How Will Rosneft Exit Impact BP?

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Britain BP
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BP's bombshell announcement that it will start the process of relinquishing its stake in Rosneft after Russia's invasion of Ukraine dramatically changes the UK major's portfolio. It also has significant financial and strategic implications for the company.

BP's proved reserves and production without Rosneft will look very different than if it had kept its 19.75% stake in the Russian state-controlled oil giant.

In the fourth quarter, BP's equity oil and gas from Rosneft contributed 1.1 million barrels of oil equivalent per day of output — equivalent to one-third of BP's production for the period.

Rosneft's oil-heavy portfolio boosts BP's oil weighting from 48% of its "in-house" production to 58% overall.

The Russian giant accounts for more than half of BP's proved liquids reserves. It is BP's largest source of low-cost oil at a time when the resilience of reserves in the face of the energy transition is a key concern for investors.

Rosneft has put its average lifting costs at just $2.70 per barrel, among the lowest in the world and well-below BP's internal target of $6/bbl by 2025.

The loss of Rosneft's contribution will materially change BP's production trajectory.

Under BP's strategy, its own in-house production is forecast to decline some 40% over the coming decade, as the company holds upstream investment relatively flat and keeps production stable, but sells off fields with lower profit margins.

However, Rosneft's plan to grow production by more than 20% by 2030 meant that BP's overall equity production would fall by just 3% over the same period.

Rosneft's contribution to BP's financial health was not as significant as the contribution to its production and reserves. But it was still material and had the potential to grow in line with increases in oil and gas prices.

BP's share of Rosneft profits, before tax and interest, totaled just over $2.4 billion in 2021, or about 17% of BP's total for the year.

That was roughly in line with the contribution from much more high-profile BP business lines including Gas & Low Carbon, which houses its LNG operations, and Customers & Products, which includes its retail marketing arm.

BP's share of Rosneft's dividends totaled $640 million in 2021 after subtracting taxes, and investment bank Jefferies estimated that they could grow to as much as $1.6 billion in 2022.

In addition to BP's stake in Rosneft itself, the UK major has three joint ventures with Rosneft, which the company booked at a carrying value of about $1.4 billion. BP will relinquish those too.

In November, Rosneft announced the discovery of what BP characterized as a "material" gas condensate field by the Yermak Neftegaz venture with Rosneft, in which it holds a 49% interest.

Despite its importance to BP's portfolio, Rosneft, and its focus on growing its oil and gas production, was not a comfortable fit with the UK major's energy transition strategy, as analysts would often remind it.

CEO Bernard Looney was always quick to point out that Rosneft had set targets to reduce its emissions intensity and cut gas flaring and methane leakage.

Nevertheless, the lack of a strategic focus by Rosneft on either low-carbon energy or large-scale carbon capture and storage made many suspicious of the Russian company's ambitions.

Because BP's emissions goals expressly excluded Rosneft's contributions, meeting those targets will not necessarily become easier for BP to achieve now that it is parting company with Rosneft.

Corporate Strategy , Majors, NOCs, Ukraine Crisis
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