BP cedes Arctic project to Russia partner

6th May 2011, Comments 0 comments

British energy giant BP said Friday it will cede the Arctic exploration part of its tie-up with Rosneft to its Russian unit under an arbitration ruling that may see it salvage the $16 billion deal.

The announcement is a part of BP's strategy to preserve the share swap portion of its agreement with Rosneft and thus retain its foothold in the market of the world's largest oil producer.

But both parts of the revised agreement are subject to Rosneft's approval and the state-held company has previously ruled out working with TNK-BP -- the British firm's much smaller and less experienced local subsidiary.

BP shares still shot up by about 2.5 percent in London amid hopes that a deal that looked doomed only days ago could still be revived on terms that preserved the British firm's status as Russia's biggest private oil partner.

"The arbitral panel has today issued a consent order permitting BP and the Alfa-Access-Renova (AAR) consortium to assign the Arctic opportunity to TNK-BP, subject to Rosneft consent," BP said in a statement.

AAR is the consortium of Russian investors in TNK-BP.

"The order also permits the proposed share swap between BP and Rosneft to proceed subject to Rosneft having consented to assign the Arctic opportunity to TNK-BP," the British firm said.

Yet the share swap portion of the new agreement comes with strict conditions: neither Rosneft nor BP will be allowed to hold seats on each other's boards and all voting right will be held by independent trustees.

TNK-BP immediately welcomed the decision while a Rosneft official refused to comment on the ruling when contacted by telephone in Moscow.

"We see the Arctic transaction with Rosneft as a great opportunity for TNK-BP and for Russia which we would like to succeed," TNK-BP chief executive Stan Polovets said in a statement.

"We are now focused on working with BP and management of TNK-BP to continue the development of TNK-BP in Russia and internationally," the TNK-BP official said.

The historic share swap and Arctic exploration agreement with Rosneft was meant to herald a new era for BP in which it blazed the trail to unexplored energy fields while putting behind it the costly 2010 Gulf of Mexico oil spill.

The deal's negotiation was rapid and led personally by the country's powerful energy czar Igor Sechin -- a close ally of Prime Minister Vladimir Putin who had served on Rosneft's board until last month.

But the three Russian and one Russian-born US tycoons who make up AAR put up a surprisingly stiff fight against one of the most important deals the Russian government has struck in the past decade -- a risky move that now promises to reap massive rewards.

Rosneft and the government were seeking a reliable Western partner that had the advanced technology needed to dig for oil in hostile Arctic conditions and then bring the enormous wealth believed to be buried there to market.

Both the firm and the state said TNK-BP lacked the experience or equipment necessary for either of these.

Sechin also noted on one occasion that TNK-BP was not publicly traded on the London or New York stock exchanges -- a clear reference to Rosneft's desire to boost its market capitalisation through the deal.

The catch successfully used by the Russian tycoons came in the fine print of their company's shareholder agreement with BP.

It stated that any deal BP struck in Russia had to either go through TNK-BP or be rejected first by the group in favour of the parent company.

A visibly-frustrated Putin berated BP on March 4 for failing to notify him of that clause when he meet the firm's chief executive Bob Dudley for talks in Moscow in January.

Most of the speculation for how the deal could proceed after the first court injunction was issued in March had focused on whether the dispute could be settled through a buyout of the Russian shareholders in AAR.

That injunction still remains in place and Rosneft has until May 16 to either accept or reject the revised terms of the deal.

© 2011 AFP

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