Friday, March 25, 2011
by Guy Chazan & Gregory L. White
The Wall Street Journal
BP and Rosneft scrambled Friday to salvage their landmark alliance after BP's Russian partners in its TNK-BP Ltd. joint venture blocked it. But it is unclear how a deal so mired in legal challenges and high-stakes Russian power struggles can now be rescued.
Rosneft still appears determined to implement its tie-up with BP, despite Thursday's decision by a Stockholm arbitration panel to effectively put it on ice. The Russian company's chairman, Igor Sechin, noted the arbitrators did not block the deal completely, but simply extended an injunction temporarily freezing it.
Sechin, who is also Russia's deputy prime minister, told Russian newswires that Rosneft was "satisfied" with BP as a partner, and was working on a series of measures to allow it "to defend its interests."
That suggests the state-controlled oil company has not given up on its proposed alliance with BP, under which the two firms agreed to swap shares in each other and explore for oil and gas together in the frigid, hydrocarbon-rich waters of the Russian Arctic.
The panel's move marked a setback for the architects of the deal, Sechin and BP Chief Executive Bob Dudley, and both are bound to lose face as they seek to navigate a way out of the impasse. Some analysts worry the dispute could harm BP's overall position in Russia, which accounts for one-quarter of its global oil and gas production and close to a fifth of its reserves.
"On the face of it this looks a messy situation and one where we think BP will do well to emerge with all of its investment in TNK-BP, reputation in Russia and Arctic oil deal intact," Citigroup said in a note.
But for the apparent winners of the spat, Access-Alfa-Renova or AAR, the group of Soviet-born billionaires who own 50% of TNK-BP, the victory may be Pyrrhic. Some bankers and analysts say AAR could soon face pressure from the Russian authorities to drop its opposition to a deal that has the public support of the country's top leaders.
"It's pretty risky to challenge the government on something that's considered strategically important," said one veteran Moscow banker.
People close to AAR insist the Russian shareholders are confident they have the support of the authorities for what they see as a defense of their legal interests.
One way out of the standoff would be for TNK-BP to participate in the Arctic project in place of BP, as the joint venture's management had proposed last month. At the time, both Rosneft and BP opposed that option, arguing that TNK-BP lacked the experience and technology required for the venture.
Sechin appeared to soften his position slightly Friday, saying TNK-BP might be able to come up with a structure that would allow it to take part -- such as by outsourcing some of the work to others with experience drilling offshore. "But this is a somewhat different construct," he said.
BP, meanwhile, is still determined to at least salvage the share swap element of its deal with Rosneft. It said Thursday that it would be seeking a determination from the Stockholm arbitrators as to whether that part of the agreement "may proceed on its own."
A BP spokesman denied suggestions from analysts that such an equity investment would be of dubious strategic value to BP without the Arctic deals. "It would still be a very effective way of building on the relationship we've had with Rosneft since the late 1990s," he said.
In opposing the BP-Rosneft tie-up, AAR argued that it violated their shareholder agreement with BP, which stipulates the U.K. company must pursue all business opportunities in Russia exclusively through TNK-BP. The deal was sent to independent arbitrators after AAR won a court injunction last month freezing it.
The Russian tycoons can now either ensure that TNK-BP is dealt in on the BP-Rosneft alliance, or that they are richly compensated for dropping their opposition to the deal.
Thursday's ruling will also give them maximum leverage if they want to discuss terms for an exit from TNK-BP, according to people close to the situation. "This at least forces everyone to the table," said one person.
AAR insists they have no plans to sell, and Sechin said Friday that Rosneft has not discussed a buyout with them. The likely price tag -- at least $30 billion -- would make the deal a costly one for any potential buyer, analysts and bankers say.
Another possible outcome could see BP selling its stake in TNK-BP to another international oil company, thereby freeing the U.K. giant up to proceed as planned with its Rosneft deal. No such discussions have been held, according to people close to TNK-BP.
The most painful scenario for BP would be to see the Arctic deal go to a rival, such as Shell or Chevron.
