BP's joint venture with Rosneft is given a cautious welcome

BP agreed on Friday to form a joint venture with Rosneft to develop three of Rosneft's offshore exploration blocks in northern Russia, which the companies said could hold as much oil and gas as the UK North Sea, implying a 60 billion barrel prize.

BP's shares rose 0.2 per cent last night to close up 1.2p at 500.7p.

The rise was a more muted reaction than the initial excitement that greeted early rumours of the deal.

BP faces opposition to the deal from Russian oligarchs, the defunct Yukos, whose assets make up the bulk of today's Rosneft and some US politicians.

A BP spokesman said its partners had been "kept in the loop" about developments and that BP chief executive Bob Dudley had met one of the oligarchs on Thursday to discuss the deal.

A US congressman has called for greater scrutiny of the deal, citing security concerns as BP is one of the key suppliers of the US military.

Analysts said while the deal offered the potential of big reserves additions, it did not solve all the problems facing BP, such as falling production and big cash demands, after its Gulf of Mexico oil spill – the worst in US history.

"While this deal is a good long-term opportunity, it does little to address the lack of short-term growth," analysts at Bernstein said in a research note.

BP has been forced to sell oil fields to pay for the spill and investors fear the company will face regulatory delays in developing its remaining fields in the US – home to 40 per cent of its assets.

As part of the deal, BP will swap a five per cent stake in itself for a 9.5 per cent stake in Rosneft.

Gordon Gray, analyst at Collins Stewart, said that since Rosneft paid a much lower dividend than BP did, the share issue would be dilutive to BP's earnings.

Analysts said the agreement showed that BP's talent for cutting innovative deals survived after the oil spill raised questions about the company's tolerance of risk.

Full financial terms of the deal have not yet been concluded but it is clear the joint venture will not own the Arctic oil blocks but merely a right to develop them.