Why Rosneft Still Matters to BP

The Issue

BP's large stake in Russia's state Rosneft is again in the spotlight as tensions between Russia and the West ratchet higher. The UK major has had to fend off both confusion and criticism over the past two years for its steadfast commitment to the stake, with Rosneft equity contributions excluded from BP's otherwise aggressive emissions reduction targets. Now, investors are wondering what the threats of Western sanctions might mean for BP's interest — and whether the cons of ownership increasingly outweigh its benefits.

How It Got Here

BP became Rosneft's largest private shareholder in 2013 through a complex deal that saw the UK major sell its 50% stake in the TNK-BP joint venture to the Russian state firm for $12.48 billion in cash and an 18.5% stake in Rosneft. BP also received the power to nominate two members to Rosneft's board — positions which are currently held by BP CEO Bernard Looney and former CEO Bob Dudley. Combined with the 1.25% it already owned, BP's interest rose to a 19.75% voting interest. BP now has a 22% financial interest in the company due to changes in Rosneft’s shareholdings.

That interest is BP’s largest single asset, and it plays a key role in its current and future strategy.

Rosneft Means Low-Cost Oil

Rosneft represents BP’s largest low-cost oil asset at a time when investors see low-cost reserves as the only ones worth paying for. In fact, Russia accounts for nearly 55% of BP's proved liquids reserves and 44% of its proved gas reserves.

The UK major doesn't have large exposure to advantaged Permian Basin tight oil as its US peers do, with its position modest relative to the company's size. Nor does it boast the same level of exposure to resilient Middle East oil (like TotalEnergies), Brazil's pre-salt (like Total and Shell), or Guyana (like Exxon Mobil).

Instead, BP leans on equity barrels from Rosneft to contribute 1.1 million barrels of oil equivalent per day of output — equivalent to one-third of BP's production in fourth-quarter 2021. Rosneft's oil-biased profile tips BP's oil weighting from 48% for its in-house production to 58% on an equity basis.

With Rosneft's average lifting costs of $2.70 per barrel among the lowest in the world and well-below BP's internal target of $6/bbl by 2025, those are some premium barrels to have on hand.

Diverging upstream strategies will further weight BP's production and reserves profile toward Rosneft's contributions. The UK major plans to sell enough assets between now and 2030 to lower its in-house production by 40%. By contrast, Rosneft plans to boost its oil and gas flows from just under 5 million boe/d to 6.2 million boe/d. If BP's stake holds firm, Rosneft’s contribution to total BP production would rise to more than 40% as a result.

It also means that, on an equity basis, BP's production would decline by 2.6% by 2030 — a far cry from the 40% headline declines articulated as part of its transition strategy.

Bottom Line Boost

BP is meanwhile able to book Rosneft earnings associated with its interest in its own results. Given the Russian giant’s strong recent performance, such accounting has been a boost to BP's bottom line. By some standard accounting measures, Rosneft was BP’s second-most lucrative business unit after its upstream oil business in 2021, a year when the company had its best earnings since 2014.

Rosneft also contributes cash dividends to BP's coffers, typically equating to 50% of its net profit paid. BP received a $464 million-equivalent interim dividend in the fourth quarter after netting out taxes, based on Rosneft’s performance in the first half of 2021. Dividends paid to BP have tallied more than $2.5 billion over the past four years.

Long-Term Value, Long-Range Questions

The contributions of BP's Rosneft stake are clear. What BP will do moving forward is not.

Rosneft’s emissions are currently not included in BP’s otherwise ambitious climate goals, to the ire of a growing number of investors. Many such investors similarly see the Russian firm's oil and gas growth plans as incompatible with BP's pivot toward reduced emissions and low-carbon energy.

So far, the book value of BP’s Rosneft shares has increased more than 78% since that 2013 deal, but gains have been hit of late by worries that tensions over Ukraine will lead to Western sanctions that will harm the Russian state oil giant.

Indeed, rising oil prices helped boost Rosneft shares on the Moscow Stock Exchange to a record of more than 655 rubles ($8.27) per share last October. But the threat of sanctions has hit the Russian stock market in general and Rosneft shares in particular in recent days, with Rosneft shares plunging almost 30% in the past week. Those losses shrunk the value of BP's stake from just over $14 billion to around $10.8 billion since Feb. 16.

But Looney has shrugged off the threat. “Our job is to focus on the business — our business — which is what we're doing,” the BP chief told investors earlier this month. “If something comes down the road, then obviously, we'll deal with it as it comes down the road.”

Should BP ever look to sell, the share price may have little bearing on the decision. Any sale would be seen as a strategic investment in Russia itself, with its value reflecting a range of factors beyond Rosneft's bottom line.