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BP confirms advanced talks with Russia's state controlled oil company

The new $30 billion deal would put an end to recent disputes between BP and its partners

Image: Andrew Milligan/PA Wire/Press Association Images

BRITISH OIL COMPANY BP confirmed today that it is in advanced talks about selling its stake in TNK-BP to Rosneft, Russia’s state-controlled oil company. The new $30 billion deal would pave the way to further big changes in one of the world’s biggest energy markets.

Today’s confirmation was the first from BP that it was negotiating to sell its 50 per cent stake in the TNK-BP joint venture to Rosneft, Though its involvement in the joint venture had been hugely lucrative, BP has had a turbulent experience, especially in the last few years.

Although the deal has yet to be concluded, the expectation in the markets is that BP will end up taking a stake in Rosneft, which is 75 per cent owned by the Russian government. The oil company has already been involved in the Russian energy market for 15 years.

A person familiar with the talks told The Associated Press yesterday that Rosneft would buy BP’s stake in TNK-BP for between $10 billion and $15 billion cash, plus a 15-20 per cent share in Rosneft. The person spoke on condition of anonymity. At current prices, a 20 percent stake in Rosneft is worth around $15 billion.

The transaction could be announced later today following a meeting between Rosneft chief executive Igor Sechin and Russian President Vladimir Putin, the Financial Times reported.

Russia is an increasingly important part of BP’s business, accounting for a quarter of its oil production. Despite its problems in Russia, BP’s Chief Executive Bob Dudley has looked to the country’s vast oil resources as a key ingredient to the company’s recovery from the disastrous oil spill in the Gulf of Mexico.

Rosneft lies at the heart of BP’s problem in the TNK-BP joint venture. Dudley’s hope in early 2011 of forging a partnership with Rosneft to explore for oil beneath the Arctic Ocean foundered on opposition from its partners in TNK-BP. Four Russian billionaires, under the guise of a company called Alfa-Access-Renova, control the remaining 50 percent stake in the venture.

Dispute

The company and its partners have since spent much of its time in dispute, with Dudley accusing Russian shareholders of harassment while the shareholders protested against hefty spending on expatriate compensation packages for BP’s managers brought in to TNK-BP as well as BP’s focus on production in Russia.

Though an exit of the TNK-BP will put an end to squabbling, a tie-up with Roscroft presents new challengers for the company, not least whether it will be drawn into supporting the Russian government’s foreign policy.

Rosneft as well as other state-owned companies have in the past years committed to an array of deals with the Kremlin allies such as Venezuela which have very uncertain economic prospects. Analysts have pointed that several foreign pipeline and oil projects by Russian companies abroad are so economically unviable that can only be explained by geopolitical objectives.

Some experts have said the company’s involvement in Rosneft may make it more independent and reduce downside risks related to government ownership especially inrelation to investment decisions and the decline in crude oil production.

Rosneft, already a key player in the Russian energy complex, looks like it will get even bigger soon.

New licenses

Russian Deputy Prime Minister Arkady Dvorkovich said Rosneft would get several licenses to develop new oil fields in the coming days.

Dvorkovich told the Itar-TASS news agency today that remaining formalities would be settled in “the coming days, weeks at most,” he said.

Analysts at Moscow-based investment bank Renaissance Capital said recently that the BP-Rosneft deal “could have a domino effect on the Russian oil sector, as other players may try to respond to Rosneft’s move by acquiring other companies,” and bring a larger presence of international companies.

Renaissance said it expects Rosneft to eventually acquire full control of TNK-BP by buying AAR.

- Additional reporting by Michelle Hennessy.

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