After a Rough Q3, BP Secures Major Fuel Supply Deal

Oil

Despite the fact that BP (NYSE:BP) is dealing with the legal and financial repercussions of the 2010 oil spill in the Gulf of Mexico, the company continues to look to the future, with plans to expand drilling operations and generate greater profits from its stake in state-controlled Russian oil producer Rosneft (RNFTF.PK).

BP’s Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010 when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. Marshes, fisheries, and beaches stretching from Louisiana to Florida were polluted, harming local tourism and fishing. The oil producer has acknowledge responsibility for the oil spill, spending more than $25 billion on cleaning up the marshes, fisheries, and beaches along the coast and compensating victims.

That spending is just the tip of the company’s spill-bill iceberg; $42.4 billion has been spent or earmarked for spending on clean-up, compensation, fines, and other costs. To pay those expenses, BP even sold $38 billion worth of oil fields and other properties over the last three years, assets that once generated $5 billion of cash flow a year. Those sales do not include the sale of its stake Russian-affiliated TNK-BP to Rosneft for approximately $27.5 billion in cash and stock.

However, the assets sales served a secondary purpose, aside from raising cash to pay the company’s massive spill bill. Robert Dudley, who replaced Tony Hayward as chief executive after the spill has used the opportunity the assets sales have provided to reorganize the company, giving the BP a tighter focus. But shareholders have yet to truly profit from Dudley’s restructuring. The third-quarter earnings report showed that profit declined 34 percent from the year-ago quarter primarily because of the company’s divestment of key assests, especially the sale of TNK-BP, which lowered oil production by 2 percent. BP’s 20 percent stake in Rosneft generated approximately $792 million, while the company earned about $1.2 billion from its TNK-BP stake the previous year.

Shareholders had pushed BP to rid itself of TNK-BP for some time before the stake was sold last March, and since a clean cash exit from Russia was never an option, investors hoped the company would maximize the cash proceeds and minimize the number of Rosneft shares that BP accepted as payment for TNK-BP. Even at the time it was clear that the Rosneft stake was a gamble. Outsiders expected that Dudley would reassure shareholders that the takeover would be followed by announcements of ambitious Arctic oil exploration with Rosneft, but no such announcements were immediately forthcoming. Rather, Dudley told shareholders to consider the Russian company as an investment opportunity.

So far, BP’s participation in Rosneft’s ownership has been slow to translate into cooperation in upstream projects — which include the search for potential underground or underwater crude oil and natural gas fields. Comparatively, Exxon Mobil (NYSE:XOM) has signed numerous partnership deals with Rosneft to tap the Russian Arctic. Furthermore, BP has not been among the major buyers of Rosneft’s oil and refined products in recent years, while rival Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) has taken major exports from the world’s largest producer. In fact, BP did not have its first breakthrough deal until this October, when the company signed a deal to buy $5.3 billion of crude oil from Rosneft.

On Tuesday, a regulatory filing made by Rosneft revealed that it had also agreed to sell $6 billion worth of refined product to BP, making the company one its biggest buyers after years without a significant deal. In particular, the Russian oil producer will sell BP Singapore up to 3.2 million metric tons of fuel oil, worth up to $2.6 billion, and BP up to 1.44 million metric tons of diesel, worth about $1.77 billion, another 2 million metric tons of fuel oil, worth around $1.62 million, and up to 60,000 metric tons of naphtha, worth $65 million.

Through a Singapore-based fuel oil trader with Western trading house, Reuters learned that a significant percentage of the volumes from the Rosneft contract will head to China. “BP will have a bigger trading presence in the straight-run fuel oil market in China,” he said, where straight-run fuel oil refers to the petroleum product that is derived from the straight distillation of crude oil. “BP is taking a view on the straight-run market next year” as refineries are lowering crude oil distillation because of low refining margins, another Singapore-based fuel oil trader told the publication.

Follow Meghan on Twitter @MFoley_WSCS

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