Rosneft deal gives BP a second chance
THE DEAL struck between Russian giant Rosneft and British energy major BP may prove to be a real turning point in Russian oil.
Rosneft is set to absorb Russia’s third largest oil company, the long-troubled TNK-BP, at a total cost of US$61 billion.
It will become the largest crude oil producer in the world.
The deal puts an end to a long-standing conflict between BP and its Russian billionaire partners.
When TNK-BP formed in 2003, it was believed that the deal was blessed – and protected – by President Vladimir Putin himself.
Soon enough it transpired that the Russian partners, the AAR (Alfa, Access, Renova) group, were not bound by restrictions from above. And they were not happy with the joint venture agreement.
Following increasing pressure, the entire BP management team was forced to flee Russia in 2008.
In January 2009, AAR assumed control over TNK-BP. BP’s faith in protection from Mr Putin turned out to have been misguided.
In January 2011, markets were stunned by another banner headline deal. This time BP was to undertake a US$16 billion share swap with Rosneft, aimed at joint exploration of the oil and gas riches of the Arctic. The AAR group argued that the TNK-BP joint venture agreement included the right of first refusal for any further deals inside Russia. It won an international injunction after claiming that the deal with Rosneft was in breach of that agreement.
BP apparently had believed that protection from above would save it from legal action by its partners. This was another mistake. Following litigation, the deal collapsed and Rosneft instead turned to ExxonMobil.
While the saga of TNK-BP has been highly damaging to investor confidence in investment in Russia, the players involved have little reason to complain. Since TNK-BP was formed, BP has earned US$19 billion in dividends, and when it cashed out it was paid US$17.1 billion in cash and received a 12.84 per cent share of Rosneft. The AAR group received US$28 billion for its share.
The overall story of Russian energy has been one of very large deals, substantial foreign involvement and severe disappointments.
This may be about to change. Russian brownfield energy assets in Western Siberia are being depleted and new frontiers must be explored, particularly in the Arctic. As this requires foreign participation, it also requires stable rules of the game.