Rosneft, BP ink global alliance, Arctic deal

Alan Petzet
OGJ Chief Editor-Exploration

HOUSTON, Jan. 17 -- Rosneft and BP PLC have agreed to form a strategic global alliance that includes a stock swap, an Arctic offshore exploration joint venture and research effort, and a refining partnership.

Rosneft and BP called the agreement “historic” because it creates the first major equity-linked partnership between a national and international oil company.

When it has been completed, Rosneft will hold 5% of BP’s ordinary voting shares in exchange for 9.5% of Rosneft’s shares. BP already has a 1.3% shareholding in Rosneft, and as a result of the latest transaction, BP’s stake in Rosneft will increase to 10.8%

The aggregate value of the shares in BP to be issued to Rosneft was $7.8 billion at London market close Jan. 14. The transaction is subject to certain listing approvals and the completion of administrative requirements. It is expected to complete within a few weeks.

“The share swap component of the alliance creates strategic alignment to pursue joint projects and demonstrates mutual confidence in the growth potential of both companies,” they said.

Rosneft and BP will form a joint operating company in the next 2 years with a 66.67% and 33.33% participation, respectively.

Arctic shelf exploration
The two companies agreed to explore and develop the EPNZ 1, 2, and 3 blocks in the underexplored South Kara Sea basin in relatively shallow water on the Russian Arctic continental shelf.

These licenses were awarded to Rosneft in 2010 and cover 125,000 sq km in a highly prospective area of the South Kara Sea. This is an area roughly equivalent in size and prospectivity to the UK North Sea, the two companies said.

Between EPNZ-3 and the Yamal Peninsula lies Rusanovskoye, a supergiant gas field in an area navigable only 2-3 months/year without the aid of icebreakers.

Undeveloped Rusanovskoye, discovered in 1989 in 50 m of water, could hold as much as 282.4 tcf of recoverable gas (see map, OGJ, Aug. 6, 1990, pp. 28-29). Exploration plans during the Soviet era called for tests of at least nine other structures in the Kara Sea’s southwest arm, and two other giant and possibly supergiant Yamal Peninsula fields were known to have major extensions beneath the Kara Sea.

BP and Rosneft also agreed to establish an Arctic technology center in Russia that will work with leading Russian and international research institutes, design bureaus, and universities to develop technologies and engineering practices for the safe extraction of hydrocarbon resources from the Arctic shelf. The technology center will build on BP’s deep offshore experience and learnings with full emphasis on safety, environmental integrity, and emergency spill response capability.

Rosneft and BP agreed to continue their joint technical studies in the Russian Arctic to assess hydrocarbon prospectivity in areas beyond the Kara Sea. A presentation slide called attention to the greater Sakhalin Island area Russia’s entire Arctic shelf from Yamal-Kara to the Russian Far East.

Wider refining partnership
Rosneft and BP will seek further opportunities for international collaboration beyond their 50-50 joint venture partnership in Ruhr Oel GMBH, a refining joint venture in Germany.

The Ruhr Oel partnership is subject to completion of Rosneft’s recent purchase of 50% of Ruhr Oel from Petroleos de Venezuela SA (OGJ, Jan. 3, 2011, p. 90).

Rosneft said in October 2010 that it had agreed to buy from PDVSA 50% of Ruhr Oel, a German refining joint venture with BP (OGJ Online, Nov. 5, 2010).

Other financial aspects
The swap ratio is based upon the volume weighted average prices of the shares of the two companies across all exchanges in which significant numbers of shares of the companies, (and associated American Depositary Receipts and Global Depositary Receipts), are traded (Moscow, London, New York) over the fifteen trading days in which all three exchanges were open, beginning Dec. 9, 2010, and ending Jan. 12, 2011.

BP has agreed to issue 988,694,683 ordinary shares to Rosneft; Rosneft has agreed to transfer 1,010,158,003 ordinary shares to BP.

The shareholdings being exchanged are subject to mutual lock-up restrictions for a period of 2 years (subject to limited exceptions). After the lock-up period, the exchanged shareholdings of BP and Rosneft will be subject to certain disposal restrictions.

Rosneft, Russia’s leading oil producing company, produces some 2.4 million b/d of oil equivalent and has reserves of 15.146 billion boe. It produces oil in all key regions of Russia.

BP and Rosneft started an alliance in 1998 that eventually led to the formation of three joint ventures to conduct exploration on the Russian continental shelf off Sakhalin. In January 2006 the two firms launched a scientific research study to evaluate the Russian Arctic.

Other Soviet background
The Kara Sea covers 341,000 sq miles; water depth averages 120 m and extends at least as deep as 200 m.

However, just east of Novaya Zemlya lies the huge Novaya Zemlya trough, with water more than 500 m deep in some places. The trough extends nearly the full length of the 500-mile long Novaya Zemlya Island, part of the boundary between the Kara Sea and Barents Sea basins. The Rosneft-BP blocks lie generally east of the trough.

In the Barents Sea some 200 miles west of the Kara Sea lies supergiant Shtokmanovskoye gas-condensate field, discovered in 1988 in 200-300 m of water. Shtokmanoveskoye, 350 miles northeast of Murmansk with an estimated 137 tcf of recoverable gas, is in an early phase of development by a unit of Gazprom JSC for an LNG project (OGJ Online, Nov. 29, 2010).

Contact Alan Petzet at alanp@ogjonline.com.



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