Gulf in right place to back up BP

Investment from Middle East party could help oil major ride out storm over US spill

If history and geographical presence are anything to go by, a strategic alliance with a Gulf country seems a logical step for BP in its hour of need. As a leading player in the global energy business, BP has links with the oil-rich Middle East that go back more than a century and significant operations in most of the big markets of the Gulf, centred on the UAE.

Its exploration and production activities for the region are based in Abu Dhabi, where it is a partner of the Abu Dhabi National Oil Company, while the hub for its refining and marketing business is in Dubai. From these two main centres it serves 38 countries, from Egypt in the west to Sri Lanka in the east. Financially, too, a strategic link-up would make sense, assuming the sides agree on terms. "I think it would be a good opportunity for a potential investor at these prices and on BP's side, some debtholders would like to see some extra equity on the balance sheet," said Rob McKinnon, an oil industry expert and the chief investment officer of the Saudi-owned broker ASAS Capital.

Rachel Ziemba, the sovereign wealth analyst at the think tank Roubini Global Economics, said: "I could imagine there would be a lot of investors in the region interested in picking up a global oil major at what they see as an undervalued price." An industry insider, who asked not to be named, said that from a shareholder point of view a larger Middle East presence was attractive. "American investors accounted for around 40 per cent of the register before the Gulf of Mexico disaster, but with all the politics swirling around in the US they must now be sellers. Who better to take that up than the Gulf?"

BP knows all about politics in the Middle East. It began life as the Anglo-Persian Oil Company in 1908, but changed its name to the Anglo-Iranian Oil Company after the first Pahlavi shah came to power in Iran. Its expansion outside Iran into the rest of the Gulf was prompted by the expropriation of its assets by the government of Mohammed Mossadegh in 1951. Again re-named, this time to the British Petroleum Company, it resumed business with Iran under another shah, but never got back control of the country's oil industry.

Politics again came to the fore in 1987, when the British government was privatising BP. The Kuwait Investment Office (KIO), the London arm of the emirate's investment authority, snapped up nearly 22 per cent of the shares in a market raid. Worried about losing control of a company regarded as a pillar of British business, the government blocked a Kuwaiti takeover and forced the KIO to sell down its stake. It retains a 1.8 per cent holding from that period.

But this time the considerations are mainly corporate and financial. The repercussions from the Gulf of Mexico explosion and environmental disaster that followed are forcing BP to rethink its strategy. There is also pressure from investors on top management, including the chairman Carl-Henric Svanberg and the chief executive Tony Hayward. Some analysts have put the total cost of the clean-up and legal claims from the accident as high as US$60 billion (Dh220.38bn). Even at a more conservative estimate of $35bn, which was produced by Citibank last week, short-term holders of BP debt still feel the need for extra security, which an equity injection would provide. The cost of insuring BP debt has increased as the environmental crisis has widened.

The company also feels vulnerable to a possible opportunistic takeover by industry rivals attracted by the falling share price. Despite yesterday's rally, BP shares are still about half of where they stood before the April blowout. ExxonMobil, Royal Dutch Shell and PetroChina have all been mentioned as possible buyers. A strategic investor from the Middle East, prepared to take a long-term view of BP's prospects, would be one way of guarding against such a bid.

Not everybody agrees about the financial problems at the company. "I'm not sure they need the capital, and why dilute existing shareholders? The estimates of legal claims are blown way out of proportion," Mr McKinnon said. On the other hand, he thinks it would be a good opportunity for investors from the region. "If you can get 5 or 10 per cent of BP at these prices and hold for 10 years, you could be looking at an upside of 300 per cent," he added.