BP and Russia's state-controlled Rosneft agreed to a share swap under which they would jointly explore for offshore oil and gas, in a deal that immediately raised concerns in the United States about Russia's global oil ambitions.
BP, recovering from its Gulf of Mexico oil spill, said Friday it will swap 5 percent of its shares, valued at $7.8 billion, for 9.5 percent of Rosneft. BP said it will issue new shares to Rosneft.
BP shares [BP 49.25 1.71 (+3.6%)] rose sharply in regular trading Friday as word of the swap leaked out.
But shares fell in after-hours trading because BP will issue new shares to the Russian company, diluting current shareholders' holdings. (Click here to see latest quote.)
The deal covers areas in the South Kara Sea in the Arctic that BP said could contain billions of barrels of oil and gas.
The deal, which is expected to be completed in a few weeks, highlights a sharp turnaround in relations with Moscow both for BP and its Chief Executive Bob Dudley, who was forced to flee Russia in 2008 after heading BP's Russian joint venture, TNK-BP, which is half-owned by BP.
Dudley said the deal was the first significant cross-shareholding between a nationally owned oil company and an international oil company.
Dudley called the deal "a new template for how business can be done in our industry...This is truly the first alliance fit for the 21st century."
Dudley had been the boss for TNK-BP's formation in 2003 and was forced to leave due to what he described as a campaign of harassment by BP-TNK's billionaire oligarch co-owners.
The issue has since been resolved and Dudley returned to Moscow for the first time this summer, following his appointment as CEO of BP, to be warmly welcomed by officials.
Tony Hayward, Dudley's predecessor who was vilified for his handling of BP's massive Gulf of Mexico spill in 2010, holds a seat on TNK-BP's board of directors.
"They've chosen to get into that part of the world to expand reserves and for future growth in production," Michael Cuggino, CEO of Pacific Heights Asset Management and a BP shareholder, said.
"So I don't know if this is something new, or just a recommitment to that strategy. The problem is they had a difficult time a few years ago," he said.
Russia is a key part of BP's global operation, providing the company with a quarter of its reserves before the U.S. oil spill, so it is vital for Dudley to establish a good working relationship with the world's largest oil exporting nation.
Congressman Edward Markey, who is the top Democrat on the House Natural Resources Committee, immediately called for a review of the deal by U.S. regulators.
BP has a market capitalization of $150 billion, while Rosneft is valued at about $83 billion.
BP's deal with Rosneft gives BP access to highly sought after reserves of oil and natural gas in Russia's remote Arctic region.
Russia, the world's top oil producer with output of more than 10 million barrels of oil per day (bpd), estimates that its Arctic zone holds about 51 billion tonnes of oil, or enough to fully meet global oil demand for more than four years.
"Rosneft is well aware that its ability to do deepwater Arctic work alone is very limited," Cliff Kupchan, Director of the Eurasia Group in Washington, said. "They have been looking for ways to bring in companies with the technology and especially management skills needed to pull off deepwater Arctic work."
Russia wants to encourage oil exploration and production in its icy Arctic waters, but in the wake of BP's Gulf spill, Russian officials and experts warn that a similar accident in the Arctic could turn out far worse.
The BP-Rosneft discussions "are ones that have happened over a number of months and are not in reaction to anything in the United States," Dudley told a London new conference.
"This is part of BP's strategic direction of access to large hydrocarbon basins and we have had a strong relationship with Rosneft for a long time." Russia has increasingly been looking to raise its influence on the global financial stage, with major companies—including state-controlled ones—seeking foreign acquisitions.
Some deals have come under fierce opposition in the countries involved, such as Surgutneftegas's purchase of a stake in Hungary's MOL. Others, like Sberbank's bid for German carmaker Opel, collapsed.
Prime Minister Vladimir Putin's government has also pledged to ease investors' access into Russia as it looks to foreigners to play a key role in helping to modernize the economy—including through taking part in a big privatization drive starting this year.
Britain's new coalition government has attempted to improve relations with Moscow -- tense since the murder of ex-KGB agent Alexander Litvinenko in 2006—although tensions resurfaced last month with the expulsion of a Russian diplomat from London.
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