BP’s heads of terms agreement to sell its 50% TNK-BP stake to Russian oil giant Rosneft was major news this week. But there was little mention of how oil and gas reserves would be treated as part of the transaction.

This is perhaps the most important aspect of this deal because reserves are one of the main factors that go into valuing an oil company. “On completion of the proposed transaction, BP expects to hold 19.75 per cent of Rosneft shares, including BP’s existing holding of 1.25 per cent, and to have received $12.3 billion in cash,” according to BP’s press release.

At this level of ownership, BP expects to be able to account for its share of Rosneft’s earnings, production and reserves on an equity basis. In addition BP expects to have two seats on Rosneft’s nine person main board.”

It appears the two board seats are the crucial factor that will allow BP to book reserves and production using the equity method of accounting, Phil Weiss, Senior Analyst at Argus Research explained to Breaking Energy.

Typically, anything less than a 20% ownership stake is treated under the cost method of accounting, which does not permit a company to book reserves, according to a representative of brokerage Sterne Agee. The analyst speculated that with only a 19.75% share in Rosneft, BP might not be able to book the reserves and this could be the reason for keeping the equity stake below 20%.

“As at the end of 2011, Rosneft’s proved developed reserves stood at 9.96 billion barrels of oil equivalent (boe) with proved undeveloped reserves of 8.39 billion boe,” according to BP’s press release. While much has been made about the $12.3 billion in cash BP expects to receive, being able to book roughly 2 billion barrels of oil equivalent (which includes oil, liquids and gas) is equally, if not more important. The transaction is still months away from official completion.