BP Buys Sidanco Stake for $375M

BP announced Tuesday that it would boost its stake in Sidanco to 25 percent in a $375 million deal that marks the latest chapter in a saga about the desirability and risks of Russia's oil industry.

Added to its original 10 percent stake purchased in 1997, BP will hold a blocking stake in the medium-size oil producer.

"This purchase underlies BP's confidence in Russia and its improving business environment," BP chief executive Lord Browne said. "Over the last few years Sidanco has refined its costs, strengthened its balance sheet and increased its focus on the upstream business. With this foundation, Sidanco is well-positioned to compete in the Russian market."

The deal values Sidanco -- which produces about 380,000 barrels of crude per day at its western Siberian facilities -- at $2.5 million. This is a far cry from the $5 billion that Sidanco was estimated to be worth in 1997.

"We welcome BP's increased participation as a shareholder in Sidanco and its enhanced management commitment," said Mikhail Fridman, chairman of Alfa Group. Alfa Group jointly with Access/Renova will own 56 percent of Sidanco after the new deal is concluded.

"We view this transaction as an important step in developing our cooperation with BP, and as a signal of renewed investor confidence in Russia," Fridman said.

Fridman, however, was marching to a different tune in November 1999 when he helped orchestrate the purchase of Chernogorneft -- a subsidiary that provided Sidanco with most of its crude output -- for $176 million at a scandalous bankruptcy auction.

BP cried foul and took its cause to the court of world opinion, putting the spotlight on bad corporate governance exercised by many Russian companies at the time.

Alfa Group, Tyumen Oil Co. (50 percent owned by Alfa Group) and BP began to make amends last year, and a deal to return Chernogorneft to Sidanco was struck in August. The deal valued Sidanco at $1.5 billion, a figure much smaller than the $2.5 billion suggested in Tuesday's deal.

After the announcement of the August peace agreement, BP began to express an interest in increasing its exposure to Russia. The British-based oil company is engaged in a drawn-out courtship with TNK, Russia's No. 4 oil producer, and the two have participated in preliminary talks concerning BP's possible purchase of a stake in TNK.

"The purchase may be a prelude to BP taking a stake in TNK itself," Troika Dialog said in a research note.

However, a TNK official said BP has not been promised that the assets of TNK and Sidanco will be merged. "BP and TNK's partnership is still young and has a long way to go," the official said. "People should not interpret our deepening relationship as a definite merger."

While the Sidanco deal is a positive signal for Russia's second-tier oil companies, it is not a definite sign that confidence has fully returned, said Adam Landes, an oil analyst with Renaissance Capital. "This is not the most aggressive move that BP could have undertaken."

Elsewhere in Russia, BP has a 33 percent interest in Rusia Petroleum -- which holds the license to the potentially lucrative Kovykta gas condensate deposit -- 34 gas stations in Moscow and joint bidding agreements with Rosneft and Sakhalinmorneftegaz for the potential exploration of Sakhalin-4 and Sakhalin-5.

Since the situation in the Middle East began to destabilize after the Sept. 11 attacks, Russian reserves have become a viable alternative for global oil majors.

Russian oil companies on average have enough reserves to last them 30 years at their current production rate. Multinationals have about 8 years.

Renaissance Capital estimated that BP is paying $0.26 per barrel of proven reserves under the deal. This compares with $6 per barrel paid by BP's rival Royal Dutch Shell for the reserves of North Sea player Enterprise Oil in a deal earlier this month, according to Reuters.