BP’s Rosneft Alliance Tested by U.K. Tough Talk on Russia

(Bloomberg) — The U.K. government has argued for some of the toughest possible sanctions on Russia. At the same time, BP Plc holds one of the single biggest foreign investments in the country.

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It’s an increasingly uncomfortable position for the British oil major — one that has prompted concerns at the highest levels of government. Business Secretary Kwasi Kwarteng is uneasy about BP’s ties to Russian energy giant Rosneft PJSC and expressed his concerns to BP Chief Executive Officer Bernard Looney at a meeting on Friday.

Yet despite the unfortunate political symbolism of BP’s 20% stake in the Kremlin-controlled oil producer, the alliance may be shallower than it appears.

In the relationship with Rosneft, BP really is “just a dividend receiver,” said Peter McNally, global head of industrials, materials and energy at Third Bridge, a provider of market intelligence. “They’re not being asked to pony up capital. It’s much more hands off than TNK-BP,” which was BP’s previous Russian venture, he said.

A quick glance at BP’s 2021 earnings shows Rosneft accounting for a third of the London-based company’s total oil and gas production of about 3 million barrels a day. But that really is just a matter of accounting, BP doesn’t have direct stakes in any of Rosneft’s fields nor physical access to the hydrocarbons they produce.

Instead, it receives an annual payout from Rosneft, which amounted to $640 million in 2021 compared with BP’s total operational cash flow of $23.6 billion. The dividend was zero the year before.

There is the risk of “some sort of sanction package that limits the ability to move money to and from investments made in Russia,” said Jefferies analyst Giacomo Romeo. Yet even with sky-high oil prices, he expects the Rosneft dividend to amount to just 5% to 6% of BP’s cash flow from operations this year.

Read More: U.K. Government Summoned BP’s Looney to Explain Rosneft Links

After Russia invaded Ukraine, a BP spokesperson said the company is monitoring the situation, without providing further detail.

BP has a longer history in Russia than many of its peers. It was one of the first Western oil majors to establish a presence in Russia after the collapse of the Soviet Union. John Browne, the chief executive officer at the time, bought a stake in Sidanco in the 1990s, which eventually morphed into TNK-BP, a joint venture with a group of billionaires.

That venture gave BP direct operational control of Russian oil fields, with large numbers of expat staff in the country. It was highly profitable, but also fraught with tension between the oligarchs and their Western partners. A bitter battle for control in 2012 ultimately resulted in BP exchanging its stake in TNK-BP for $17 billion in cash and a large chunk of Rosneft shares.

BP CEO Looney, a Rosneft board member, has said he remains staunchly committed to the alliance, and the company will avoid politics and abide by any sanctions. Restrictions imposed in the wake of Putin’s 2014 annexation of Crimea also didn’t prevent then-CEO Bob Dudley from sitting on the company’s board.

Looney also rebuffed allegations that Rosneft’s vast crude output, and its plans to tap new fields in the Arctic, conflict with BP’s low-carbon ambitions. Yet in McNally’s view, BP could quit the country if it had to.

“BP got rid of its Alaska assets,” which would have seemed unthinkable years ago, McNally said. “I don’t know that there are any sacred cows.”

(Updates with Kwarteng-Looney meeting in second paragraph.)