BP backs deal to swap TNK-BP for Rosneft stake

LONDON—The board of UK energy company BP PLC has struck a deal to swap its troublesome Russian oil venture TNK-BP for a big stake in Rosneft, the Kremlin-controlled energy company, a person familiar with the matter said yesterday.

The person said that the sale of BP’s half of TNK-BP was expected to net the company between US$10 to US$15 billion in cash as well as a 15 to 20 per cent stake in Rosneft, Russia’s largest producer of oil. The person said that the ranges were approximate because the parameters of the deal were still being worked out. He spoke on condition of anonymity before an official announcement which he said the companies hoped to make “soon.”

Such a deal would allow BP to exit its contentious partnership with the consortium of billionaires which controls the other half of TNK-BP while keeping a presence in Russia, a country responsible for producing nearly 10 million barrels of crude every day.

BP sees the Russian market—in particular the vast reserves of oil thought to lie beneath the Arctic Ocean—as key to its recovery from the Gulf of Mexico oil rig explosion, a deadly disaster which led to the United States’ worst-ever offshore spill.

The TNK-BP venture has been lucrative, paying out around US$19 billion in dividends since it was set up in 2003, but the company has periodically been shaken by outbursts of open hostility between the London-based BP and its Russian shareholders. In 2008, relations deteriorated to such a point that Bob Dudley —then-chief executive of TNK-BP, now chief executive of BP itself— had to flee Moscow after what his company described as a campaign of harassment.

Jettisoning the consortium might bring a measure of stability to BP’s operations in Russia, but the deal would also draw the British company much closer to the Kremlin; Rosneft is run by former deputy prime minister Igor Sechin, a longtime aide to Russian President Vladimir Putin, and BP’s shareholders may worry about the political dimensions of the deal.

Britain’s The Sunday Telegraph said that five of BP’s leading investors, which it didn’t identify by name, had qualms about the move. It’s not clear what, if any, action the consortium, known as Alfa-Access-Renova or AAR, plans to take in response to the move.

An email listed on the group’s Web site was invalid, and other contact details couldn’t immediately be located. A previous deal involving Rosneft and BP—announced last year to massive fanfare—had to be shelved after AAR sued to stop it.

Rosneft declined to comment when reached by phone late Sunday. BP said it would not be making an official statement. The transaction is crucial to BP as it provides an exit from the TNK-BP venture which has posed a series of difficulties for the British company, including the departure of Bob Dudley from Russia in 2008 when he was head of the venture.

It has required US$8 billion of investment by BP which in turn has taken out US$19 billion in dividends. Dudley, now chief executive of BP, has told his board that he backs the cash and share deal for the 50 per cent TNK-BP stake which will eventually allow him to hand out billions to BP shareholders.

Rosneft is also expected to buy out the other half of the TNK-BP joint venture from the local oligarchs known as AAR, which had previously prevented BP from taking a larger stake in Rosneft. BP will receive between US$10 billion and US$14 billion in cash from Rosneft and take shares in the Russian company in which it already owns a 1.25 per cent stake following the partial sell-off in 2006.

The Kremlin owns 75 per cent of Rosneft and while there has been speculation that it will reduce its stake to as low as 50 per cent plus one share, this is yet to happen.

Igor Shuvalov, Russia’s deputy prime minister, said last Friday that the government would consider further privatisation in an attempt to soothe any concerns among BP investors about the influence of the Kremlin over such a crucial part of the UK oil company whose share price is yet to recover from the Deepwater Horizon in the US disaster in April 2010. BP gets a quarter of its production from the existing Russian venture.

Dudley’s Rosneft counterpart, Igor Sechin, is a former spy who flew to London last week to take control of the long-running negotiations and whose company has long been attractive to BP. In January 2011 BP and Rosneft announced a share swap to enable them to explore in the Russian Arctic until AAR, BP’s existing partner in Russia, blocked the transaction.

BP's technical expertise is likely to be essential if the Russian Arctic is to be explored, although this is likely to incur the wrath of environmental campaigners.

BP, which declined to comment on Sunday night, is also keen to get more expertise from Russia, a market which produces 10m barrels of crude oil every day, and is considering whether to appoint a Russian national to its board. An announcement on the identity of any new board members is not thought to be imminent.

AP