BP rescue could be launched in Middle East

Multibillion-dollar strategic investment would bolster its severely weakened balance sheet.

Financial institutions in the Middle East are understood to be considering a strategic investment in BP, the oil giant racked by problems caused by the oil spill in the Gulf of Mexico. Informed sources said proposals from the region had already been made to BP advisers in London, and a response was awaited.

"BP knows there is potential support from the Middle East," said one informed source. Middle East investors would also consider buying key assets from BP, he said. They might also give financial backing to any capital raising the oil company might be planning to reinforce its balance sheet, badly damaged by the cost of cleaning up the catastrophic oil spill in the Gulf of Mexico. Estimates put the clean-up cost as high as US$60 billion (Dh220.37bn).

It emerged yesterday that a deal with a strategic investor was one of the options BP was considering to tackle the crisis that began in April with an explosion on the Deepwater Horizon oil rig, which sank and triggered the undersea leak. Executives at BP are concerned the collapse of the company's share price as a result of the crisis could leave it open to an opportunistic takeover bid, the Financial Times reported.

In London, a BP spokesman declined to comment on the possibility of an investment from the Middle East. The US oil giant ExxonMobil, as well as the Anglo-Dutch rival Royal Dutch Shell and the Chinese company PetroChina were mentioned as possible bidders. BP shares have fallen 50 per cent since the rig accident, which claimed 11 lives and has led to the worst environmental disaster in US history. Middle East sovereign wealth funds (SWFs) have a record of support for big western companies in trouble. During the credit crisis, the SWFs of Qatar and Abu Dhabi took stakes in western banks such as Citigroup and Barclays, investments that were welcomed by those companies. The deals effectively put a "floor" under the companies' share prices and halted further declines.

Financial experts think a deal with a strategic investor would make sense for BP, which has pledged to put $20bn into an escrow account to pay for the clean-up operation. Financial markets are also shortening the odds on a BP debt default in the short term, with the cost of insuring against default increasing significantly. The London arm of the Japanese brokerage Nomura Securities said recently: "We think funding of around $10bn would offer the credit market the security it needs.

Backing from a sovereign wealth or strategic investor would enhance credibility." An investment of $10bn would buy about 11 per cent of BP. A BP source in London dismissed reports of a "clear-out" of top executives once the leaking well has been capped, which could happen in the next few weeks. "It is nonsense," he said. But there has been increasing speculation that the BP chairman Carl-Henric Svanberg and the chief executive Tony Hayward would quit to make way for a new team untainted by the crisis.

Mr Svanberg has been criticised for the low profile he maintained in the early part of the crisis, while Mr Hayward's performance as the executive in charge of BP's response has earned him hostility and ridicule, especially in the US. Mr Hayward has been removed from day-to-day handling of the crisis, with Bob Dudley, his successor as US troubleshooter, widely tipped to succeed him as the chief executive.

Many in the financial markets are speculating about a break-up of BP, which before the crisis was the UK's largest industrial company by market capitalisation. The US business, formed mainly out of the merger between British Petroleum and Amoco in 1998, is regarded by some analysts as "toxic" because of the unquantifiable liabilities it might have to meet as a result of the spill. The US accounts for 40 per cent of BP sales, one third of its reserves and more than half of its refining capacity.

The future of another major part of BP's business is also uncertain. Russia accounts for about 25 per cent of BP production through the joint venture with TNK. The venture has been bedevilled by squabbles with the Russian establishment over ownership issues. Mr Hayward visited Russia last week to assure Moscow of his company's commitment to Russia. BP has a long history in the Arabian Gulf, having begun life as the Anglo-Persian Oil Company. In the 1980s, the Kuwait Investment Authority took a large stake in BP as the prelude to a possible full takeover that was eventually blocked by the British government.