BP Loses Arctic Deal to its Russia Subsidiary

BP said on May 6 that an arbitration panel has forced it to hand the Arctic exploration part of its tie-up with Rosneft to its Russian subsidiary TNK-BP. The London panel has also ruled that the share swap portion of BS's agreement with Rosneft may proceed only under the condition that the Russian state-held company agrees to work with TNK-BP.

Rosneft has previously ruled out joining forces with BP's Russian venture and the London panel's ruling appears to represent a serious setback for the British firm.

"The arbitral panel has today issued a consent order permitting BP and the Alfa-Access-Renova (AAR) consortium to assign the Arctic opportunity to TNK-BP, subject to Rosneft consent," BP said.

"The order also permits the proposed share swap between BP and Rosneft to proceed subject to Rosneft having consented to assign the Arctic opportunity to TNK-BP," the British firm said.

But the share swap also comes with conditions: neither Rosneft nor BP will be allowed to hold seats on each other's boards and all voting right will be held by independent trustees.

"Rosneft's consent will be required for both of these matters to proceed," BP said.

TNK-BP immediately welcomed the decision while a Rosneft official refused to comment on the ruling when contacted by telephone in Moscow. "We see the Arctic transaction with Rosneft as a great opportunity for TNK-BP and for Russia which we would like to succeed," TNK-BP chief executive Stan Polovets said. "We are now focused on working with BP and management of TNK-BP to continue the development of TNK-BP in Russia and internationally."

The $16 billion share swap and Arctic exploration agreement with Rosneft was meant to herald a new era for BP in which it blazed the trail to unexplored energy fields while putting behind it the costly 2010 Gulf of Mexico oil spill.

The deal involves Russia's largest oil firm and its negotiation was led by personally by the country's energy czar Igor Sechin -- a close ally of Prime Minister Vladimir Putin who had served on Rosneft's board until last month. But the three Russian and one Russian-born U.S. tycoons who make up AAR put up a surprisingly stiff fight against one of the most important deals the Russian government has struck in the past decade -- a risky move that now promises to reap massive rewards.

Rosneft and the government were seeking a reliable Western partner that had the advanced technology needed to dig for oil in hostile Arctic conditions and then bring the enormous wealth believed to be buried there to market.

Both the firm and the state said TNK-BP lacked the experience or equipment necessary for either of these.

Sechin also noted on one occasion that TNK-BP was not publicly traded on the London or New York stock exchanges -- a clear reference to Rosneft's desire to boost its market capitalization through the deal.

The catch successfully used by the Russian tycoons came in the fine print of their company's shareholder agreement with BP. It stated that any deal BP struck in Russia had to either go through TNK-BP or be rejected first by the group in favor of their parent company.

A visibly-frustrated Putin berated BP on March 4 for failing to notify him of that clause when he meet the firm's chief executive Bob Dudley for talks in Moscow in January.

Most of the speculation for how the deal could be completed after the first court injunction was issued in March had focused on whether the dispute could be settled through a buyout of the Russian shareholders in AAR.

But the Russian partners have been asking for a reported $40 billion for their half of the company -- a vast some that more than doubles BP's estimated cash in hand.

Rosneft has also flatly ruled out the idea taking part in a buyout. Its free cash flow was reported at just $3.2 billion at the end of March.

The Russian company has until May 16 to either accept or reject the revised terms of the deal.