BP and Rosneft could resolve deal by buying out oligarchs' stake in TNK-BP joint venture – but price remains a sticking point
A bid to salvage BP's Arctic exploration alliance with the Kremlin-controlled oil group Rosneft appeared in the balance after a midnight deadline to complete the deal had passed last night.
The British oil company was in three-way discussions with Rosneft and Alfa Access Renova (AAR), the consortium of Russian billionaires controlling half of TNK-BP, BP's existing Russian 50/50 venture. They were attempting to hammer out a deal that would satisfy AAR and still allow BP to pursue the Rosneft alliance. The oligarchs, led by Mikhail Fridman, had successfully blocked the alliance in the courts on the basis it breached an agreement BP had made with TNK-BP giving the joint venture exclusive rights to pursue opportunities for BP in Russia.
AAR's refusal to back down has left BP and Rosneft with little option but to buy AAR's 50% stake in the joint venture – which would remove the opposition to their alliance – or risk the deal collapsing.
However, as the midnight deadline passed last night, the three parties were haggling over the price and exact structure of the deal. Complicating things further, any agreement had to be endorsed by Rosneft's owner, the Russian government. Some analysts took the lack of an announcement as indication that the two sides would continue to negotiate revised terms for the deal.
It is thought that the oligarchs, who include Viktor Vekselberg and Leonard Blavatnik, want about $35bn (£21.6bn), while BP is reportedly pushing for a little over $30bn. Last month, AAR rejected an offer of about $27bn.
Analysts said that although BP might be willing to go a little higher to avoid the embarrassment of the alliance falling through, it was wary that paying too much could anger long-suffering shareholders who are still reeling from losses in the Deepwater Horizon disaster.
At the same time, BP and Rosneft were working out how best to structure the deal. The most likely outcome, according to analysts, would see Rosneft buying half of AAR's stake, giving it a quarter of TNK-BP, and the British company buying the rest, giving it 75%. Less likely scenarios would see either Rosneft or BP buying the oligarchs' entire interest.
BP and Rosneft were also considering whether to postpone the deadline for a second time – the original one was in mid April – to give the parties longer to agree, or whether to give up and walk away, allowing the alliance to collapse.
"On the surface it would appear that BP cannot win, as there is a suspicion that any deal with the AAR partners would be done at a disadvantage to BP," said Richard Griffith, an analyst at Evolution Securities. "If BP walks away it is not necessarily a disaster, and would be better than a rash deal with AAR that could prove more damaging in the long term."
Share transfer
BP announced the proposed alliance to fanfare in January, as incoming chief executive, Bob Dudley, sought to put last summer's oil disaster behind the company.
The arrangement involved transferring 5% of BP ownership to Rosneft while giving BP a 9% stake in the Russian company. It also promised developing reserves in 48,000 sq miles of the South Kara Sea, in the Russian Arctic.
Although no deadline had been set for the three parties to agree on the sale of the oligarchs' TNK-BP stake, a timetable was effectively thrust on them by the deadline to finalise the Arctic alliance – which cannot go ahead while AAR is blocking it.
Earlier this month, BP made an unsuccessful bid to save the Rosneft alliance when it agreed to let TNK take a stake in the deal. However, while TNK-BP welcomed the suggestion, Rosneft opposed it – although the topic may re-emerge as part of last-minute discussions.
Analysts said it would be better for Dudley to walk away than overpay for the AAR stake and that, if he did, he should get credit for having the courage to make such a move. However, they agreed that overall, a failure to do the deal would be an embarrassment for Dudley, especially since he had intimate knowledge of TNK-BP and the Russian oil industry at large. He had previously run TNK-BP until he was forced out of Russia after falling out with the oligarchs who co-founded the venture.