Russian doll

16 October 2003

40,000 man hours of due diligence were enough for BP to feel comfortable about investing $7bn in Russia, but not investors. BP has not bet the farm on Russia with this deal. Nevertheless, it is still a punt on Russia and on continuing high oil prices.

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BP boosted the estimate of oil reserves in its $7.7bn Russian joint venture by 28% and said profits from there will improve as production rises.

The fields hold 4.1bn barrels of developed and undeveloped reserves, using US SEC rules. In August, BP gave a forecast of 3.2 billion barrels.

The TNKBP, 50/50 venture – which will account for 15% of BP's production over the next five years and add 11% to reserves would have increased BP's earnings a share by 3% in the first half of 2003 had it had been included in BP's accounts, the company said.

BP is paying $6.35bn in cash and stock for half of the company, TNKBP. In August, it also agreed to spend an extra $1.35bn to include assets from Russian oil producer Slavneft.

TNKBP's oil production will increase by 12% to 14% this year and by a further 7% next year, BP said. After 2004, supply will grow by about 5%. The venture plans to invest $1 billion a year in the ``near term,'' a lower figure than some analysts expected.

BP said payments to the venture's shareholders would be 40% of net income, and that for the first half of 2003 the payout would be 50%, or about $600m.

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