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BP set to remain in the Caspian

Embattled oil giant BP, which is looking for ways to meet bills arising from the Deepwater Horizon blowout in the Gulf of Mexico, has numerous assets it could sell to meet its obligations, but reports that these could include Caspian Sea projects appear to be unfounded.

The company last week said it would sell some assets to cover damages and other costs associated with the blowout. The company is selling mainly some of its pipeline and oil storage assets in North America. It may also dispose of some mature or declining fields such as Alaska's Prudhoe Bay.

At the end of last month, a flurry of press reports apparently driven by the Russian-language media in the region indicated the likelihood that BP would sell all its Caspian Sea basin assets to Russian gas monopoly Gazprom. One report even said BP was going to close its Baku office before autumn.

The opposite is more likely to be the case, with the company plowing ahead with resource development in the Caspian region. To stem unfounded rumors to the contrary was almost certainly the reason behind chief executive Tony Hayward's one-day trip to Baku a week ago.

During that trip, BP and the Azerbaijan state enterprise, SOCAR, signed a memorandum of understanding foreseeing a 25-year production sharing agreement for the D8 and D10 structures in the Caspian Sea offshore from Azerbaijan, held further discussions on the deep gas production project at Azeri-Chirag-Guneshli (oil from which already fills the Baku-Tbilisi-Ceyhan pipeline), and agreed to continue to coordinate development of the Shah Deniz Phase Two natural gas deposit.

Indeed, BP continues to sign agreements for going ahead with development of its offshore assets in the Caspian Sea. Just this month it agreed a five-year master contract with the engineering and project management company AMEC for the ongoing Chirag Oil project and also the West Chirag project looking forward to Shah Deniz Two.

Exxon is reportedly seeking anti-trust permission from Washington to look into the possibility of submitting a bid for BP, a takeover that would create an energy behemoth with a market capitalization of over US$400 billion. Although Chevron is also sometimes mentioned as a suitor in the same breath, BP is so huge that the only other company that could probably bid for it would be one of the Chinese para-statal enterprises. These reports follow unsubstantiated and frankly unreasonable rumors, in late June and earlier this month, of BP declaring bankruptcy.

Any outright purchase of BP by any third party would require anti-trust approval not only by the US but also by the European Union. Such obstacles have not stopped others from contemplating significant investment in the company.

BP's corporate structure does not make the company amenable to being broken up, according to a quick study done by Citigroup. This is because BP American Production Co is heavily involved in the production and transportation of oil and gas not only in North America including the Gulf of Mexico, but in fact worldwide.

BP American Production is in a direct and integrated line of subordination from BP plc, the mother entity, via several wholly owned (and heavily indebted) intermediaries; in turn, it holds as major subsidiaries various companies involved in production around the world, including in the Caspian Sea basin (and also Latin America and South America).

The crown prince of Abu Dhabi, Sheikh Mohammed bin Zayedal-Nahayan, is only one of a number of potential investors who, while not even suggesting a takeover of the company, aver to be considering acquisition of a significant capital stake. This would involve investment not by the sheikh personally but rather by the Abu Dhabi state-owned International Petroleum Investment Co.

However, sovereign wealth funds from Persian Gulf countries are more likely to form strategic alliances or partnerships with BP for specific Middle East/North Africa projects, because this would permit BP to concentrate on providing technical know-how and proprietary expertise while conserving cash if necessary for issues arising from the blowout in the Gulf of Mexico. In particular, BP has gas projects in Algeria, Egypt, Jordan, Libya, and Oman.

Eventual liabilities from the Gulf oil spill are still unknown and to be determined, and this uncertainty could be a significant deterrent to any merger of the company with another group. The political obstacles to a merger with a Chinese firm would likely be insurmountable; however, Chinese firms as well as Russian firms have indicated an interest in purchasing BP assets in the Caspian Sea basin.

The Azerbaijani company SOCAR, for its part, has stated its readiness to "consider options" for the repurchase of Azerbaijan's offshore assets from other investors. But the head of its investment department, Vagif Aliev, is careful to underline that the firm has no intention to "corner its partners" - that is, to force BP's hand - by making such proposals.

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URL:  http://www.robertcutler.org/blog/2010/07/bp_set_to_remain_in_the_caspia.html
First published in Asia Times Online, 16 July 2010.

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