May 10, 2011
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№ 4 (April 2011)

BP-AAR-Rosneft: Down To The Wire

The decision as to how the BP-AAR dispute ends has effectively now been passed to the state. While the arbitration panel has cleared the way for TNK-BP to be brought into the Arctic deal in place of BP, state controlled Rosneft has previously said that it does not favour that. This week will likely see very intense negotiations between all parties with a view to concluding a deal ahead of the May 16th deadline. While the Prime Minister’s spokesman has previously said that the state is not involved, that will surely now change. It is inconceivable that the resolution of such an important deal in the country’s mote important strategic sector will not be overseen by the Prime Minister’s office.

By Chris Weafer, Chief Strategist, UralSib Bank

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Rosneft must now decide. On Friday, a joint statement by BP and AAR said that the arbitration panel in London agreed to allow the share swap between BP and Rosneft to proceed only on condition that TNK-BP replaces BP in the deal with Rosneft to explore the Kara Sea blocks in Russia’s Arctic. The next step is for BP and TNK-BP to open negotiations with Rosneft to get its approval for this revised partnership. Rosneft has previously said that it does not want TNK-BP as BP alone has the exploration/technical experience required. Prime Minister Putin has also said the same thing.
After Friday’s ruling, there are three clear options;
    1.    Rosneft allows the revised partnership and all sides find a way for BP to be the expert “sub-contractor” on the project as part of an internal TNK-BP deal
    2.    Rosneft refuses to agree to the new terms and the original deal collapses
    3.    The AAR shareholders are either bought out of TNK-BP or a longer-term exit route is agreed that would allow TNK-BP to be taken over by a BP-Rosneft combination or other viable alternative
State still wants the BP deal. It is clear that the state wants to avoid option 2, i.e. the deal fails. This is too important for Russia’s strategic energy development plan and for Rosneft’s ambitious future development as a global oil player. The fit with BP is opportunistically perfect for both sides and a similar structured deal, i.e. with an equity swap, is unlikely to be achieved with any other oil major that has the technical know-how.
Important to conclude this positively. Before this latest dispute with AAR, concluding such a major deal between a state company and BP was also considered a strong positive to the perception of investment risk in Russia because of the latter’s often controversial history in Russia. Now it is almost essential to avoid a further deterioration of that perception.
AAR wants a high exit price. The AAR shareholder’s position is that they do not wish to sell out of TNK-BP and want to best position the company for future growth. That said, it is reported that AAR did offer to sell its 50% stake for $40 bln while BP offered $27 bln (the current stock market value of a 50% stake is $25 bln). The principal AAR shareholders are all involved in other, non-energy related, industries. Last week it was reported that Len Blavatnik’s Access Industries is the front-runner to buy Warner Music Group.
End game. From a strategic perspective, a revised deal, with TNK-BP replacing BP, is more likely to be agreed with Rosneft than the original deal to fail outright. The only question is whether the AAR shareholders will be part of that revised deal; for how long; and, if not, who takes them out and for how much?
Note: UralSib currently has a Hold recommendation in all of the stocks in the Oil & Gas sector except Gazprom, Alliance Oil, the Oil Service companies (all rated  Buy) and Transneft (rated Sell).
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