BP-Rosneft $16 billion share swap deal fails

AP News
Posted: May 17, 2011 9:45 AM
BP-Rosneft $16 billion share swap deal fails

BP's hopes of making Arctic oil production the key to its recovery from the Gulf of Mexico spill were dealt a severe blow on Tuesday after it failed to secure a $16 billion share swap with Russia's state-backed Rosneft.

BP PLC revealed a midnight deadline for the deal expired after it failed to broker a settlement with its Russian partners in TNK-BP, its existing joint venture in the country, who have objected to the Rosneft deal.

The London-based company said that discussions would continue with all the parties, but a Rosneft official said the Russian company will now start considering partnership offers from other overseas oil companies.

The failure to shore up the deal to explore the Arctic's oil-rich Kara Sea, first announced by BP with much fanfare in January, is an embarrassing setback for Chief Executive Bob Dudley.

The deal, which would have been Dudley's biggest since taking over from gaffe-prone Tony Hayward late last year, was to cement BP's move forward from the Gulf spill and show it no longer needed to rely so heavily on the United States, where it is still barred from drilling in the Gulf.

The new CEO proclaimed it was "historic" and "groundbreaking," as analysts praised the group for pulling off what was seen as a significant coup for the company after its U.S. problems.

Huge oil and gas reserves are thought to lie in the Arctic Circle, where Rosneft, which is 75 percent owned by the Kremlin, has the access and expertise to drill _ unlike TNK-BP.

Nick McGregor, an oil analyst at Redmayne-Bentley, said BP had lost crucial credibility.

"This was a rehab deal to show that BP was still a player, could still do the big deals on the world stage," McGregor told BBC radio. "The fact that it was potentially a good deal, but they didn't stitch this up first of all and get a binding pre-agreement from their Russian partners really does call into question quite a lot about this deal and the way that BP is being managed."

The initiative ran aground after a quartet of Russian billionaires, BP's partners in the older TNK-BP venture, won an injunction in the London courts, claiming the new deal violates their own agreement with BP.

The shareholders, known collectively as Alfa-Access-Renova, claimed they had the right to a share in all BP operations in Russia.

A high-placed source at Rosneft told The Associated Press that the talks had failed on Monday after AAR declined an offer of $32 billion for their 50 percent stake in TNK-BP, which BP and Rosneft believed to be a 10 to 15 billion premium to the market price.

Moscow-based investment fund Troika Dialog said in a note to investors that it believed $32 billion to be a fair price.

The Rosneft source, who declined to be identified because of the sensitivity of the issue, said that Rosneft was not interested in further talks with BP and that it could no longer hold off considering partnership offers from other international oil companies.

Rosneft has received numerous offers from other international oil majors to develop the Arctic together but has refrained from talks with them waiting for the BP deal to be completed.

Rosneft declined official comment. BP did not provide any detail on what it expected the continued talks to entail.

In one positive for BP, AAR agreed to issue a joint statement reaffirming their "commitment to the growth and success of TNK-BP."

The billionaire partners in AAR are Alfa Group's Mikhail Fridman and German Khan, Renova's Viktor Vekselberg and Access Group's Len Blavatnik.

Fridman, chairman of Alfa Group, said in the joint statement with BP that AAR sees "significant benefit to developing cooperation with Rosneft within the framework of the TNK-BP shareholder agreement," and is planning "to continue discussions about potential collaboration among BP, Rosneft and AAR."

The pledge is key for BP, which cannot afford to be permanently locked in conflict with its existing partners in Russia, where it makes a substantial amount of its revenue.

BP shares were up 1 percent at 443.2 pence ($7.19) in afternoon trading on the London Stock Exchange. Rosneft shares were down 1 percent at 228 rubles ($8.09) on Moscow's MICEX stock exchange.

Dmitry Peskov, spokesman for Russian Prime Minister Vladimir Putin, who oversaw the signing of the deal in January, told the Interfax news agency that the failure of the deal will have no impact on the investment climate in Russia. The office of British Prime Minister David Cameron, who is due to travel to Moscow later this year to discuss economic ties and trade, declined to comment.

Environmental campaign group Greenpeace, meanwhile, welcomed the apparent collapse of the deal.

"The reality is that BP and the rest of the oil industry will never be able drill our way out of the oil supply challenges facing us," it said in a statement. "The only future is to go beyond oil."


Vasilyeva reported from Moscow. David Stringer in London contributed to this report.

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