BP faces $25bn hit as it divests Rosneft stake

BP has announced it will exit its 19.75% stake in Russian oil giant Rosneft — the most significant move yet by a Western company in response to Russia’s invasion of Ukraine.

BP said divesting the stake will result in charges of up to $25 billion, but the firm did not make clear how it plans to exit the position.

“The BP board today announced that BP will exit its shareholding in Rosneft,” said BP in a statement.

“BP has held a 19.75% shareholding in Rosneft since 2013.

“Additionally, BP chief executive officer Bernard Looney is resigning from the board of Rosneft with immediate effect.

“The other Rosneft director nominated by BP, former BP group chief executive Bob Dudley, is similarly resigning from the board.

“The resignations will require BP to change its accounting treatment of its Rosneft shareholding and, as a result, it expects to report a material non-cash charge with its first quarter 2022 results, to be reported in May.”

BP chair Helge Lund said: “Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region.

“BP has operated in Russia for over 30 years, working with brilliant Russian colleagues.

“However, this military action represents a fundamental change.

“It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.

“We can no longer support BP representatives holding a role on the Rosneft board.

“The Rosneft holding is no longer aligned with BP’s business and strategy and it is now the board’s decision to exit BP’s shareholding in Rosneft.

“The BP board believes these decisions are in the best long-term interests of all our shareholders.”

BP CEO Bernard Looney said: “Like so many, I have been deeply shocked and saddened by the situation unfolding in Ukraine and my heart goes out to everyone affected.

“It has caused us to fundamentally rethink BP’s position with Rosneft.

“I am convinced that the decisions we have taken as a board are not only the right thing to do, but are also in the long-term interests of BP.

“Our immediate priority is caring for our great people in the region and we will do our utmost to support them.

“We are also looking at how BP can support the wider humanitarian effort.”

Looney has been a director of Rosneft as one of two BP-nominated directors since 2020. Dudley has been a director of Rosneft since 2013.

On the impact of the divestment on the company’s reporting and finances, BP said: “As a result of the resignations of BP’s nominated directors, BP has determined that it no longer meets the criteria set out under International Financial Reporting Standards (IFRS) for having ‘significant influence’ over Rosneft.

“BP will therefore no longer equity account for its interest in Rosneft, treating it now as a financial asset measured at fair value.

“This will result in two material changes to BP’s financial reporting and finances in the results for the first quarter of 2022.

“First, it is expected to give rise to a non-cash adjusting item charge at the time of the first quarter 2022 results, representing the difference between the fair value of BP’s Rosneft shareholding at 31 March 2022 and the carrying value of the asset.

“At the end of 2021 this carrying value stood at around $14 billion.

“Second, in addition, the change is expected to result in non-cash adjusting item charge, principally arising from foreign exchange losses accumulated since 2013 that under IFRS were previously recorded directly in equity rather than the income statement.

“At the end of 2021 these totalled around $11 billion, and this adjustment will not impact equity.

“The change in accounting treatment also means that BP will no longer recognise a share in Rosneft’s net income, production and reserves.

“BP will no longer report Rosneft as a separate segment from the first quarter 2022 results.”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The decision to exit the Rosneft stake will be an eye wateringly expensive one for BP, but the shocked board clearly felt they had no option but to pay the high price and distance the business from Russia’s aggression.

“It marks a huge shift in position for CEO Bernard Looney who just two weeks ago indicated that the Rosneft slice remained a core part of BP’s operations, and shows the extent to which corporate Britain is now under pressure to make very stark choices faced with the sharply escalating situation.

“Just how BP will manage this exit is unclear but it looks like it will be highly difficult for the company to recover anywhere near what was considered to be the full value of the stake, estimated to be $14 billion at the end of 2021 and it will also strip BP of lucrative dividends which were due to pour in from the Russian business.

“Last year higher oil prices and foreign exchange tailwinds helped BP’s underlying profit from Rosneft rise to $2.7bn from $56m.

“There are now estimates that extricating itself could cost BP up to $25 billion.

“A write down of this magnitude is also likely to limit the extent to which BP can continue to accelerate its transition towards renewables, but at the same time the crisis is clearly concentrating minds about the need to find alternative sources to reliance on Russian oil with Germany pledging to build up renewable energy as fast as possible.

“This move is set to add further volatility to financial markets, with a fresh wave of anxiety expected to take hold following the frightening rhetoric from President Putin.

“Parallels are emerging with the Cuban missile crisis in 1962, when financial markets underwent a steep correction after a year of strong market gains, particularly for tech stocks, and there was a fresh market plunge brought on by a highly fraught geopolitical stand-off.

“The ramping up of sanctions and more targeted action to freeze out Russia’s financial sector with the exclusion of banks from the Swift international messaging system is a move likely to hit the rouble hard with the Russia currency set for a sharp slide on Monday, while a flight to the perceived safety of the US Dollar and Japanese Yen may intensify.

“For now oil and gas though is still flowing from Russia to Europe but signals that governments around the world are ready to tighten the screw of sanctions further are likely to add to fresh concerns about global energy supplies, piling fresh upwards pressure on Brent crude and natural gas prices.

“Defensive stocks may be among the few beneficiaries of a volatile trading period ahead, with Western governments set to significant increase military budgets in the face of Russian aggression.

“Faced with turbulence it may be tempting for investors to try and switch and ditch stocks but during times of heightened volatility, it’s even more important to try and look beyond daily market moves to long term goals and ensure that your holdings are well diversified across a range of assets and geographies.’’

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.