In what could be the defining move of CEO Bob Dudley’s tenure, BP has confirmed that it is looking to sell its $25 billion TNK-BP joint venture after receiving what it has called “unsolicited indications of interest” from an unnamed third party.
In what is almost certainly an end to the company’s involvement in Russia for the foreseeable future, BP’s executive board resolved to sell out of TNK-BP – a partnership between BP and Russian billionaire investors in Alfa-Access-Renova (AAR) on Thursday afternoon.
TNK-BP accounts for around 30% of the supermajor’s reserves and production and is Russia’s third largest oil producer. Excluding TNK-BP’s 900,000 barrels per day (bpd), the company’s group-wide production will fall to below 3 million bpd for the first time since 1997.
BP paid $8 billion into the JV in 2003 and says it has drawn over $19 billion in dividends from the venture since. The firm’s 50% interest is now said to be worth between $25 and $35 billion.
Despite healthy revenues the partnership between BP and billionaires’ conglomerate AAR has been mired in disputes for several years. Dudley had to quit Russia in a hurry in 2008 after AAR forced him out as CEO of TNK-BP and made criminal allegations against him.
The JV’s Mikhail Fridman quit on Monday, citing irreconcilable differences between the 50/50 JV partners. Industry analysts say that the source of the dispute was ultimately over the underlying vision of the company. AAR saw the JV as a way into BP itself, whereas BP saw TNK-BP was a separate Russia-only deal which would not challenge its business elsewhere or influence the rest of BP’s operations. There is speculation that the “unsolicitied indications of interest” are long-standing ones from AAR itself, and that BP is willing to sell up now to avoid AAR attempting to take control of BP wholesale.
BP tried to sign an arctic exploration partnership with Russia’s Rosneft last year, prompting a law suit by AAR and accelerating the deterioration of already frosty relations between the partners.
David Peattie, head of BP’s Russia business, told the Financial Times on Friday that the company remains committed to Russia, but it seems the feel is not mutual, and it is unclear exactly where Russian opportunities lie for BP.
Dudley is working hard to move BP away from the supermajor model and transform it into a nimbler, more upstream-focused oil company. The move has been triggered by the Macondo disaster in the Gulf of Mexico in 2010, which forced the sale of $38 billion of BP’s assets, and left the aggressive growth-by-acquisitions strategy devised by John Browne in tatters.
If the sale goes ahead, Dudley will likely divest around $10 billion to shareholders, leaving a war chest of up to around $25 billion to pursue a new growth strategy that BP shareholders have long been calling for. The move could see oil junior getting snapped up, and a speculative premium may be placed on oil companies in markets thought to be targets for BP.
Failure by Dudley to persuade investors that the TNK-BP receipts will be wisely spent could see BP come under pressure to pay out further funds or become a takeover target.
It also seems unthinkable that BP is not – despite its protestations to the contrary – at least considering following in the footsteps of ConocoPhillips and hiving off its low-margin downstream business as part of a drive for a diverse and high-quality upstream portfolio.
Shares in BP closed 1.8% higher at 402p on the London Stock Exchange Friday, suggesting investors remain unsure what to make of the move. Shares are down 14.1% over the year.
