Rosneft and BP are preparing to announce a deal worth over $25 billion that could give the British oil company a stake of between 16 and 20 percent in the state-controlled Russian energy firm, sources familiar with the situation said.
The agreement, which has yet to be finalized but which could be made public on Monday or Tuesday, folds BP's half of TNK-BP , Russia's third-largest oil company, into Rosneft, in exchange for cash and Rosneft stock.
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It allows BP to end a stormy relationship with its partners in the venture, AAR, and to pursue closer ties to a Russian government that exerts a much tighter hold on the oil industry than in it did in the 1990s when BP first invested there.
TNK-BP is highly profitable and provides a quarter of BP's total production, but its fields are mature, and the Soviet-born business tycoons who own the other half through AAR were in the way of BP's search for growth in oil-rich Russia through closer ties with Rosneft and its powerful boss.
Should the deal be finalized and survive a months-long Russian government approval process, BP's overall exposure to Russian barrels would be lower, but the holding could secure it seats on the Rosneft board and closer ties than any of its rivals to Igor Sechin, the chief executive of Rosneft, who has a significant say in energy policy.
Rosneft is already the top producing company in Russia. If, as looks likely, it buys out AAR's half of TNK-BP as well, it will control more than half the country's output and be pumping more oil and gas than Exxon Mobil , the world's top international oil company.
The deal gives Rosneft extra output and cash flow to finance exploration of Russia's vast reserves to replace ageing and depleting fields. It keeps BP's expertise in Russia and provides the "quality" private shareholder President Vladimir Putin has been looking for to show his critics he is pursuing a privatization program.
SOURCING THE STOCK
The deal can be described as having two steps for a single transaction worth in excess of $25 billion, according to one source familiar with a proposal that was put to BP by Rosneft last week.
Under step one, BP will receive a 13.4 percent holding of Rosneft's shares that belongs at present to Rosneft in the form of so-called "treasury stock", and which is nominally worth about $10 billion based on a tiny free-float of Rosneft shares that put the value of the company at around $73.5 billion. It will also receive an amount of cash.
Under step two, BP will use some of that cash to buy more Rosneft stock, as it promised to do at a recent meeting between Sechin and BP's chief executive Bob Dudley.
That would most likely to be sourced from the 75.2 percent holding of Rosneftegaz OAO , a state energy holding company which is also headed by Sechin.
The price and amount of shares was still being hammered out at the weekend, but based on a total deal value of $25 billion, a Rosneft stake of 16-20 percent would be worth about $12-$15 billion, leaving $10-$13 billion in cash, some of which shareholders hope will be returned to them.
"There's still stuff going on so it's best not to get too specific," said the source.
Those shareholders have seen little capital growth in recent years while rivals have benefitted from strong oil prices. This has been mainly due to the 2010 U.S. Gulf oil spill, but the increasingly bitter wrangles with AAR have played their part too.
Putin has been regaining state control of assets that passed cheaply to a small group of businessmen when privatized in a hurry in the 1990s.
Rosneft's absorption of another oil firm, Yukos, and the imprisonment of its former owner Mikhail Khodorkovsky, in the mid-2000s was the biggest step in this process until now.
That was also masterminded by Sechin, who was deputy chief of staff at the Kremlin - Putin's gatekeeper - at the time.
Sechin was in London last week to help push through the deal with BP, whose CEO Dudley is himself a veteran of BP's Russian activities.
If Sechin also buys out AAR tycoons Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik, his combined Rosneft-TNK-BP would produce well over 4 million barrels of oil and gas a day, although bankers said finding more than a total of 20 billion in cash could be a stretch for the group.
On the financing side, about $15 billion could be met by a loan Rosneft has been negotiating with international banks. It could get another $3 billion from Russian banks.
Sources have also said that the AAR side of the deal could involve deferred payments over a number of years, and the TNK-BP business itself could be leveraged up. It has strong cashflow and little debt, allowing the partners to rake off $4 billion a year in dividends in recent times.
Bankers told ThomsonReutersLPC a total of 10 banks have already joined the deal and the loan could be concluded in three to four weeks.
Rosneft, AAR and BP declined to comment.
(Additional reporting by Douglas Busvine, Melissa Akin, and Vladimir Soldatkin in Moscow and Sophie Sassard in London, Editing by Rosalind Russell)