BP, Rosneft set up $25 billion-plus TNK-BP deal

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, 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.

It allows BP to end a stormy relationship with its partners in the venture, AAR, and to pursue closer ties with a Kremlin that exerts a much tighter hold on the oil industry than it did in the 1990s when BP first invested in Russia.

TNK-BP is highly profitable and provides a quarter of BP's total production, but its fields are mature, and the Soviet-born tycoons who own the other half through AAR have blocked BP's search for growth in Russia through closer ties with Rosneft.

Executives at TNK-BP have in the past had run-ins with Russian law enforcement at times of friction between the shareholders, with two managers arrested in 2008 amid a dispute over strategy that forced then-CEO Bob Dudley, who now heads BP, to flee Russia.

Should the deal be finalized and survive a months-long approval process, BP's exposure to Russia would be lower, but it 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.

In a statement on Monday confirming the offer from Rosneft for the first time, BP said "no agreement has yet been reached".

The two sides have yet to work out a final cash and equity split, which will determine how much influence the British major will have on the board of an enlarged Rosneft, a source close to the Russian oil company said.

The source also said BP was aiming to get two directors on the board of Rosneft, which is already Russia's top oil producer.

If Rosneft buys out AAR's half of TNK-BP as well, it will control nearly half of Russia's oil output and pump 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 wants to show his critics he is pursuing a real privatization agenda.

OLIGARCHS UNDER PRESSURE

With BP on the brink of a sale, negotiating time is running out for the four tycoons of AAR, who are reluctant to remain in a joint venture with the politically powerful Russian state oil company.

A source close to the consortium said they had agreed a non-binding memorandum of understanding to sell. Sources said last week that AAR had a preliminary deal to sell its 50 percent for $28 billion in cash.

But one of the four, German Khan, who is effectively serving as chief executive of TNK-BP after the departure of other senior executives, told TNK-BP senior management on Friday that AAR had no deal to sell, two sources close to the management said.

One of the sources said AAR was also holding out for an equity stake in Rosneft.

"Neither BP nor AAR wants to stay in this arrangement," one of the sources said. "There is a sense it will all be resolved in the coming days."

"The question is how much cash and stock Rosneft can offer, how much cash in hand it has, and how many shares, whether it is enough for a seat on the board."

SOURCING THE STOCK

The BP-Rosneft deal would have two steps for a single transaction worth more than $25 billion, according to one source familiar with a proposal put to BP by Rosneft last week.

Under step one, BP would receive a 13.4 percent holding of Rosneft's shares held in the form of so-called "treasury stock", and which is nominally worth about $10 billion based on a small free-float of Rosneft shares that put the value of the company at around $73.5 billion. It would also receive 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 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, 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, speaking at the weekend.

Rosneft and AAR have declined to comment.

(Writing/reporting by Melissa Akin; Additional reporting by Douglas Busvine and Vladimir Soldatkin in Moscow; Editing by Giles Elgood)