BP May Get Rosneft Swap for Ceding Arctic Project to TNK-BP

BP Plc gained the right to carry out a $7.8 billion share swap with state-owned Russian oil producer OAO Rosneft in return for ceding its place in an Arctic oil exploration deal to its TNK-BP venture.

An arbitration panel in London today permitted the move conditional upon Rosneft’s approval, BP and its billionaire partners in TNK-BP said today in a joint statement. The BP-Rosneft alliance is Robert Dudley’s biggest deal since becoming chief executive officer of the U.K. producer following the Gulf of Mexico oil spill last year.

The order may end almost four months of wrangling after BP’s partners in TNK-BP challenged the Kara Sea exploration deal and share swap in court. An injunction won by the billionaires’ AAR group remains in place pending Rosneft’s agreement.

“This is a way forward,” said Christine Tiscareno, an equity analyst at Standard & Poor’s in London. “But it looks like AAR is calling the shots now. It makes BP look very weak.”

BP rose 3.1 percent to 454.70 pence as of the 4:30 p.m. close in London. The stock is down 9 percent since the planned alliance was announced Jan. 14. Rosneft rose 2.9 percent, the biggest gain in more than two weeks, to 235.33 rubles in Moscow.

Investment Only

Rosneft last month agreed to move back the deadline to complete an exchange of about 9.5 percent of its shares for 5 percent of BP to May 16. The Kara Sea blocks in Russia’s Arctic may contain as much as 100 billion barrels of oil. AAR claimed that their shareholder agreement gave TNK-BP exclusive rights to pursue such opportunities for BP in Russia.

The billionaires rejected buyout offers from BP and Rosneft to allow the alliance to go through, Dudley said April 14. The bid was for about $27 billion. BP also offered the partners participation in the Arctic, cash and international projects, Dudley said.

The arbitrators ordered today the stakes would have to be for investment purposes only, with voting rights exercised by independent trustees. Neither Rosneft nor BP is allowed seats on each other’s boards, according to the statement.

“We welcome today’s developments,” Stan Polovets, the CEO of AAR, said in an e-mailed statement. “We see the Arctic transaction with Rosneft as a great opportunity for TNK-BP and for Russia.”

Replacing BP

The agreement will bring BP’s expertise and technology to Russia’s offshore, Polovets said. AAR is now focused on working with BP to develop TNK-BP in Russia and expand internationally, he said.

In March, TNK-BP management under interim CEO and billionaire shareholder Mikhail Fridman proposed replacing BP in the deal with Rosneft, which BP’s directors on the TNK-BP board voted down at a meeting in Paris. AAR rejected BP’s proposal that TNK-BP hold talks with Rosneft on joining the Arctic project while allowing the share swap.

“Why would Rosneft want to strengthen AAR? This deal would make them much stronger,” Tiscareno said.

TNK-BP, set up in 2003 and owned 50-50 by BP and AAR, made BP the biggest foreign producer in Russia and now accounts for a quarter of BP’s output and a fifth of its reserves. In 2008, the billionaires ousted Dudley as head of TNK-BP, as part of the resolution of a shareholder battle over strategy.

Rosneft CEO Eduard Khudainatov has said his company wants BP, not TNK-BP, to explore in the Arctic. Russian Prime Minister Vladimir Putin said in January that BP’s experience in the Gulf of Mexico had made it the preferred partner.

Rosneft hasn’t yet held consultations with BP about the U.K. producer ceding its place in the Arctic deal to TNK-BP, Rustam Kazharov, a Rosneft spokesman, said by phone, declining to comment further. Putin’s spokesman Dmitry Peskov declined to immediately comment.

“The deal is still in the stalemate, which means a buyout of AAR still seems the only reasonable way out,” Luis Saenz, a London-based director director of international sales at brokerage Otkritie Securities Ltd., said in an e-mailed note.

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