BP, Russia face deadline as Arctic deal slips away

photo: AFP

The agreement signed earlier this year was hailed as a breakthrough for foreign investment in Russia and also a comeback for BP after the fiasco of the 2010 Gulf of Mexico oil spill.

But it ground to an almost immediate halt when it was challenged by the group of billionaires known as AAR who make up the Russian half of BP's local venture TNK-BP and are led by influential banker Mikhail Fridman.

They objected that the deal to create a joint venture for Arctic exploration between Rosneft and BP violated their shareholder pact and succeeded in having it blocked in court.

More bad news came on Monday when Russia's hugely powerful Deputy Prime Minister Igor Sechin -- who had championed the deal -- resigned from Rosneft in line with a Kremlin plan to remove government figures from the boards of state companies.

"Sechin's departure will not help the success of the transaction as he was one of its most vocal supporters," said analyst Valery Nesterov of the Troika Dialog investment bank.

Both the joint Arctic exploration and share-swap parts of the deal have been held up by a court injunction, making Thursday's deadline to complete the transaction an apparently impossible goal.

Under the agreement, Rosneft was to take a 5.0 per cent stake in BP with the British company taking 9.5 per cent in the Russian firm.

A Stockholm arbitration panel last week decided to keep its injunction on the BP-Rosneft cross holding "until further notice," after issuing a similar ruling on the Arctic exploration part of the historic agreement two weeks earlier.

It left the door open by saying the British giant could discuss the possibility of extending the April 14 deadline but it is not clear how BP intends to go about this.

Thursday's deadline also coincides with BP's annual meeting in London, a gathering that now promises to be a stormy affair as shareholders vent their frustration with management.

Prime Minister Vladimir Putin personally blessed the tie-up that would have enabled Russia to win a broader swathe of the world energy market, raising questions over how the conflict with AAR arose in the first place.

The Wall Street Journal reported this month that Putin had warned BP's embattled chief executive Robert Dudley that the deal could hit problems, saying it was simplistic to believe that the Kremlin controls everything in Russia.

It remains unclear how and if the conflict will be resolved. Analysts have long speculated the end-game could bring a transformation in the shareholder structure of TNK-BP, long seen as one of the British firm's prize assets.

This would see Rosneft entering TNK-BP, most likely through buying out AAR at a premium, although the company has repeatedly denied being in talks on the issue and several other permutations have been mooted in the press.

The Vedomosti daily reported on Tuesday that the sides were in initial talks on a possible solution whereby BP and Rosneft would jointly buy out the billionaires in TNK-BP.

"I think that there will be a way out of this," Sechin said last week. "All the participants in this process have time to think things over and make a contribution" that could resolve the dispute.