TNK-BP secures injunction on BP-Rosneft deal

Roland Nash from Verno Capital comments a BP - Rosneft issue

An arbitration panel ruled on Mar. 24 that the interim injunction issued on the deal between BP and Rosneft should continue, casting doubt on the $16 billion deal between the giants. But what's next - another showdown between the Kremlin and the oligarchs, or a buyout?

The injunction on the deal - issued by London's High Court last month - was sought by AAR, which owns 50 percent of BP’s joint-venture TNK-BP. AAR claimed that the tie-up between BP and Rosneft violated a shareholder agreement inside the joint-venture that either partner must run all Russian projects via TNK-BP. 

BP and Rosneft agreed on a $16 billion share swap deal on Jan. 14 in which Rosneft agreed to exchange 9.5 percent of its stock for 5 percent in BP. The two firms also agreed to jointly undertake exploration and development projects on the Russian Arctic shelf. 

Bloomberg reported that AAR CEO Stan Polovets sent an e-mailed statement saying: "Willfully ignoring the provisions of the shareholder agreement was a serious misjudgment by BP that has severely damaged the relationship between the TNK-BP shareholders; it has also harmed BP's reputation in Russia. We expect Bob Dudley to make every effort to rectify the situation and rebuild the trust that has been lost." 

For its part, BP said it "has always been and remains, fully committed to investing in Russia" and would look for ways to carry out the deal with Rosneft despite the injunction, reported RIA Novosti. "BP will now apply for a determination whether the share swap may proceed on its own," the company said in a press release posted on its website. It added that it hopes to: "[find] a way to resolve its differences with its Russian partners to allow these important Russian Arctic developments to proceed in future." 

With the PR out of the way, the question is: What is next for a deal that the Kremlin trumpeted as a major step in its modernization drive? Attracting foreign investment is a crucial element in that strategy, and the BP/Rosneft deal had officials beaming. Set up by Deputy Prime

Minister and Rosneft chairman Igor Sechin, it was also personally blessed by both Prime Minister Vladimir Putin and President Dmitry Medvedev.

The Kremlin is unlikely to want a fight with the oligarchs of AAR, even if they are guaranteed a win. As Roland Nash of Verno Capital suggested to bne in January: "If you were putting money on it, then you'd probably back [AAR’s Mikhail] Fridman in a fight with [former BP CEO] Tony Hayward, but Fridman versus Sechin... no contest."

The problem the Kremlin faces is that it looks damned if it does and damned if it doesn't in terms of PR to international investors. If the deal does break down, investors will point to the unfettered power of the likes of Fridman - who is renowned for beating international partners into a cocked hat. However, a crack down on three or more of Russia's most powerful tycoons risks even worse: another Khordorkovsky. 

That hasn't stopped Rosneft making a series of statements containing warnings reminiscent of sound bites from a gangster film. "Any activities aimed at disrupting the deal that cause damage to Rosneft will be closely examined," the company said in a statement on Mar. 11. "Based on such examination, Rosneft will undertake all measures to defend the rights of its shareholders, with all the resulting consequences."

Still, the success of AAR's legal action is more likely to be just another fillip for its return when selling out its 50 percent in TNK-BP. The Russians likely realized that their days in the joint-venture were numbered as soon as the BP/Rosneft agreement was announced. The state company won't want to share the marital bed with a third partner. The more trouble AAR can cause, the more desperate BP and Rosneft will be to see the back of them, and the higher a price they can ask to get out of the way. 

The scenario that AAR claims it is pushing—for TNK-BP to replace BP in the tie-up with Rosneft makes little sense. On one hand, the oligarchs of AAR made their cash from quick and high returns on land they know well. There seems little reason to believe that they're now desperate to start paddling out to the Arctic—when they've never even been offshore before—and wait 20 years for a possible return.

This reluctance is matched on the other side as well. The attraction of the tie-up with BP for Rosneft is the British company's offshore experience and exposure to international markets. TNK-BP offers neither, as Rosneft has repeatedly reminded it. 

"Rosneft again underscores that it neither conducted nor is conducting any negotiations with AAR or TNK-BP regarding a change of partners in the project. TNK-BP was never considered as a possible participant in the alliance due to its lack of the relevant competence, and TNK-BP never made any proposals to Rosneft expressing its interest in working on the shelf,” said Rosneft via a statement on Mar. 11. 

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