Editor's note: The following is an excerpt from a longer article that appears on MoneyShow
(NYSE:XOM) is no longer the world's number-one oil producer. As of last week, that title belongs to Rosneft
(PINK:RNFTF), Russia's state-controlled oil company.
Rosneft is buying TNK-BP, which is a vertically integrated oil company co-owned by British oil firm BP
(NYSE:BP) and a group of Russian billionaires known as AAR. One of the Top Ten privately owned oil producers in the world, in 2010 TNK-BP churned out 1.74 million barrels of oil equivalent per day from its assets in Russia and Ukraine, and processed almost half that amount through its refineries.
TNK-BP has been an economic dream, producing many billions in dividend payments for its owners—but it has been a relationship nightmare. The partners have fought repeatedly. In 2008 Russian authorities arrested two British TNK-BP managers amid a dispute over strategy that forced then-CEO Bob Dudley (who now heads BP) to flee Russia—and that is just one of many scandals.
The writing has been on the wall for TNK-BP since this time last year, when one of the AAR billionaires quit his role as CEO of the venture and declared that the relationship with BP had run its course. Since then, speculation has raged over who might buy into the highly profitable venture.
Now we know: Rosneft is buying the whole thing, in a two-part deal. In the first part, Rosneft is acquiring BP's 50% stake of the joint venture in exchange for cash and Rosneft stock worth $27 billion. The deal will give BP a 19.75% stake in Rosneft. In stage two, AAR would get $28 billion in cash for its half, though this deal is not yet finalized. To put the $56 million TNK-BP deal in perspective, it will be the largest in the industry since Exxon bought Mobil in 1999. In consumer terms, it is as if Nike
(NYSE:NKE), worth $34 billion, merged with Kraft
(NASDAQ:KRFT) worth $27 billion. State-owned Rosneft's CEO, Igor Sechin, a former Soviet spy and longtime ally of Russian President Vladmire Putin sealed the deal which capped a dramatic turnaround from last year when Sechin was pushed out of the chairmanship of Rosneft by former company president Dmitry Medvedev. To explain this reversal of fortune many believe Putin moved to put both the state and his personal allies in charge of the company and deduce, therefore, that Putin is the de facto head of Rosneft.
Rosneft is certainly a key industry: If it all comes to pass, the company's daily production will jump to some 4.5 million barrels per day—more than any Middle Eastern country except Saudi Arabia -- and enough to put the Russian firm neck and neck with Exxon in the race to be the world's top oil producer.
Europe is reliant on Russia for oil and gas. Gazprom
(PINK:OGZPY), the Russian state gas company, supplies 34% of Europe's gas needs, and when the under-construction South Stream pipeline starts operating, that percentage will increase. Yesterday Gazprom offered the highest bid to obtain a stake in the massive Leviathan gas field off Israel's coast.
Some alarmists are saying Russia could choke off supply to raise prices, that Putin could play oil- and gas-needy nations off one another, forcing European nations to commit to long-term, high-priced contracts if they want secure supplies.
In the most extreme scenario, some envision Russia joining OPEC. If so, the oil cartel would control more than half of global oil production and most of its spare capacity.
Editor's Note: This article was written by Marin Katusa of Casey Research.
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