strategic step into a country with massive oil and gas reserves and immense potential for future growth."

"BP entered Russia 5 years ago when we bought 10% of Sidanco. We had a tough time initially, but after the present management and ownership structure was established early in 2001, we have gradually built an important, mutually beneficial relationship with the owners of AAR and learned a great deal about doing business in Russia," Browne said.

After a "very thorough" analysis of the assets involved, BP executives decided that it was time "to deepen our partnership with AAR," Browne said. "We believe this to be a great moment in the history of BP and of TNK/Sidanco and, indeed, an important milestone in the history of the industry. . . ."

A 10-member board will govern the new company, with members nominated equally by BP and AAR. AAR will nominate the board chairman, and BP will nominate the chief executive and provide significant management and technical resources to the new company. BP and AAR intend to apply Western principles of corporate governance.

The new combined company will have production of some 1.2 million b/d of oil a day. BP estimates that the oil and gas resources are at least 5.2 billion bbl.

BP's share of resources will be in line with its 50% interest in the company. Its share of oil production will total more than 500,000 b/d. More than 40% of the output is exported as crude and 15% as refined product, both at international prices. The remainder is sold domestically at lower prices.

The assets being contributed by BP to the new company include its holding in Sidanco, its stake in Rusia Petroleum, its interest in the Sakhalin V exploration license, and its holding in the BP Moscow retail network.

AAR is contributing its holdings in TNK and Sidanco, its share of Rusia Petroleum, its stake in Rospan gas field in West Siberia, and its interest in the Sakhalin IV & V exploration license.

Neither AAR's association with Russia-Belarus state-controlled Slavneft JSC, nor BP's interest in LukArco or the Russian elements of BP's international businesses such as lubricants, marine and aviation, are included in the transaction.

Tyler Dann, analyst with Banc of American Securities LLC said, "It appears either that BP has more confidence than its peers in the investment climate in Russia or, if others are confident as BP, that BP are prepared to act more quickly than others in light of their historical experiences in the region.