BP Oil Deal BP Agrees on Terms of Rosneft Deal: Oil Company Sells TNK–BP Shares to Russian Giant

Editor: Dominik Stephan

BP agrees to sell its shares in the Anglo–Russian oil joint–venture TNK–BP to Russia's oil giant Rosneft. The British oil company will receive a mixed payment of US $ 17.1 billion in cash, and shares representing 12.84 per cent of Rosneft. Part of that money shall be used to acquire further Rosneft shares, company speakers explained.

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BP’s chairman Carl-Henric Svanberg said: ““Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns.”
BP’s chairman Carl-Henric Svanberg said: ““Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns.”
(Picture: BP)

“This is an important day for BP. Russia is vital to world energy security and will be increasingly significant in years to come. Russia has also been an important country for us over the past 20 years. Our involvement has moved with the times. TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia,” explains BP’s chairman Carl-Henric Svanberg.

A good investment indeed: Although the relationship between BP and its Russian partners, several oligarchs, was troubled at best, BP had entered the joint–venture with a US $ seven million investment. Although the British will now have to reduce their ambitious plans for crude oil production in Russia, they could hold a 19.75 percent of Rosneft shares on completion of the proposed transaction – plus further US $12.3 billion in cash.

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BP–Rosneft Deal Could Give British Roughly 20 Percent in Russia's Oil Giant

At this level of ownership, BP expects to be able to account for its share of Rosneft’s earnings, production and reserves on an equity basis. In addition BP expects to have two seats on Rosneft’s nine person main board.

Signing of the definitive agreementsis conditional on the Russian government agreeing to the sale of the 5.66 per cent stake in Rosneft and it is intended that the TNK-BP sale and this further investment in Rosneft would complete on the same day.

BP Expects Good Returns from Russian Oil Deal – A Stake in Russia?

“Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns. We consider that this is a deal which will deliver both cash and long term value for BP and its shareholders. It provides us with a sustainable stake in Russia’s energy future and is consistent with our Group strategy,” Svanberg added. BP intends to retain the shares resulting from the proposed transaction, and will evaluate how the cash proceeds will be utilised. The company further encourages a complete takeover of TNK–BP by Rosneft... more on page 2!

BP’s group chief executive Bob Dudley said: “This investment builds on BP’s track record of value creation in Russia. It is consistent with our strategy of deepening our positions in the world’s most prolific oil and gas regions.”

“Rosneft is a company working to become a global leader in the sector. It is developing its substantial asset base with new technologies and improving its management processes and corporate governance. As a major investor BP looks forward to being able to contribute to Rosneft’s success and add value through our participation on the Board. In this regard BP is supportive of Rosneft’s intention to pursue further equity in TNK-BP in due course.”

Terms and Details of Deal Between BP and State–Owned Rosneft Revealed

In accordance with the heads of terms, BP and Rosneft have an exclusivity period of 90 days to negotiate fully-termed sale and purchase agreements. After signing definitive agreements, completion would be subject to certain customary closing conditions, including governmental, regulatory and anti-trust approvals, and is currently anticipated to occur during the first half of 2013. In addition, BP will agree not to dispose of any of the Rosneft shares acquired in the transaction for at least 360 days following the completion of the transaction.

Transaction Follows Cooperation of the Two Oil Giants

BP has a long relationship with Rosneft including an alliance that started in 1998 to explore the Russian continental shelf offshore Sakhalin. Rosneft and BP are 50/50 owners of the 530,000 barrels a day German refining joint venture Ruhr Oel.

Rosneft’s proved oil reserve replacement ratio was 127 per cent in 2011. The company has recently begun a programme to develop its substantial tight oil reserves, estimated at 5.8 billion barrels, as well as exploring and developing offshore oilfields in the Arctic. – More on page 3!

TNK–BP's history was often troubled by friction and discrepancies between the joint–venture partners. Russia's oil administration is also notorious for granting exploration rights to public companies, industry experts say. Russia produces roughly 10280 thousand barrels of oil per day, making the country the number two global oil producer (following Saudi Arabia with average of 11161 thousand barrels per day).

Putin Intimates Dominating Russia's Oil Industry

Rosneft's rise to power began after the divestiture of the Jukos Group, a major private Russian oil producer lead by oligarch Michail Chodorkowski. Chodorkowski, who recieved a prison sentence for tax evasion, money laundering and fraud during the process, suspects intimates of Russia's president Wladimir Putin behind this scheme.

The closing of the TNK–BP transaction could make the state owned company the biggest producer of crude oil in the world, giving the Kremlin a unique control over the country's oil industry. Now, as Russia aims to develop offshore oil production in the Arctic, Rosneft's chaiman Igor Setschin (former deputy head of the Presidential Administration of Russia) will likely control the Russian oil empire for President Putin.

Rosneft Becomes Global Number One Oil Company – Dethroning Exxon

In 2011 Rosneft, a fully integrated national oil and gas company, produced 2.45 million barrels a day of oil, up 52 per cent since 2006. As at the end of 2011, Rosneft’s proved developed reserves stood at 9.96 billion boe with proved undeveloped reserves of 8.39 billion boe. After the takeover of TNBK–BP Rosneft will become the world's biggest oil company, bigger than the current number one, Exxon Mobil of the US.