Is cash king? For BP in Russia, it depends how much cash

Energy Shocks
Energy Shocks
Russian Prime Minister Vladimir Putin, right, and Deputy Prime Minister Igor Sechin attend a meeting to discuss prospects for the Russian gas sector  in Kirishi near St. Petersburg, Russia, Friday, March 23, 2012. Putin and energy officials discussed prospects for the Russian gas sector. (AP Photo/RIA-Novosti, Alexei Nikolsky, Government Press Service)
Sechin: “$20 billion? But Mr President, where will I find a suitcase big enough?” (RIA-Novosti via AP Photo/Alexei Nikolsky)

When ordinary methods of persuasion fail, try hard cash, and lots of it. The four Russian oligarchs who own half of Russia’s third largest-oil company, BP-TNK, have been trying to buy the other half from their co-owner, BP. The British oil firm is eager to divest, after a rocky relationship with the oligarchs, but has spurned their (hitherto meagre) offers and has instead been wooing the state-owned firm Rosneft. BP’s boss, Robert Dudley, recently had an audience with Russian president Vladimir Putin, a key stamp of official approval.

So now AAR, the oligarchs’ consortium, is upping its game. It says it will make an all-cash offer for BP’s share in TNK-BP, which could be worth more than $20 billion.

The stakes are high for all sides. Rosneft chairman Igor Sechin, who is close to President Vladimir Putin, has his personal reputation on the line, after the oligarchs upended a previous attempt at a Rosneft-BP tie-up last year. For the British firm, TNK-BP accounts for one-quarter of its global oil production, and any deal must be worth the loss of this cash cow. And AAR is setting itself up for a direct showdown with Putin and the Russian state.

Having two suitors now compete for its hand must feel rather sweet to BP afters years of trouble in Russia (including a period in 2008 when Dudley, then the CEO of BP-TNK, had to flee the country and go into hiding). But why, I asked a source familiar with the oligarchs’ thinking, should BP accept an all-cash offer when a deal with Rosneft might give it cash, shares in Rosneft, and drilling rights in the hydrocarbon-rich Arctic? Do the oligarchs intend to make an offer exceptionally higher than Rosneft’s?

“Essentially. Or at least higher enough,” the source replied. But what about the Arctic rights? “Cash is King!” was the reply.

I asked someone familiar with BP’s own strategy. “Cash may be king, but it depends how much cash,” this person said.

AAR appears to be gambling that BP isn’t actually that interested in the Arctic, given the massive costs of producing there, not to mention the perils of a spill. After all, it is less than two years since BP’s catastrophic oil spill in the Gulf of Mexico. And while Dudley may be loth to give the oligarchs what they want after what they have put him through, in the oil business—and especially the Russian oil business—money tends to trump personal vendettas.

But BP has been in a warm courtship with Sechin, who has been in London in talks with bankers to raise up to $15 billion for the deal, in addition to $5 billion he has been seeking in Moscow. What’s more, some analysts have posited that this is the first leg of a Rosneft strategy to buy out the oligarchs’ half of TNK-BP as well, which would result in Rosneft producing a mammoth 4 million barrels of oil a day.

So Rosneft is likely to put up a fight. AAR has exclusive negotiating rights to buy out BP through Oct. 15. Expect the oligarchs to submit their offer around then, and Rosneft soon after.

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