Rosneft and BP are preparing to announce a deal worth more than US$25 billion that could give the British oil company a stake of between 16 percent and 20 percent in the state-controlled Russian energy firm, sources familiar with the situation said.
The agreement, which has yet to be finalized, but which could be made public on today or tomorrow, folds BP’s half of TNK-BP, Russia’s third-largest oil company, into Rosneft, in exchange for cash and Rosneft stock.
It allows BP to end a stormy relationship with its partners in the venture, AAR, and to pursue closer ties to a Russian government that exerts a much tighter hold on the oil industry than in it did in the 1990s when BP first invested there.
TNK-BP is highly profitable and provides a quarter of BP’s total production, but its fields are mature, and the Soviet-born business tycoons who own the other half through AAR were in the way of BP’s search for growth in oil-rich Russia through closer ties with Rosneft and its powerful boss.
Should the deal be finalized and survive a months-long Russian government approval process, BP’s overall exposure to Russian barrels would be lower, but the holding could secure it seats on the Rosneft board and closer ties than any of its rivals to Igor Sechin, the chief executive of Rosneft, who has a significant say in energy policy.
Rosneft is already the top producing company in Russia.
If, as looks likely, it buys out AAR’s half of TNK-BP as well, it will control more than half the country’s output and be pumping more oil and gas than Exxon Mobil, the world’s top international oil company.
The deal gives Rosneft extra output and cash flow to finance exploration of Russia’s vast reserves to replace ageing and depleting fields.
It keeps BP’s expertise in Russia and provides the “quality” private shareholder Russian President Vladimir Putin has been looking for to show his critics he is pursuing a privatization program.
The deal can be described as having two steps for a single transaction worth in excess of US$25 billion, according to one source familiar with a proposal that was put to BP by Rosneft last week.
Under step one, BP will receive a 13.4 percent holding of Rosneft’s shares that belongs at present to Rosneft in the form of so-called “treasury stock,” and which is nominally worth about US$10 billion based on a tiny free-float of Rosneft shares that put the value of the company at around US$73.5 billion. It will also receive an amount of cash.
Under step two, BP will use some of that cash to buy more Rosneft stock, as it promised to do at a recent meeting between Sechin and BP’s chief executive Bob Dudley.
That would most likely to be sourced from the 75.2 percent holding of Rosneftegaz OAO, a state energy holding company which is also headed by Sechin.
The price and amount of shares was still being hammered out over the weekend, but based on a total deal value of US$25 billion, a Rosneft stake of 16 percent to 20 percent would be worth about between US$12 and US$15 billion, leaving between US$10 and US$13 billion in cash, some of which shareholders hope will be returned to them.
“There’s still stuff going on so it’s best not to get too specific,” the source said.
Those shareholders have seen little capital growth in recent years while rivals have benefitted from strong oil prices.
This has been mainly due to the 2010 US Gulf oil spill, but the increasingly bitter wrangles with AAR have played their part too.