BP Races to Save Deal With Rosneft

(Dow Jones Newswires), Apr. 13, 2011

As a bruising fight between BP and some of Russia's most powerful oligarchs intensifies, BP is now weighing a previously unthinkable step to end the battle: possibly pulling out of its lucrative Russian joint venture with the oligarchs, TNK-BP.

BP is considering the move as part of its scramble to salvage a separate, proposed alliance with Russia's state oil company, Rosneft, before a crucial deadline for that deal -- which is opposed by its TNK-BP partners -- expires Thursday.

The U.K. oil company is considering a range of options to rescue the Rosneft partnership, some of which would have been inconceivable before the deal ran into trouble in February. One of them is to divest its 50% stake in TNK-BP, according to a person familiar with the matter.

Selling its half of a company that accounts for one quarter of BP's global oil-and-gas production and close to one-fifth of its reserves is seen as unlikely. But it is a sign of BP's desperation as the countdown begins to Thursday's deadline that it is even considering such an option.

In January, BP and Rosneft said they would swap shares in each other and jointly explore for oil and gas in the Russian Arctic, an area previously off limits to foreign oil companies, as part of a groundbreaking strategic partnership.

But BP's partners in TNK-BP, a consortium of Soviet-born billionaires collectively known as AAR, claimed the Rosneft deal violated their shareholder agreement, which stipulated that TNK-BP should be the main vehicle for both partners' investments in Russia. In February, AAR won a court injunction blocking the deal.

Last Friday a panel of independent arbitrators left the injunction in place until further notice but gave BP permission to seek to extend the April 14 deadline for the share swap.

The company is now pursuing a number of solutions to its dispute with AAR. Yet even now, it isn't clear which path it will take to extricate itself from the mess.

The options under consideration include allowing TNK-BP to participate in the Arctic venture, possibly through an equity interest, or compensating AAR financially to win its assent to the deal, according to the person familiar with the matter. However, some people close to BP think AAR is likely to demand a level of compensation that is far beyond what BP could accept.

Alternatively, Rosneft, BP or a third party could buy out AAR's stake in TNK-BP; or Rosneft or a third party could buy out BP's stake, the person familiar with the matter said.

Most of those options are considered extremely difficult to execute, according to analysts. AAR's 50% stake in TNK-BP is thought to be worth at least $25 billion, and it would be hard for BP or Rosneft to raise that kind of capital. The Russian government, opposed to foreign ownership of its strategic natural resources, may also balk at BP taking full ownership of one of Russia's largest oil producers.

On the other hand, BP would be loath to divest TNK-BP, whose rich dividend flow quickly exceeded BP's original investment, industry observers say.

In addition, it is unclear who would buy its stake. Most other Western oil companies are too risk-averse to make such a big bet on Russia.

"I think BP selling out of TNK-BP is the least likely option," said a Russian banker with knowledge of the firms. "It's a cash machine." He expects BP to offer AAR compensation, "a considerable payout, running into the billions of dollars."

There is little sign Rosneft will agree to an extension of the share-swap deadline, given its doubts about whether BP would be able to prevail in arbitration with AAR. "[Rosneft] seem to be frustrated," one person close to BP said. A spokesman for the Russian company said it had received no proposals from BP.

Meanwhile, people close to TNK-BP said the company was planning lawsuits against BP and its managers to claim compensation for damages the venture allegedly suffered from missing out on the Rosneft deal. People close to BP dismissed the leaks as a pressure tactic, apparently aimed at signaling BP won't be able to restore the status quo inside TNK-BP that existed before it announced its tie-up with Rosneft. Media reports about the planned lawsuits helped push BP shares lower Tuesday.

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