[A-List] BP watch: Russian expansion

["Michael Keaney" <michael.keaney@xxxxxx>]

Browne insists BP's £4bn move into Russian oil is a gamble he can handle
By Michael Harrison, Business Editor
The Independent
12 February 2003

BP's chief executive Lord Browne of Madingley admitted yesterday that the
company was taking a gamble by paying $6.75bn (£4.17bn) for a half stake in
what will be Russia's third biggest oil company.

But he insisted that the risks were "limited and manageable" and that BP had
learnt the lessons from the past when it was badly burnt by its initial
foray into the Russian market.

Unveiling the deal, to be financed with $3bn in cash and $3.75bn in BP
shares payable over the next four years, Lord Browne said: "Of course, we
recognise that many people regard Russia as a risky place in which to
invest. But we believe we have learnt a great deal over the last few years
which will mitigate that risk ... we've designed the transaction in a way
that will ensure that there is a genuine continuing common interest in
success."

The deal, negotiated over the past year and signed early yesterday morning
in Moscow, puts BP in bed with the same group of businessmen whom it accused
three years ago of trying to cheat it out of valuable oil assets after it
purchased an initial 10 per cent stake in the Siberian oil producer Sidanko
in 1997. The legal dispute was settled in 2001 through a deal that enabled
BP to raise its stake in Sidanko to 25 per cent and take management control
but not before it had been forced to write down its initial investment.

The new joint venture company brings together BP and Alfa-Access-Renova, the
Russian parent companies which own Sidanko and the larger Russian oil
company TNK.

The new company will have oil production of 1.2 million barrels a day and
reserves of at least 5.2 billion barrels, catapulting it into the ranks of
Russia's big three oil groups behind Lukoil and Yukos. The deal will
increase BP's reserves by 60 per cent and its daily production by about 15
per cent. The new joint venture will also own five oil refineries and a
network of 2,100 petrol stations across Russia and the Ukraine. Currently,
44 per cent of its production is exported.

Lord Browne said that among the safeguards, the new company would be
incorporated outside Russia and would apply BP's standards of corporate
governance. BP will also appoint five of the company's 10 directors,
including the chief executive. Under a lock-in deal, its Russian partners
will have to retain their shareholdings in the new joint venture until at
least the end of 2007.

Lord Browne described the deal, which creates a sixth profit centre for the
group as "a great moment in the history of BP" and added that the
transaction would make Russia "a very important element in the long-term
renewal of BP".

The market welcomed the deal, which coincided with news of a $2bn share
buy-back by BP and the formal abandonment of its much-reduced production
growth targets, and BP shares closed 4 per cent higher. BP posted a 25 per
cent reduction in adjusted profits to $8.7bn for last year.

Although analysts questioned the premium BP was paying for its half-stake in
the new Russian venture, with some putting it as high as 50 to 90 per cent,
Lord Browne said the deal would be earnings enhancing immediately. He also
said that in the longer term it could generate $7.5bn in cost savings and
revenue enhancements.

He said that the extensive examination BP had carried out into the deal
would allow "all parties to protect their assets and not adversely shift
liabilities between each other".