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Analysis & Opinion
11.04.11 A Rider In The Storm
By Tai Adelaja

If British Petroleum wants to have a viable business in Russia, it will need to do more than rely on an oligarch-style business template and old-style political patronage, analysts say. The British company will again be making frantic efforts this week to salvage its $16-billion deal with Russia’s Rosneft, after the Stockholm Arbitration Court ruled on Friday that a February 1 injunction blocking the deal should remain in place until further notice. The court's decision adds a new dimension to the multifaceted problems of the oil giant, which is still struggling to shake off the financial aftermath of last year’s Macondo well disaster in the Gulf of Mexico.

The international oil major teamed up with the state-owned oil company Rosneft in January, in a controversial deal that Bob Dudley, BP's chief executive, enthusiastically called "a new template for how business can be done in our industry." According to the terms of the transaction, the companies would jointly explore and develop a 5,000-square-kilometer area of the Kara Sea on Russia's Arctic continental shelf, estimated to contain some five billion tons of crude oil and ten trillion cubic meters of gas. BP was to receive 33 percent in the joint venture, and Rosneft – 66 percent. In addition, BP will swap five percent of its shares, valued at $7.8 billion, for 9.5 percent of Rosneft.

The deal could easily have made BP the biggest non-state equity holder in Rosneft, a company 75 percent controlled by the government, while Rosneft will have become its single largest shareholder. But the Russian billionaire shareholders of TNK-BP, the joint venture owned by BP and Alfa-Access-Renova (AAR) consortium, opposed the deal, arguing that it violates the terms of a shareholder agreement. According to TNK-BP, which produces around a third of the British company's oil output, its shareholders own the right of first refusal on any deals struck by BP in Russia. AAR, the consortium representing billionaires Mikhail Fridman, Viktor Vekselberg, Leonard Blavatnik and German Khan, the Russian shareholders in TNK-BP, filed a suit in a London High Court and won a temporary ban on all transactions on the exchange of shares. The case was transferred to the Stockholm arbitration tribunal, and in a March 24 ruling the tribunal upheld an injunction against the BP-Rosneft deal to conduct a $16 billion share swap and launch an Arctic offshore exploration venture. The British oil major requested a further review of the share swap as a standalone deal, excluding the Arctic project, arguing that it was allowed under a carve-out clause in the shareholder agreement.

In its Friday ruling, the tribunal asked BP and AAR to submit additional documents to the case and scheduled another hearing at a later date. The court also gave BP some room to maneuver by allowing the company to discuss the possibility of extending its share swap agreement – which expires on April 14 – with Rosneft. BP said in a statement on Friday that it would now "also be exploring possibilities for a reasonable commercial solution with all parties," as one of a number of ways to resolve its differences with its partners. AAR, which has so far won every round in the legal battle over the BP-Rosneft pact, welcomed the decision of the tribunal on Friday, describing it as “fair, balanced, and thoughtful.” “We will be pleased to continue to cooperate with the tribunal and will provide any additional information and evidence it requires during the next stage of the hearings," Stan Polovets, chief executive officer of AAR, said in a statement.

The Russian government’s reaction has also been swift, albeit providing little comfort for the embattled British oil company. Deputy Prime Minister Igor Sechin, who is also the chairman of Rosneft’s board of directors, told reporters on Friday that he expects Rosneft and the Russian shareholders of TNK-BP, Alfa-Access-Renova (AAR) consortium, to settle their dispute over the planned tie-up between BP and Rosneft by April 14. Otherwise, he said, "Rosneft may take actions to secure its interests." Some analysts saw in Sechin’s statement a desire by Rosneft to seek moral and material compensation from BP for failing to foresee the legal disputes and give appropriate warning. "It is believed that the government adapted a back-seat approach to the BP-AAR dispute, while the two parties tried to resolve the issue between them," said UralSib chief strategist Chris Weafer. "Now that this has failed, we can expect that there will be a lot more pressure applied this week and, if no agreement is reached by Thursday, then direct intervention by the state."

BP’s conundrum illustrates how much state oligarchy has changed in Russia since President Dmitry Medvedev made combating corruption his number one priority, analysts say. “This is the first case after [Mikhail] Khodorkovsky’s that ‘a privately-owned Russian company has dared to publicly challenge obvious state interest’,” Yulia Bushueva, an independent analyst, wrote in the Vedomosti business daily. Prime Minister Vladimir Putin, who gave the BP-Rosneft alliance a strong backing in January, has so far avoided getting publicly enmeshed in the controversy. Putin said in Bryansk last month that he was "completely unaware" that BP and TNK-BP could disagree over the British oil company's planned cooperation agreement with Rosneft. "I met with the head of BP, and he didn't say a word to me about it," Putin said. "Neither TNK-BP – BP's 50/50 joint venture with a group of Russian investors – nor the British company informed Rosneft that ‘there could be any difficulties’.”

BP’s oversight has kept analysts wondering how the international oil major, with its extensive experience and expertise, could have failed to see the writings on the wall in Russia. “BP will have done its due diligence and understood the risk,” Weafer said. “But, for reasons we are not aware of, BP management assumed that AAR would not take the action it has or would have been persuaded against it.” Other analysts were more pointed. Bushueva said BP has largely misread and misinterpreted signals from the Kremlin. “BP has long worked in Russia and had perhaps grown accustomed to the unorthodox ways of getting things done,” Bushueva said. The oil-giant might also be betting on Sechin, who oversees the energy sector, to pacify AAR and prevent the conflict from spilling out, she said. "It is now obvious that the company miscalculated," Bushueva said. “BP is the first Western public company that tried to violate a contractual agreement by employing the tactics of Russian oligarchs.”

Ahead of Friday's decision, BP has asked the Russian partners in its joint venture TNK-BP to convene a board meeting to discuss its stalled partnership with Rosneft, Reuters reported, citing a source close to TNK-BP management. In the past, AAR has shown an interest in the Arctic project, and BP's Bob Dudley said that the oil giant is not against the participation of TNK-BP. But the shareholders of TNK-BP have not been able to come to any decision about possible participation in the alliance, and Rosneft has said that TNK-BP has neither the expertise nor the technology to develop the Arctic shelf. In the coming days, both sides will struggle to work out an exit strategy, which might include the participation of TNK-BP one way or another in the BP-Rosneft deal, analysts say. “We know that this deal is too important for Russia’s long-term strategic interests to be allowed to fail,” Weafer said. “Russia wants to remain the world’s biggest energy producer. That is the country’s principal competitive advantage in geo-politics and as it looks to increase trade and investment access.” That may also be the only hope for BP in Russia.
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