Arbitration court nixes BP's Russia tie-up

24th March 2011, Comments 0 comments

An arbitration tribunal on Thursday blocked British energy giant BP's Arctic oil tie-up with Rosneft in a decision that could hit Russia's hopes of expanding its share of the world energy market.

The Stockholm Arbitration Tribunal ruling upholds a freeze on the tie-up issued by a London court in February and formally puts a halt to the $16 billion deal.

The British firm immediately issued a statement saying it "remains committed to partner with Russia" and would seek other ways of completing the historic deal.

"BP has always been and remains fully committed to investing in Russia," it said.

The news appeared to catch Russian officials off guard and is likely to cloud the immediate outlook of the country's largest oil company -- a state-held firm that is urgently seeking international investors' support.

"We only just received this information and have to study it in full," chief Kremlin spokesman Dmitry Peskov told the RIA Novosti news agency.

The unprecedented share-swap and Arctic exploration agreement was announced with much fanfare by the Russian government in January and was soon followed by a similar agreement between Rosneft and the US oil major Exxon Mobil.

The deal would have handed Rosneft five percent of BP's ordinary voting shares in exchange for approximately 9.5 percent of the Russian company's stock.

The two firms also agree to jointly search for oil in Rosneft's three licensed blocks in the Arctic -- a 125,000 square kilometre (50 square mile) region said to contain five billion tonnes of oil and 3.0 trillion cubic metres of gas.

Rosneft has been seeking a Western partner to provide it with the know-how and technology to develop the forbidding region and the Kremlin eventually gave the nod to BP -- a company with a long but sometimes troubled history in Russia.

The agreement was personally blessed by Russia's powerful prime minister Vladimir Putin and hailed by BP as an important part of its expansion plans following the humiliation it suffered during last year's Gulf of Mexico oil spill.

But its implementation has been blocked in the courts amid arguments by BP's current Russian joint venture TNK-BP that the Rosneft tie-up violated its own shareholder agreement with the British company.

BP was technically committed to perform all its operations in Russia through its TNK-BP venture but was already working on its own in the vast energy project the country is developing in the Pacific Sakhalin Island.

It used the Sakhalin argument when it was presenting its case to the Kremlin and Putin himself later admitted to being surprised that the agreement was having such difficulties in the courts.

Russia's energy tsar Igor Sechin -- a close ally of Putin -- even warned in one interview ahead of the decision that "Rosneft would estimate its losses from the unrealised deal and require compensation" from BP if it was blocked.

The British firm's Thursday statement said it would still look to complete the share swap without the joint Arctic exploration part of the pact -- a move that could potentially keep it out of litigation.

"BP will now apply for a determination whether the share swap may proceed on its own," the company said.

The small group of billionaires making up the Russian half of the TNK-BP joint venture -- collectively known as AAR and led by Alfa Group chief Mikhail Fridman -- said the ruling left them satisfied but still concerned.

"Willfully ignoring the provisions of the shareholder agreement was a serious misjudgement by BP that has severely damaged the relationship between the TNK-BP shareholders," AAR said in a statement.

"We expect (BP chief executive) Bob Dudley to make every effort to rectify the situation and rebuild the trust that has been lost between BP, AAR and the management of TNK-BP," the AAR statement said.

Analysts suggested that the Russian billionaires' misgiving are well-justified because BP is now likely to return to arbitration in a bid to complete the share swap portion of the Rosneft deal.

© 2011 AFP

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