BP faces judgement day on Rosneft tie up

May 16, 2011

, MOSCOW, May 16 – Prospects for BP of tapping the Arctic oil reserves controlled by Russia faced judgement day on Monday amid reports of a last-minute bid by the British energy giant to salvage the troubled deal.

The $16 billion (11.4-billion-euro) "strategic alliance" between BP and state-held Rosneft — Russia\’s largest and most powerful oil company — has undergone serious revision since first being announced in January.

The deal had been set for final approval when it suddenly became contested by BP\’s local partners in its TNK-BP Russian joint venture — a top-10 private company with its own sights on Arctic oil.

An arbitration ruling this month ordered BP to hand the Arctic exploration portion of the tie-up to its Russian joint venture. But Rosneft has previously rejected the idea of working jointly with TNK-BP because of its relative lack of experience and access to foreign deposits.

Rosneft is also reportedly uncomfortable with a new stipulation stating that all shares swapped by the companies would have to be held in trust.

The original agreement would have handed Rosneft five percent of BP\’s ordinary voting shares in exchange for about nine percent of its stock. But now neither company will have the option of joining each other\’s board.

Rosneft — which has remained silent — has until the end of the day Monday to either accept or reject the revised terms of the deal or possible negotiate another deadline extension with BP.

And analysts said an extension now seemed likely amid reports that the British firm was holding last-minute negotiations with the both the Russian government and its local partners in TNK-BP.

The Wall Street Journal cited "people familiar with the situation" as saying that BP for the past week has been negotiating buy-out terms with the four Russian billionaires in the joint venture.

Russian and Western news reports said that BP had previously offered $27 billion for the stake. But the Russian billionaires have valued their share of BP\’s local venture at up to $40 billion and denied any interest in selling.

Some analysts said the Russian billionaires could still use this opportunity to cash out because of inevitable frictions with both BP and Rosneft.

"I think that after some more delays this deal will get done because it is advantageous to the two companies and it is politically advantageous to Russia," Mikhail Molodov of Maxwell Capital Management told the RBC business channel.

"But this is a question of the medium-term perspective," Molodov added.

The deal\’s failure could deliver a damaging blow to both the fortunes of BP\’s under-fire chief Bob Dudley and the company\’s efforts to find a new growth solution following the 2010 Gulf of Mexico oil spill.

Dudley came under heavy criticism from stockholders during an April shareholders meeting in London and is under intense pressure to prove that his Russian gamble will pay off.

The restructured terms of the deal would see BP only reap half of the financial reward of future Arctic oil exploration — terms that Dudley said were worth the investment.

But he also appeared to confirm reports that BP was still hoping to secure more favourable terms that would also suit Rosneft.

"Like many things in Russia, there are lots of discussions going on," Dudley told reporters in Switzerland on Friday.

"I am sure that a resolution will come at some point in time."

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