beyondbrics

BP is bending over backwards to save its controversial deal with Rosneft, the Russian state-controlled oil group, and try to square its interests with those of the Russian authorities and of the oligarch partners in its current Russian joint venture, TNK-BP.

Shareholders should be wondering whether all the contortions involved are worth the effort.

Rosneft has given the British company until May 16th to negotiate an acceptable alternative to their original January agreement, that envisaged a $16bn share swap and an ambitious exploration and development joint venture for the Russian Arctic.

That deal has been blocked by the Russian billionaire shareholders in TNK-BP who – quite reasonably – decided their investment would be undermined if the UK group went off with a powerful new Russian partner.

On Friday, it emerged that they have, in effect, won their case at an arbitration court which allowed BP to go ahead with its Rosneft share swap only if it agrees to cede its place in the Arctic joint venture to TNK-BP.

BP announced on Friday, through gritted teeth, that it would do so.

But that’s hardly the end of the story.

First, Rosneft must decide whether it will drop its earlier opposition to having TNK-BP as a partner instead of BP. The British group’s deep-sea expertise is a key element in the deal. While that can be transferred to the joint venture via TNK-BP – or indeed bought in from outside – it will involved three partners instead of two. Given the torrents of bad blood between BP and AAR, the oligarch consortium holding half of TNK-BP, that is hardly auspicious.

Next, the share swap will be subject to external oversight, with a ban on exchanging boardroom representation. So the deal will bring Rosneft much less of the kudos it hoped to gain by working with a global oil giant.

Finally, those BP shareholders who grumbled about the deal in the first place will look even less kindly at the current proposals. The whole point was to secure for BP access to the Russian Arctic – one of the world’s largest remaining undeveloped oil and gas territories. The huge technical, financial and political risks involved were to be mitigated by a direct deal with Rosneft and its 75-per-cent shareholder, the Russian state. A three-way arrangement deal including AAR is nothing like the same.

So the deal will die? Not necessarily.

First, the Russian state wants it to go ahead. Prime minister Vladimir Putin and his allies are keen to encourage foreign investment in Russia, including in oil and gas. If they cannot secure a venture between a Russian company the state controls and a foreign company that has been operating in Russia longer than any other big multinational energy group then what chance does it have with other potential combinations? Failure would send a damning message.

Next, oligarch Mikhail Fridman and the other AAR partners have won a big victory in defending their interest in the face of Rosneft, and its powerful ex-chairman Igor Sechinm the deputy prime minister (the fact that he had to stand down last month when government officials were ordered to leave state company posts was a damaging defeat for Rosneft-BP).  But Fridman and friends know that they cannot push the government in general and Putin into particular into a humiliating debacle. If the state wants an Arctic deal, AAR cannot afford to stand in the way indefinitely.

One possible compromise is for the deal to go ahead with a share swap and a three-way Arctic venture.  At some future date, the oligarchs agree to sell out. While they have publicly said that they won’t, the FT reported last month that they had been prepared to sell their stake for $35bn-plus. BP wouldn’t pay above $27bn. But the gap may not be unbridgeable.

However, what about the BP shareholders? Some publicly questioned the deal even before the latest turn of events. Those who supported the company and Bob Dudley, chief executive, did so in the belief that a big bold investment in the Russian Arctic was worth the risk given BP’s expertise and Dudley’s desire to look for new frontiers following the US disaster. But a big bold investment is one thing. Half a big bold investment quite another. Dudley will have a lot of explaining to do even after he is finished in Moscow.

Related reading
In depth: Oil – Apr-05
BP-Rosneft: battle of the billions, beyondbrics
Energy Source: Dudley survives stormy AGM, FT
Editorial Comment: Oligarchs call BP’s bluff,FT
Dudley faces backlash over Russia, FT