Taking a stake in Rosneft is a big gamble for BP | Nils Pratley

The demand to the board from many BP shareholders was loud and clear – when getting out of TNK-BP, make sure you maximise the cash proceeds and minimise the number of Rosneft shares you accept as part-payment.

BP has done the opposite. It will end up owning almost 20% of Rosneft and has even agreed to buy a 5.66% slug from the Russian government at 12% above the market price; the overpayment amounts to $500m extra for the Kremlin, hardly a trivial sum even the context of a $27bn transaction. Overall, some $12.3bn will return to London in cash – nice to have, but less than hoped for.

Given the backdrop, you might have assumed that BP chief executive Bob Dudley would seek to reassure the doubters by talking up the exciting exploration adventures to be undertaken in the Arctic with Rosneft. But there were no new Arctic ambitions to report. Maybe they will follow once the oligarchs at AAR, the other half-owner of TNK-BP, are safely off the scene.

Instead Dudley asked BP shareholders to consider Rosneft purely as a wonderful investment opportunity: “Rosneft is a company working to become a global leader in the sector. It is developing its substantial asset base with new technologies and improving its management processes and corporate governance. As a major investor BP looks forward to being able to contribute to Rosneft’s success and add value through our participation on the board.”

Okay, the arrangements may turn out to be mutually beneficial for many decades if the Kremlin, which will still own 69.5% of the stock, really has decided that it wants Rosneft to adopt western-style governance and practices. In that case, BP’s timing in aligning itself with Russia‘s oil champion may be perfect and Rosneft’s share price, asleep for the past half-decade, may awaken.

On the other hand, nobody would pretend that life as a minority shareholder in a President Putin-controlled company will be a bed of roses. BP will appoint two directors to Rosneft’s nine-strong board. That’s better than having only a token representative but can hardly be viewed as a solid power base in the event of quarrels.

Dudley’s hands, to some degree, were tied since the option of a clean cash exit from Russia was never on the table. A foreign oil company that invested $8bn in 2003 and has taken out $19bn in dividends (BP’s record at TNK-BP) would not then be allowed to wave goodbye to the country with a further $27bn lump sum. Some form of new partnership with the state was inevitable.

This deal, then, may be the best that BP could achieve. But tying up $15bn of capital – more than 10% of BP’s market value – in a single illiquid stock is a big punt. Come back in a decade to learn whether a Rosneft revolution happened.

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