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BP's (NYSE: BP) Russian Crude Deal

Brian Hicks

Written By Brian Hicks

Posted November 13, 2013

Russia’s Rosneft (MM: ROSN) announced Tuesday that it struck a deal with BP (NYSE: BP) to sell $6 billion worth of refined products to the British oil and gas giant.

Russia’s top crude oil producer will make BP one of its biggest buyers after years without any such deal between the two. This latest transaction comes on the heels of an agreement earlier this year that would let BP buy $5.3 billion of crude oil from Rosneft.

RosneftRecently, BP also launched itself to become Rosneft’s largest shareholder, with a nearly 20 percent stake in the company as Rosneft closed its $55 billion takeover of TNK-BP in March. The Russian government still controls 69.5 percent of the company.

Most of the volumes from these contracts will make their way to China, as BP is buying large shipments of straight-run fuel oil, typically processed by smaller, independent refineries in China.

Both companies declined to comment on each deal, and there is no time frame for deliveries, but those familiar with each side suggest shipments within the next 12 months or so.

History

If we know anything about Rosneft and the way it has conducted business in the past, we would also know that, traditionally, it has always been Royal Dutch Shell (NYSE: RDS-A) that gets a first crack at Rosneft’s oil and refinery products.

So where on earth did BP come from?

It just so happens that both contracts – one for $5.3 billion and one for $6 billion – come only months after Rosneft hired a man named Marcus Cooper, who for years worked for BP as a senior trader, according to Reuters. Just last year, Cooper took over Rosneft’s Geneva office.

The first deal – a breakthrough in itself – came in October when BP agreed to buy $5.3 billion of crude oil from Rosneft.

This came as a surprise for many of us, as we saw BP get shut out of Rosneft’s bid to tap the Russian Arctic. Exxon Mobil (NYSE: XOM) would sign on in a number of offshore deals.

And seemingly out of the blue, BP and Rosneft came to another agreement, this time for $6 billion, after many years in which BP has been absent as a Rosneft buyer – usually a spot reserved for Shell.

But Rosneft seems to be repositioning its portfolio. It has sold large amounts of crude to trading houses Glencore, Vitol, and Trafigura, gathering as much as $11.5 billion in pre-payments in an effort to free up its balance sheet, according to Reuters.

Included in the announcement of Tuesday’s deal, Rosneft also agreed to sell up to 3.2 million metric tons of fuel oil worth up to $2.6 billion to BP Singapore, according to Global Times, between November 2013 and December 2014. That contract could be extended into 2015.

In more BP dealings, Rosneft will also sell up to $1.77 billion of diesel from its Black Sea holdings and as much as $1.62 billion of fuel oil from the Baltic Sea, with an additional $65 million from its Tuapse port in the Baltic, according to Reuters.

TNK-BP

And then there is the TNK-BP Holding that Rosneft purchased in March – its largest takeover ever. Last Wednesday, Rosneft said it was debating whether to delist its TNK-BP shares if an offer to buy out minority shareholders fell through.

This ultimatum presented to shareholders has ruffled more than a few feathers, leaving investors who followed the Rosneft takeover to feel like they’re being squeezed out.

The deal left shareholders with a 5 percent stake in TNK-BP, later renamed RN-Holding (MM: RNHS).

In September, Rosneft offered shareholders 67 roubles ($2.06) per ordinary share and 55 roubles per preferred share, according to Reuters. Investors were hoping to get something closer to $3.70 per share.

Rosneft will proceed with its initial offer, effective for the next 75 days from last Wednesday, until January 20.

No matter how it turns out, RN-Holding could still be delisted.

The Investor

Needless to say, these ramblings gave RN-Holding a less than warm response from investors not knowing which way to go.

But BP is poised to make a run for the Chinese market, with its sights set on building that empire into next year.

And as BP and Rosneft deal more frequently, it looks more and more like BP will be the right hand of Rosneft’s onshore energy projects.

BP should be the focus for U.S. investors, as Russian stocks are currently too unstable to present anything concrete.

For now, let’s look at BP and China.

 

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