BP Plc’s (BP) share-swap agreement with Russia’s state-operated oil company, Rosneft is in dire straits. First, the U.K. oil giant faces a court injunction held by its Russian partner, TNK-BP related to the deal. The next blow is the resignation of the deal’s chief patron, Russia’s Deputy Prime Minister, Igor Sechin, following President Dmitry Medvedev’s orders to remove ministers from the boards of state companies. This move is part of the President’s drive to separate politics and business.
In mid-January 2011, BP and Rosneft entered into a share-swap agreement to jointly explore and develop three offshore licenses in the prospective Siberian Artic region. Under the agreement, the U.K. oil major offered 5% of its ordinary shares, valued at $7.8 billion, in exchange for 9.5% of Rosneft’s shares.
However, TNK-BP management alleged BP of keeping it in the dark about the share-swap deal, thereby violating their joint venture (JV) shareholder agreement. The Russian partner took legal action and blocked the Rosneft deal though court order. TNK-BP is Russia’s third largest oil company, held 50% by BP and 50% by the Alfa-Access-Renova (AAR) Consortium.
TNK-BP is also considering legal charge, between 5 billion and $10 billion, against BP for damages from business prospects it lost due to the Arctic deal. The BP spokesman, however, denied receiving any notice about a possible lawsuit. TNK-BP also declined to comment.
Meanwhile, BP is facing an April 14 deadline, when its share-swap agreement with Rosneft will expire. The adjudication panel did not completely block the share swap, giving BP a chance to extend the deadline.
Hence, it remains to be seen whether the U.K. oil giant will ask Rosneft to defer the deadline or divest its 50% stake in TNK-BP to save the Rosneft partnership. If luck prevails for BP, it might even succeed in wining AAR’s confidence for lifting the injunction.
Russia is presently the leader in oil production with a daily output of more than 10 million barrels. The Artic region, by itself, is expected to have a reserve potential of 51 billion tons of oil, enough to cover worldwide demand for four years or more. Hence, the deal enables BP, which already owns 1% of Rosneft, to strengthen its position in the Russian hydrocarbon reserve, which was previously off limits to foreign companies.
Unless BP is compelled to detach itself from the TNK-BP JV, it will continue to hold an advantageous position in Russia as compared with other western oil companies like Chevron Corp. (CVX) or ExxonMobil Corp. (XOM).
This isn’t the first time that BP is facing a controversy. Last year, the Gulf of Mexico oil spill had hit the company hard. However, it managed to come out of the disaster through various upstream activities. While the deal with Rosneft has affected BP’s share performance, we expect the company to come out of this dispute and hence, stick to our long-term Neutral recommendation.
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