Investors want cash back as BP strikes £17bn deal with Rosneft

Oct 22, 2012

Deal has been struck that gets BP out of difficult relationship with AAR oligarchs

Oli Scarff

A £17bn agreement between Rosneft and BP that will give the UK firm between 16 and 20 per cent in the state-controlled Russian energy giant is expected to be announced this morning, ahead of its rubber-stamping on 30 November.

Reuters reports the deal will allow BP out of a difficult relationship with several Russian oligarchs in the firm AAR, and establish closer ties with the Russian government. In addition to the shareholding in Rosneft, BP will receive a cash payment of around $7bn and one seat on the board.

But investors have expressed disappointment that the new ownership structure will see investor returns fall as much as 85 per cent. The Daily Telegraph reports that BP shareholders have demanded that the $7bn cash be returned via a share buy-back scheme. They don't want to see the money added to the capital set aside to cover liabilities from the 2010 Gulf of Mexico oil spill.

The New York Times says BP's board approved the deal early this morning. The paper describes the deal as the biggest step yet in chief executive Robert Dudley's "shrink to grow" strategy in the aftermath of the 2010 Gulf disaster. Even though BP will be a minority investor in Rosneft, BP is hoping the strategic tie with President Putin's Kremlin will drum up other business.

Central to the deal is the Russian government's agreement to buy up BP and AAR's shares in TNK. This represents an effort to re-nationalise the oil and gas businesses that contribute about 50 per cent of the domestic budget and 60 per cent of export revenues. Rosneft's chief executive, Igor I Sechin, a former military intelligence officer and close aide to Putin, is a supporter of greater state ownership in the oil industry.

But some Russia-watchers warn the deal could upset the system of balance between state and private industries. "Sechin's apparent strengthening of influence could come at the cost of maintaining that balance," says John Lough, a former TNK-BP official who is a Russia specialist at Chatham House. "It could upset the apple cart."

Sign up for our daily newsletter