The exclusivity period of its deal with Rosneft expires Apr. 14. Yet people familiar with the situation say it's unlikely any other Western major would agree to swap shares with Rosneft. BP's willingness to carry out such an arrangement was a key factor in it winning the Arctic deal.
Rosneft still appears determined to implement its tie-up with BP, despite Thursday's decision by a Stockholm arbitration panel to effectively put it on ice. The Russian company's chairman, Igor Sechin, noted the arbitrators did not block the deal completely, but simply extended an injunction temporarily freezing it.
Sechin, who is also Russia's deputy prime minister, told Russian newswires that Rosneft was "satisfied" with BP as a partner, and was working on a series of measures to allow it "to defend its interests."
That suggests the state-controlled oil company has not given up on its proposed alliance with BP, under which the two firms agreed to swap shares in each other and explore for oil and gas together in the frigid, hydrocarbon-rich waters of the Russian Arctic.
The panel's move marked a setback for the architects of the deal, Sechin and BP Chief Executive Bob Dudley, and both are bound to lose face as they seek to navigate a way out of the impasse. Some analysts worry the dispute could harm BP's overall position in Russia, which accounts for one-quarter of its global oil and gas production and close to a fifth of its reserves.
"On the face of it this looks a messy situation and one where we think BP will do well to emerge with all of its investment in TNK-BP, reputation in Russia and Arctic oil deal intact," Citigroup said in a note.
But for the apparent winners of the spat, Access-Alfa-Renova or AAR, the group of Soviet-born billionaires who own 50% of TNK-BP, the victory may be Pyrrhic. Some bankers and analysts say AAR could soon face pressure from the Russian authorities to drop its opposition to a deal that has the public support of the country's top leaders.
"It's pretty risky to challenge the government on something that's considered strategically important," said one veteran Moscow banker.
People close to AAR insist the Russian shareholders are confident they have the support of the authorities for what they see as a defense of their legal interests.
One way out of the standoff would be for TNK-BP to participate in the Arctic project in place of BP, as the joint venture's management had proposed last month. At the time, both Rosneft and BP opposed that option, arguing that TNK-BP lacked the experience and technology required for the venture.
Sechin appeared to soften his position slightly Friday, saying TNK-BP might be able to come up with a structure that would allow it to take part -- such as by outsourcing some of the work to others with experience drilling offshore. "But this is a somewhat different construct," he said.
BP, meanwhile, is still determined to at least salvage the share swap element of its deal with Rosneft. It said Thursday that it would be seeking a determination from the Stockholm arbitrators as to whether that part of the agreement "may proceed on its own."
A BP spokesman denied suggestions from analysts that such an equity investment would be of dubious strategic value to BP without the Arctic deals. "It would still be a very effective way of building on the relationship we've had with Rosneft since the late 1990s," he said.
In opposing the BP-Rosneft tie-up, AAR argued that it violated their shareholder agreement with BP, which stipulates the U.K. company must pursue all business opportunities in Russia exclusively through TNK-BP. The deal was sent to independent arbitrators after AAR won a court injunction last month freezing it.
The Russian tycoons can now either ensure that TNK-BP is dealt in on the BP-Rosneft alliance, or that they are richly compensated for dropping their opposition to the deal.
Thursday's ruling will also give them maximum leverage if they want to discuss terms for an exit from TNK-BP, according to people close to the situation. "This at least forces everyone to the table," said one person.
AAR insists they have no plans to sell, and Sechin said Friday that Rosneft has not discussed a buyout with them. The likely price tag -- at least $30 billion -- would make the deal a costly one for any potential buyer, analysts and bankers say.
Another possible outcome could see BP selling its stake in TNK-BP to another international oil company, thereby freeing the U.K. giant up to proceed as planned with its Rosneft deal. No such discussions have been held, according to people close to TNK-BP.
The most painful scenario for BP would be to see the Arctic deal go to a rival, such as Shell or Chevron.
The exclusivity period of its deal with Rosneft expires Apr. 14. Yet people familiar with the situation say it's unlikely any other Western major would agree to swap shares with Rosneft. BP's willingness to carry out such an arrangement was a key factor in it winning the Arctic deal.
