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BP Will Pursue Sale of Shares in Russian Venture TNK-BP

BP Will Pursue Sale of Shares in Russian Venture TNK-BP
Employees enter the headquarters of TNK-BP in Moscow. Photographer: Andrey Rudakov/Bloomberg

BP Plc will pursue a sale of its stake in Russia’s third-largest oil producer, unwinding a nine-year investment that provides about a quarter of the U.K. company’s crude output.

A TNK-BP sale, which analysts said could raise at least $30 billion, would be the biggest by Chief Executive Officer Bob Dudley following the U.S. oil spill in 2010 and dismantle BP’s landmark venture, the largest foreign investment in Russia’s oil industry. While the 50-50 venture has paid billions for BP, it also brought conflict with the Kremlin and billionaire partners.

“BP should exit and reinvest in more profitable areas with less political risk,” said Iain Reid, an analyst at Jefferies Group Inc. in London. “The joint venture has been dogged by political controversy since its inception and the constant skirmishing in Russia means that there is now very little, if any value in BP’s share price for the business.”

BP rose in London trading as investors welcomed a sale that could fund projects in areas offering more growth, such as deepwater exploration and oil and gas shale. The Alfa-Access-Renova group, representing the billionaire partners, made a preliminary proposal to buy BP’s stake about a month ago, said AAR’s CEO Stan Polovets. The only other likely buyers are Russia’s state oil and gas companies, including the nation’s largest oil producer, OAO Rosneft, according to Jefferies.

Rosneft View

“We have a new situation developing in the market,” Rosneft CEO Igor Sechin told reporters today in Berlin. “We will need to study all the information and decide after that.”

Neither Rosneft, nor the state unit that owns it, had considered making a bid, said Sechin, a former deputy to President Vladimir Putin.

David Nicholas, a BP spokesman in London, declined to identify potential bidders. The process may take several months, he said.

BP shares rose 1.8 percent to close at 402 pence in London, after earlier posting their biggest intraday increase since November.

TNK-BP’s traded unit sank 10 percent to 70 rubles in Moscow, the lowest since it started trading on the Micex index in December 2010, valuing the company at about $31 billion. The valuation doesn’t include foreign assets in Venezuela, Brazil and Vietnam, which cost more than $3 billion.

The slump in TNK-BP’s share price may benefit the potential buyer, Sechin said.

Against Policy

A BP exit from Russia would run counter to the government’s policy of encouraging foreign investment in oil to keep the country’s spot as the world’s largest producer. Putin has overseen deals with Exxon Mobil Corp., Norway’s Statoil ASA and Italy’s Eni SpA in the past year.

He has limited overseas partners to minority stakes in large energy projects. During a 2008 battle between the TNK-BP shareholders, Putin, then prime minister, said he’d warned them that a 50-50 structure would lead to “constant friction.”

The potential sale is a “large negative for TNK-BP itself, BP and the Russian investment climate as a whole,” Alexander Nazarov, an analyst at Gazprombank, said by e-mail. “BP’s share in TNK-BP was the largest foreign direct investment in Russia for years. International perception could form that BP was finally kicked out of Russia.”

Fridman’s Exit

The future of TNK-BP was cast into doubt earlier this week when one of the billionaires, Mikhail Fridman, quit as CEO. The board hasn’t met this year because shareholders can’t agree on a third independent director.

It’s the latest flare-up in a long-fractious relationship. In 2008, Dudley, who was then CEO of TNK-BP, was forced to step down and left Russia after a dispute over company strategy.

AAR lost trust in BP after the London-based producer sought a share swap and an Arctic exploration alliance with Rosneft last year, Fridman said in an interview with newspaper Kommersant. AAR challenged the deal in arbitration, citing a violation of the TNK-BP shareholder agreement.

In an attempt to overcome that challenge, BP and Rosneft offered to buy out AAR last year for $32 billion. The billionaires rejected the bid, and the BP-Rosneft alliance collapsed. TNK-BP’s management has considered seeking damages.

Company Dividends

Even with shareholder conflict, TNK-BP has been a profitable investment for BP since former CEO John Browne forged the venture in 2003. BP’s 2011 annual report showed TNK-BP had returned $19 billion in dividends since the initial investment of $8 billion. It produced 2.04 million barrels of oil equivalent a day in the first quarter, according to a results presentation.

Foreign investors should look at how much money BP earned from the joint venture, Dmitry Peskov, a Putin spokesman, told reporters in Paris today.

“Companies come and leave,” said Peskov. “Attractive assets stay.”

Potential bids from state-owned companies will depend on their budget and development strategies, Peskov said. “This is an exclusively corporate issue.”

Rustam Kazharov, a spokesman for Rosneft, said he didn’t have information about any expression of interest in BP’s stake, as did Sergei Kupriyanov, a spokesman for state-run OAO Gazprom.

Alexey Artemnenko, a spokesman for Surgutneftegas, the Russian oil producer with the biggest cash pile, declined to comment.

“BP may have decided that the dividends, although very good, are no longer worth the management headache and loss of opportunities that partnership with Rosneft, or one of the other big Russian companies, represents,” said Julian Lee, a senior analyst at the London-based Centre for Global Energy Studies. “I certainly don’t think it means BP wants to leave Russia.”

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