By GREGORY L. WHITE, DANA CIMILLUCA, ALEXIS FLYNN and SELINA WILLIAMS
BP is close to a pact to sell its 50% stake in troubled Russian venture TNK-BP to state oil giant OAO Rosneft for about $25 billion, according to people close to the discussions, in a deal the British oil giant hopes will secure its position in a vital energy market.
Rosneft also has signed a preliminary agreement to buy out BP's partners in TNK-BP - a group of Soviet-born billionaires known as AAR - for as much as $28 billion, according to the people.
A deal for all of TNK-BP, Russia's No. 3 oil company by output, would reshape the oil industry in the world's largest energy producer, shifting ownership further into Kremlin hands.
Acquiring all of TNK-BP would cement Rosneft's position as the largest publicly traded oil producer in the world, giving it output of 4 million bpd - more oil than produced by Iraq.
Rosneft president Igor Sechin, a close ally of President Vladimir Putin, is expected to present his offer to BP in London in the next few days.
People familiar with the talks said the situation remains fluid and one or both of the deals could fall through. Buying out both AAR and BP would be a heavy burden for Rosneft, so it could wind up playing the partners against each other to get the best terms, possibly buying out only one in the end.
AAR would likely prefer to sell out entirely rather than simply switch partners, given than it would clearly be the junior partner should Kremlin-backed Rosneft buy just BP's stake.
Deputy Prime Minister Arkady Dvorkovich said that while he had heard that Rosneft and AAR had signed a preliminary deal, "there are no legally binding agreements yet."
Mr. Dvorkovich has opposed Rosneft's ambitions to expand in Russia's oil sector, but officials said Mr. Putin has so far backed Mr. Sechin in his drive to build the company into a so-called national champion.
For BP, a TNK-BP deal would resolve one of the major concerns that have troubled investors, alongside the terms of a settlement of U.S. government claims over the massive 2010 spill in the Gulf of Mexico. BP shares rose 3% to 448 pence Wednesday in London trading.
Still, TNK-BP has been one of BP's best investments, returning $19 billion in dividends on the roughly $8 billion paid for its 50% stake in 2003. The venture accounts for nearly a quarter of BP's reserves and production. But tensions with AAR over strategy and governance have plagued the venture for years, leading investors to question its value to BP.
Last year, AAR went to court in London to block a planned Arctic partnership between BP and Rosneft. In May 2011, the three groups were close to a deal to buy AAR out of TNK-BP for about $32 billion in cash and stock, but the deal fell through at the last moment.
In June of this year, BP announced it was considering selling its TNK-BP stake. Offers are due Thursday, but Rosneft is expected to be the only bidder. AAR's efforts to raise money for a bid of its own met with little success, according to people close to the process.
Rosneft is expected to offer between 10% and 15% of its own shares - worth as much as $12.5 billion - to BP as part of the deal to buy its stake in TNK-BP.
While BP shareholders may welcome any cash component of a Rosneft deal, shares in Rosneft are less attractive because of weak management and financial performance, investors and analysts said. BP brought western management and technology to TNK-BP, something that would be harder to do with state-controlled Rosneft, analysts said.
"If BP sold the whole stake and got Rosneft shares, I'm not sure that would be that satisfactory because they'd be holding a relatively unmarketable holding, and they wouldn't have any direct say in their future," said Paul Mumford, senior fund manager at Cavendish Asset Management, a holder of around $3.6 million of BP shares.
But people close to BP argue that a Rosneft stake would help cement BP's unique relationship with the dominant oil company in an important energy-producing nation - ties that could open the way to lucrative agreements in other parts of Russia, such as the Arctic shelf.
For Rosneft, buying 100% of TNK-BP at a valuation possibly over $50 billion, even if it used shares for part of the payment to BP, would be a major, but not impossible, financial burden, analysts said.
People close to AAR said the Russian government, which has publicly said it aims to reduce state ownership of the energy sector, seemed unable or unwilling to intervene to block Rosneft's bid, making it unlikely an AAR bid for BP's stake would have succeeded. President Putin, Russia's paramount leader, has been less categorical in his support for privatization.
Once it became clear last month the Kremlin wouldn't oppose a Rosneft buyout of BP, AAR scrambled to raise financing to make an offer for BP's stake but couldn't do it in time partly because Rosneft had already lined up many big lenders.
People close to AAR said that if BP accepts Rosneft's offer, Rosneft might pull out of the preliminary agreement to also buy out AAR because a BP deal would give it effective control without the extra financial burden of buying out AAR.
That would leave AAR essentially trapped in TNK-BP with Rosneft as a partner, likely unable to sell its stake because of the Russian government presence or to earn the rich dividends it has come to expect from TNK-BP if Rosneft decides to limit payouts.
Dow Jones Newswires
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