OAO Rosneft agreed to buy TNK-BP, a 50-50 venture between BP Plc and a group of billionaires, for $54.8 billion in the third-biggest oil acquisition ever.
After the deal, state-run Rosneft will match the output of Exxon Mobil Corp., the world’s largest publicly traded oil producer, and control more than 40 percent of Russia’s crude output. President Vladimir Putin, who’s sought to reassert government control over the oil and gas industry, said today’s accord was important for the Russian economy.
“This deal is in line with the Russian government’s strategy of reversing the privatization of oil and gas resources that took place in the 1990s,” said Andrey Golubov, a finance lecturer at Cass Business School in London. The deal puts Rosneft “on par with global giants like Exxon Mobil.”
Rosneft, led by Chief Executive Officer Igor Sechin, will buy BP’s 50 percent stake in TNK-BP for $26.8 billion in cash and shares and has an initial agreement to acquire the billionaires’ half of the company for $28 billion in cash, according to a statement today.
The U.K. company will take a 19.75 percent stake in Rosneft and obtain two seats on the board. The deal is London-based BP’s biggest for 13 years and BP Chief Executive Officer Bob Dudley’s boldest move yet to transform the company after the 2010 Gulf of Mexico oil spill.
“Rosneft is a company working to become a global leader,” Dudley said in the statement. “BP looks forward to being able to contribute to Rosneft’s success and add value through our participation on the board.”
The only oil and gas acquisitions that have been bigger than today’s deal are Exxon’s merger with Mobil Corp., an all-stock deal valued at $80 billion when it was announced in 1998, and BP’s $56 billion purchase of Amoco Corp. the same year.
BP will receive $17.1 billion in cash and 12.8 percent of Rosneft’s shares for its half of TNK, according to a statement today. BP will reinvest $4.8 billion in the government’s shares of Rosneft, leaving it with $12.3 billion in cash, 19.75 percent of the state-backed company and two board seats.
About half of Russian government revenue comes from the oil and gas industry. If Rosneft buys all of TNK-BP, its output alone would exceed that of every Middle Eastern country except Saudi Arabia.
BP shares dropped 1.5 percent to close at 443.45 pence in London. Rosneft rose 2.6 percent in Moscow.
BP has sold about $33 billion in other assets since 2010 as it focuses on more profitable crude oil production following the Gulf spill that erased about a third of the company’s market value. Today’s deal releases BP from a difficult nine-year relationship with its billionaire partners in TNK-BP, which accounted for about a quarter of BP’s global output and returned $19 billion in dividends.
BP expects to book earnings, reserves and output from its nearly 20 percent stake in Rosneft, Chief Financial Officer Brian Gilvary said in an interview. Compared with BP’s position as a 50 percent holder of TNK, BP will initially lose about 100,000 barrels of oil a day in production and gain about 700 million barrels of oil reserves when Rosneft gets all of TNK, he said.
While TNK-BP had focused on bolstering output from aging Siberian fields, BP sought to expand in Russian exploration last year, offering its drilling expertise to Rosneft to tap the country’s Arctic waters. BP’s TNK-BP partners, represented by the AAR holding vehicle, blocked that deal.
In 2008, Dudley was forced to resign as head of the venture and leave Russia after months of battling between the shareholders over strategy. Mikhail Fridman, one of the billionaires, quit as CEO of TNK-BP this year, saying the relationship with BP had run its course.
Fridman and his partners last year argued in court that BP was required to pursue all opportunities in Russia exclusively through TNK-BP. Exxon took BP’s place in the deal to explore the Kara Sea region, and also agreed to start drilling shale prospects in Siberia.
Putin, who returned to the presidency this year following a term as prime minister, has invited foreign companies into Russia to keep oil output at a post-Soviet high of 10 million barrels a day. BP already owned 1.25 percent of Rosneft, the country’s biggest producer, after buying about $1 billion of shares in its 2006 initial public offering.
Rosneft has relied on Sechin’s access to Putin as the state strengthened control over the energy industry. The two men have worked together for more than 20 years.
As board chairman from 2006 to 2011, Sechin helped transform Rosneft into Russia’s biggest crude producer with assets from bankrupt Yukos Oil Co., and gained preferred access to Arctic prospects.
That ascent has allowed Rosneft to eclipse Kremlin-backed OAO Gazprom, the world’s largest natural gas producer, as the dominant force in the Russian energy industry. Increasing production of shale gas in the U.S. has reduced North American import demand and prompted European customers to seek cheaper prices as well, dragging on Gazprom’s performance. It’s also been targeted by a European Commission antitrust probe of its pricing practices in central and eastern Europe.