BP’s $849 Million Loss in Russia Overnight Highlights Risk

BP Plc lost $849 million on its investment in OAO Rosneft overnight, highlighting how its relationship with Russia’s state oil company may become awkward as the crisis in Ukraine develops.

Rosneft dropped 4.1 percent today to close at 234.1 rubles in Moscow. Combined with a drop in the currency, the company’s market value fell by $4.3 billion. BP holds 19.75 percent of Rosneft after selling it half of the TNK-BP venture last year.

Russian stocks tumbled as Western powers considered how to respond to President Vladimir Putin’s move to take control of Ukraine’s Crimea region, including possible economic sanctions. BP’s stake in Rosneft, run by Putin associate Igor Sechin, is the biggest single foreign investment in Russia’s oil industry and provides 30 percent of the London-based company’s production, according to Deutsche Bank AG.

“A downward spiral in Western state relations with Russia certainly puts BP and Exxon in a very uncomfortable position,” said Andrew Neff, an analyst at IHS, in an e-mailed response to questions. “I would see a period of awkwardness and discomfort, but nothing so dramatic as a withdrawal.”

BP’s stake in Rosneft, which it acquired as a long-term holding, is now worth about $13 billion. David Nicholas, a BP spokesman in London, declined to comment on Ukraine or Russia.

BP shares dropped 2.3 percent today to close at 492.9 pence in London.

Putin’s government has worked to attract oil and gas companies to invest over the past three years, signing exploration agreements with Exxon Mobil Corp., Norway’s Statoil ASA and Eni SpA as well as bringing in BP as a Rosneft investor.

Kara Sea

Exxon plans to drill its first well in the Russian Arctic’s Kara Sea with Rosneft this year. Royal Dutch Shell Plc, Europe’s biggest oil company, is a partner in the Sakhalin gas-export project in Russia’s Far East, and Total SA is developing a liquid natural gas export plant in the Arctic with OAO Novatek.

London-based Shell spokesman Jonathan French declined to comment. A Total spokesman who could not be named under company policy declined to comment. Alan Jeffers, a spokesman for Irving, Texas-based Exxon, declined to comment on Russia and Ukraine when contacted yesterday.

Russia’s Micex Index fell as much as 11 percent today, the most since 2008, and the central bank raised interest rates to counter a drop in the ruble. Brent crude prices climbed as much as 2.2 percent to $111.41 a barrel.

Cuban Missile Crisis

“The situation is spiraling to a level of conflict and misunderstanding that’s unprecedented since the Cuban Missile Crisis” in 1962, said Richard Sakwa, a professor of Russian politics at the University of Kent and a Chatham House fellow. “With talks of boycotts and other sanctions, we can only hope that companies like BP will act as a stabilizing force.”

Ukraine mobilized its army reserves yesterday and called for foreign observers in Crimea after Russian-speaking forces seized control of government buildings and airports. Putin has permission from Russian lawmakers to deploy troops to Ukraine.

BP has been involved in Russia for more than a decade. It started TNK-BP in 2003 with a group of Russian billionaires with an $8 billion initial investment. While the venture produced $19 billion in dividends, disputes with parters forced Bob Dudley, the current CEO of BP who was in charge of TNK-BP at the time, out of the country in 2008.

Rosneft bought TNK-BP for $55 billion, using stock to pay for some of BP’s shares, catapulting it ahead of Exxon to make it the biggest publicly traded oil producer by volume.

“Russia as a place for foreign direct investment would be hurt by any kind of war effort,” said Jason Kenny, an oil equity analyst at Banco Santander SA in Edinburgh. “But anyone who says that BP supporting Rosneft equates to support for Russia is missing the point of oil and gas investment, which is about long-term industry trends.”

(Updates share prices in second paragraph.)
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