Pioneer Deal or Russian Roulette? ; BUSINESS ANALYSIS BP's Lord Browne Is Heading an Oil Rush into the East - but It's Not without Risk
Harrison, Michael, The Independent (London, England)
FOR A deal that transports BP further and deeper into Russian territory than any other Western company, let alone any other oil major, the secret codename given to yesterday's $13.5bn oil merger was anything but Eastern in flavour.
Project Whitbread conjures images of warm beer drunk on a sunny afternoon whilst watching the cricket on some pleasant English green. But BP's purchase of a 50 per cent stake in Russia's third biggest oil producer for $6.75bn takes it firmly into the icy cold of Siberia and Sakhalin, and to some of the biggest untapped oil and gas resources in the world.
At a stroke, yesterday's three-way deal with Alfa and Access- Renova, the parent companies of Russia's Sidanko and TNK, will increase BP's reserves by at least 60 per cent and its total oil and gas production by 15 per cent. But it is also a gamble, as BP's chief executive, Lord Browne of Madingley, admitted.
It is not a gamble BP needed to take right now, even though its traditional oil fields in the North Sea, Gulf of Mexico and Alaska long since became mature. BP continues to replace production with new reserves at a prodigious rate and it has identified five new profit centres, from Trinidad and Azerbaijan to Angola and the Asia Pacific, which will help lift output by a fifth over the next four years to 4.3 million barrels a day, before its new Russian joint venture has even been factored in.
And as BP's new mantra now has it: production growth is not sacrosanct. Pumping more and more barrels may still be important, but what is even more vital is the profit made on each one of them.
Gamble or not, BP's bold move may be just the catalyst to start a new oil rush into Russia by its fellow Western oil majors - provided they can find the exploration companies to partner up with.
All of the big oil companies of the West, from Exxon-Mobil through to TotalFinaElf are investing in Azerbaijan and Kazakhstan. But it is the corridor from Sakhalin in the Far East through Siberia and on to the Caspian in the south-west where analysts believe the real black gold lies. And it is a region in which BP has now firmly planted its flag following yesterday's deal with TNK and Sidanko, respectively the fifth and eighth biggest oil companies in the burgeoning Russian market.
The deal gives BP a half share in production of at least 1.2 million barrels a day and reserves estimated at anywhere from 5.2 billion to 8.6 billion barrels depending on whether you believe the Brits or the Russians. The Kovytka discovery in eastern Siberia alone is estimated to contain 2 billion barrels of oil and 60 trillion cubic feet of gas.
Analysts estimate the proven reserves of Russia's seven biggest oil companies at more than the oil reserves of BP, Royal Dutch/ Shell, Exxon-Mobil, ChevronTexaco and TotalFinaElf put together and reckon that within a decade Russia will overtake Saudi Arabia as the world's biggest oil producer with output of more than 10 million barrels a day.
Not only that, the cost of production in Russia is a fraction of that of the oil majors of the West, making its oilfields hugely cash generative. Once the infrastructure is fully in place to export all the oil Russia is capable of producing, it could wipe the floor with producers in the West.
Steven Dashevsky, head of research at the oil brokerage Aton, says: "What Lord Browne is doing is going to differentiate BP from the rest. On a 10-year view you can't justify not being in Russia. …