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BP's Options Limited Without Rosneft Alliance, Says Moody's

The collapse of a strategic alliance between BP plc and Russia's largest producer, OAO Rosneft, would limit the options for the UK-based company and its other Russian partnership, TNK-BP, and would result in a negative impact on credit, Moody's Investors Service analysts said Monday.

In January BP agreed to swap $7.8 billion in stock with Rosneft and set up a joint venture to explore about 125,000 square kilometers in the South Kara Sea in the Arctic region (see Daily GPI, Jan. 18). The Kara Sea may hold 100 billion boe of oil and gas resources, or more than the UK's North Sea.

The transaction, which is estimated to be worth an estimated $16 billion, is considered to be the centerpiece of BP CEO Bob Dudley's strategy to right the company following the Gulf of Mexico oil spill tragedy. However, talks collapsed after members of the TNK-BP consortium won a legal challenge blocking the alliance (see Daily GPI, May 10). BP and Rosneft agreed to continue to negotiate, but Rosneft also is said to be seeking an alternate partner.

"The fallout is likely to constrain strategies and raise questions about the sustainability of TNK-BP," Moody's analysts wrote. "BP's ability to pursue growth initiatives in Russia is curtailed until it resolves its differences with its current Russian partners."

The failure of the talks is neutral for Rosneft, said the analysts, because the state-owned producer should be able to find another partner to work in the Arctic region. Among the suitors apparently vying for the right to jointly explore the region are ExxonMobil Corp., Chevron Corp. and Royal Dutch Shell plc.

"Although Rosneft indicated that there is still scope for further talks on cooperation with BP, the demise of the original alliance is a credit-negative development," said the analysts. "BP ambitions to gain access to Russia's offshore Arctic oilfields through a strategic alliance with Rosneft were dealt a blow."

Russia's Energy Minister Sergei Shmatko told reporters on Monday that he doesn't expect BP and Rosneft to complete their agreement. However, he said the two producers were continuing discussions this week.

"In its current form, the deal has become a burden," Shmatko reportedly said. "I don't believe there's any chance of reincarnation of the deal in its current form."

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