BP's Russian Revolution Flops

Published in Company Comment on 17 May 2011

Its deal to seek out Arctic oil with Russian rival Rosneft appears to be over.

Beleaguered oil supermajor BP (LSE: BP) aimed to bounce back from its disastrous spill in the Gulf of Mexico by hunting oil in the vast wastes of the Russian Arctic.

Torn between two partners

The problem is that, in seeking to team up with Russian giant OAO Rosneft, BP started two-timing its existing Russian partner, Alfa-Access-Renova (AAR).

On 14 January, BP announced a ground-breaking deal with state-owned Rosneft that would see the two groups form a partnership to drill in the Arctic. To cement this alliance, BP and Rosneft would swap shares worth $7.8 billion (£4.8 billion), exchanging 5% of BP for 9.5% of Rosneft.

However, the four Russian billionaires who control AAR -- including Mikhail Fridman, Russia's seventh-richest man -- were far from happy that BP was courting Rosneft behind their backs. Hence, the spurned oligarchs applied for, and obtained, a court injunction preventing BP from getting into bed with Rosneft.

As a compromise, BP and Rosneft offered to buy out AAR's billionaires by paying $32 billion for their half-stake in the highly profitable TNK-BP joint venture. With TNK-BP valued at around $44 billion, this deal would have delivered a $10 billion premium to AAR.

Set up as a 50/50 partnership in 2003, TNK-BP now provides almost a quarter of BP's output and accounts for a fifth of its reserves. In the first quarter of this year, TNK-BP's profits gushed 91% to $2.4 billion, making it a big money-spinner for both BP and AAR.

Loss of trust

Of course, when partners stray, trust tends to go out of the window. Thus, AAR has refused to lift its injunction as it doubts whether BP and Rosneft will deliver on their proposed £20 billion buyout of TNK-BP.

Things came to a head at midnight last night, when an extended deadline for sealing the BP-Rosneft tie-up expired without agreement. As a result, BP and AAR confirmed their commitment to their existing partnership and, in effect, have put Rosneft back on the shelf.

BP reports that the BP-AAR-Rosneft talks will continue, although the ending of BP's exclusivity agreement now leaves Rosneft free to seek new partners.

All the same, this saga has become somewhat embarrassing for BP's CEO Bob Dudley, who is keen to re-focus the business on non-US fields and faster-growing economies.

BP and BRICs

Already this year, BP has signed a $7.2 billion deal with India's Reliance Industries to explore deepwater fields off India's coast. In 2010, BP inked a similar deal to explore offshore Brazil, plus it agreed a tie-up with Chinese state-owned Cnooc to drill in the South China Sea.

Even so, losing the opportunity to explore Russia's Kara Sea is a big disappointment for BP, its directors and owners. With potential reserves of up to 100 billion barrels of oil, the Kara fields would have been a huge producer for BP and its proposed Russian ally.

Therefore, if BP, AAR and Rosneft can't reach a past-the-post agreement, then BP will probably have to look outside of Russia for its next big alliance. In the meantime, BP's rivals -- perhaps including Royal Dutch Shell (LSE: RDSB) -- will be queuing up to strike a deal with Rosneft.

What's the lesson here?

As I write, BP's share price is ahead just over 1% at 443.7p, having fallen as low as 434p at the market open. In other words, BP's shareholders seem to have shrugged off this latest setback.

BP should learn a lesson from this setback. When seeking out revolutionary or transformational deals around the globe, it pays not to tread on your existing partners' toes!

More from Cliff D'Arcy:

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tru2me 18 May 2011 , 10:21am

Cliff you don't think Tony Hayward personality, Bob Dudley's predecessor had something to do with annoying the oligarchs so catastrophically?

I picked this up from an old BBC interview with Tony Hayward after the BP oil spill.

"If I had done a degree at RADA rather than a degree in geology, I may have done better, but I'm not certain it would've changed the outcome," Hayward told the BBC. "But certainly the perception of myself may have been different."

MK22 18 May 2011 , 12:27pm

The problem is Bob Dudley as far as the Russians are concerned, they just don't like him. Appointing him as CEO in place of Hayward was a bad mistake. It's about time the British members of the board bit the bullet and got rid of the American failures and hasbeens from the board.

eccyman 18 May 2011 , 12:32pm

Shell were stung by the Russians in Sakhalin, will they be keen to try again?

Chongq 18 May 2011 , 4:10pm

Dudley spent 4 years running the TNK-BP JV representing BP's 50% share & yet he failed to find time to read and/or understand the JV agreement. What a loser.

CunningCliff 19 May 2011 , 10:59am

I agree with the previous posters' comments. It seems remarkable that a global Goliath such as BP could be so bone-headed as to make such an obvious blunder with its most important regional partner!


eccyman 19 May 2011 , 3:02pm

Didn't VW make a pretty big blunder when they bought Rolls Royce Motors? Good deal except it didn't include the trade name which was owned by the aircraft engine maker of the same name, but an entirely different company.

Get's even better, Rolls Royce group licensed the Rolls Royce car brand to VW's arch rivals at BMW!

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