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BP Boosts Ex-Yukos Assets After Khodorkovsky Sentence Extended

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Robert Dudley and Eduard Khudainatov
BP CEO Robert Dudley, left, and Rosneft CEO Eduard Khudainatov sign the share swap agreement in London on Friday. Photographer: Simon Dawson/Bloomberg

Jan. 16 (Bloomberg) -- BP Plc will boost its holdings in the former assets of Yukos Oil Co. through its share swap with Russia’s state-run oil producer, two weeks after ex-Yukos chief Mikhail Khodorkovsky’s sentence was extended by six years.

BP agreed on Jan. 14 to exchange $7.8 billion of stock for 9.5 percent of OAO Rosneft, which became Russia’s largest oil producer after aquiring Yukos assets in 2007. The deal will also provide access to untapped Arctic offshore oil and gas resources as London-based BP sells assets to pay for last year’s oil spill in the Gulf of Mexico.

Khodorkovsky, once Russia’s richest man, has called the charges against him retribution for political opposition to then-President Vladimir Putin. Putin, now prime minister, has denied involvement, saying that it was a matter for the courts and that “a thief should sit in prison.” The U.S. and European governments said last month’s conviction heightened concerns about Russia’s commitment to the rule of law.

“This is BP’s ticket to the Russian Arctic offshore,” Yuri Kogtev, head of Moscow-based oil and gas research and consulting company RusEnergy, said by phone. The share swap may have been a condition imposed by the Russian government, he said. “I wouldn’t say BP was hunting for Yukos assets.”

Yukos Assets

Rosneft tripled production overnight in 2004, a year after Khodorkovsky was arrested while refueling his plane in Siberia, with the $9.4 billion purchase of Yukos’s largest unit, sold by the state to recover part of a tax bill that eventually exceeded $30 billion. Rosneft acquired most of Yukos’s remaining assets at bankruptcy auctions in 2007.

BP Chairman Carl-Henric Svanberg declined to comment on Rosneft’s purchase of Yukos assets in an interview on Jan. 14.

Khodorkovsky was convicted of money laundering and embezzling oil, extending his eight-year sentence for previous tax evasion and fraud offences by about six years. The longer term will take his stay in prison beyond the 2012 presidential election, which could return Putin to office.

Yukos lawyers and former managers have said the state expropriated assets from the company, once Russia’s biggest oil exporter, fighting to overturn asset sales and halt Rosneft’s 2006 listing of shares in London. BP bought a 1.3 percent stake in the initial public offering.

TNK-BP, the Russian venture owned by BP and a group of billionaires bid for a 9.4 percent stake in Rosneft held by Yukos in the first in a series of liquidation sales in 2007, saying it was an effort to build strategic ties with the state oil company. Rosneft outbid TNK-BP for the shares.

Yukos Risk

Yukos’s former managers and shareholders have continued to battle for damages, filing a $98 billion suit in the European Court of Human Rights and a $100 billion case in the Permanent Court of Arbitration in The Hague. The case in the human rights court completed hearings in March 2010 and may issue a judgment this year.

“BP shareholders should be concerned that once again the company has invested in a deal with Rosneft on assets over which there is significant question as to security of Rosneft’s ownership,” Claire Davidson, an outside spokeswoman for Yukos Capital, run by former Yukos managers, said in an e-mail.

Rosneft and BP’s lawyers studied possible risks, Rosneft spokesman Rustam Kazharov said by telephone. “Our lawyers monitor everything,” Kazharov said. “If even one threat existed to BP investors, they would never agree on that.”

BP and Rosneft have worked together for more than 12 years, forming an alliance to explore off Sakhalin Island in Russia’s Far East in 1998, when the state company produced about 250,000 barrels a day. Last year, Rosneft produced 2.3 million barrels a day, according to the Energy Ministry’s CDU TEK statistics unit.

“Rosneft was a mess, it became attractive when it acquired the best-run Russian company, Yukos,” said Christine Tiscareno, an equity analyst at Standard & Poor’s in London.

To contact the reporter on this story: Marina Sysoyeva in Moscow at msysoyeva@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.

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