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August 23, 2017

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BP, Rosneft face rough road ahead

MOSCOW--BP and Rosneft will transform the landscape of the global energy industry with their mega oil deal but the two companies still face challenges to close the transaction and then reap the benefits.

Rosneft should next year enjoy 100 percent control of BP's Russian joint venture TNK-BP after BP and its Russian partners both agreed to sell their 50 percent stakes in the firm to the Russian state oil giant.

The deal as a whole is valued at US$61 billion, making it one of the biggest in corporate history, and will bring BP's stake in Rosneft to 19.75 percent as well as giving it two seats on the Russian firm's board.

The agreement marks the end of the checkered partnership between BP and the Russian shareholders at TNK-BP that started in 2003 and was marked by acrimonious bickering as well as impressive production growth.

Moreover it cements Rosneft's position as an undisputed oil industry champion, a remarkable achievement for a company that only reached prominence when it acquired the assets of the jailed tycoon Mikhail Khodorkovsky's now defunct private oil giant Yukos from 2004-2007.

"The enlarged Rosneft would take on a more prominent role in Russia's oil industry, in our view, and it would become a clear leader in terms of reserves and production, with unique access to certain new projects and majority government control," said analysts at ratings agency Standard and Poor's.

Among the astonishing implications of the deal are:

— The deal makes Rosneft the world's biggest oil company by production, overtaking ExxonMobil.

— Once the deal is completed, Rosneft will produce five percent of all global oil, about 4.6 million barrels (of oil equivalent) per day.

— After completion, Rosneft will also control 40 percent of Russia's crude production.

— The deal is the third-biggest energy deal in modern times after the mergers between Exxon and Mobil in 1998 and Total and Elf Aquitaine in 1999.

The agreement of the deal is also a massive victory for President Vladimir Putin's longtime ally Igor Sechin who now serves as Rosneft chief executive after many years working as the overall "supreme" of the Russian energy sector.

'Mixed feelings'

Yet Sechin and his cohorts know that now is not the time to rest on their laurels, with a mass of work remaining to complete the twin TNK-BP purchases.

The Interfax news agency Friday quoted a source close to the deal as saying that Rosneft will only buy out the Russian stake in TNK-BP once the BP transaction is completed, which is expected in the first half of 2013.

Moreover, Rosneft and BP will have to show that they do not fall into the same trap of West-East animosity that stymied TNK-BP from the start, and that they can reach the full potential of their cooperation.

"The ability of Rosneft to learn from BP's experience and at the same time the ability of BP to influence Rosneft will be one of the most important factors for the future success of the deal," wrote analyst Ildar Davletshin of Renaissance Capital.

"We are not confident yet that Rosneft will be able to fully implement best practices from BP which has been the major success driver for TNK-BP."

Putin himself revealed that the Kremlin had been ambivalent about the deal but decided in the end that BP's desire to work in Russia needed to be encouraged after enduring years of "hand-to-hand fighting" over TNK-BP.

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