BP's reviewed strategy is to be spearheaded by a joint venture with Russian group AAR. The company's announcement of below-target, yet competitive, results was overshadowed by the possible $13-16 billion combination of TNK and Sidanco. BP must, however, leverage all its experience to unlock the full potential of Russian oil.
BP and AAR (Alfa Group and Access/Renova) have agreed to combine their Russian oil interests in a 50/50 joint venture. Under the terms of the deal, BP will pay AAR $6.75 billion over three years to turn its 25% stake in Sidanco into a 50% stake in the new company. AAR owns TNK, which in turn holds a majority stake in Sidanco. The deal is subject to regulatory approval, but is expected to close in the summer.
The move has been discussed for some time, and fits well with BP's reviewed strategy. A retreat from production growth targets (2002's target was badly missed) has been replaced by a renewed focus on profitability and high-return investment. Thus, BP has divested mature assets such as those in the North Sea, in favor of newer fields in growing areas.
Russia represents a huge opportunity, having the large fields and low-cost production that BP has prioritized. The new company would be the third biggest Russian oil producer, behind Lukoil and Yukos, with reserves of up to 8.9 billion barrels of oil equivalent. Russia has steadily advanced its position in global oil supply, with production volumes growing rapidly over the last 5 years.
Russia's attractiveness is compromised by the problems of doing business within a shaky legal framework, and historically weak corporate governance in the oil industry. Both aspects have improved since BP was stung upon entering Russia in 1997, but further reforms are needed. BP hopes that its 50% board presence, insistence on western business practices, and first-hand experience in Russia, will enable it to maximize the return on its investment.
The announcement came as BP reported a 25% drop in full year profits, compared to 2001. The results undershot 2002 targets, due to the missed production goal, but remained competitive to rivals ExxonMobil and Shell.
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