Independent, The (London): Browne insists BP's pounds 4bn move into Russian oil is a gamble he

BP'S CHIEF executive Lord Browne of Madingley admitted yesterday that the company was taking a gamble by paying $6.75bn (pounds 4.17bn) for a half stake in what will be Russia's third biggest oil company.

But he insisted that the risks were "limited and manageable" and that BP had learnt the lessons from the past when it was badly burnt by its initial foray into the Russian market.

Unveiling the deal, to be financed with $3bn in cash and $3.75bn in BP shares payable over the next four years, Lord Browne said: "Of course, we recognise that many people regard Russia as a risky place in which to invest. But we believe we have learnt a great deal over the last few years which will mitigate that risk ... we've designed the transaction in a way that will ensure that there is a genuine continuing common interest in success."

The deal, negotiated over the past year and signed early yesterday morning in Moscow, puts BP in bed with the same group of businessmen whom it accused three years ago of trying to cheat it out of valuable oil assets after it purchased an initial 10 per cent stake in the Siberian oil producer Sidanko in 1997. The legal dispute was settled in 2001 through a deal that enabled BP to raise its stake in Sidanko to 25 per cent and take management control but not before it had been forced to write down its initial investment.

The new joint venture company brings together BP and Alfa-Access- Renova, the Russian parent companies which own Sidanko and the larger Russian oil company TNK.

The new company will have oil production of 1.2 million barrels a day and reserves of at least 5.2 billion barrels, catapulting it into the ranks of Russia's big three oil groups behind Lukoil and Yukos. The deal will increase BP's reserves by 60 per cent and its daily production by about 15 per cent. The new joint venture will also own five oil refineries and a network of 2,100 petrol stations across Russia and the Ukraine. Currently, 44 per cent of its production is exported.

Lord Browne said that among the safeguards, the new company would be incorporated outside Russia and would apply BP's standards of corporate governance. BP will also appoint five of the company's 10 directors, including the chief executive. Under a lock-in deal, its Russian partners will have to retain their shareholdings in the new joint venture until at least the end of 2007.

Lord Browne described the deal, which creates a sixth profit centre for the group as "a great moment in the history of BP" and added that the transaction would make Russia "a very important element in the long-term renewal of BP".

The market welcomed the deal, which coincided with news of a $2bn share buy-back by BP and the formal abandonment of its much-reduced production growth targets, and BP shares closed 4 per cent higher. BP posted a 25 per cent reduction in adjusted profits to $8.7bn for last year.

Although analysts questioned the premium BP was paying for its half-stake in the new Russian venture, with some putting it as high as 50 to 90 per cent, Lord Browne said the deal would be earnings enhancing immediately. He also said that in the longer term it could generate $7.5bn in cost savings and revenue enhancements.

He said that the extensive examination BP had carried out into the deal would allow "all parties to protect their assets and not adversely shift liabilities between each other".

BP's Russian roulette, page 22

Outlook, page 23