(EnergyAsia, October 23 2012, Tuesday) — UK major BP said it has signed heads of terms to sell its 50% share in TNK-BP to Rosneft, the Russian integrated oil and gas company. Rosneft has agreed in principle to buy BP’s share in TNK-BP, Russia’s third largest oil company, in two tranches.

This includes the sale of BP’s 50% shareholding in TNK-BP for US$17.1 billion in cash and Rosneft shares representing a 12.84% stake in Rosneft.

As a follow-up, BP will use US$4.8 billion of the cash consideration to acquire a further 5.66% stake in Rosneft from the Russian government at US$8 per share, representing a 12% premium to share closing price on the bid date of October 18.

The deal is subject to the Russian government agreeing to the sale of the 5.66% stake in Rosneft.

If approved and completed, BP said it would acquire a total 18.5% stake in Rosneft and net US$12.3 billion in cash. This would result in BP holding 19.75% of Rosneft stock, when aggregated with its 1.25% current holding in Rosneft.

At this level of ownership, BP said it expects to be able to account for its share of Rosneft’s earnings, production and reserves on an equity basis. In addition BP expects to have two seats on Rosneft’s nine-person main board.

In accordance with the heads of terms, BP and Rosneft have an exclusivity period of 90 days to negotiate sale and purchase agreements. After signing definitive agreements, completion would be subject to certain customary closing conditions, including governmental, regulatory and anti-trust approvals, and is currently anticipated to occur during the first half of 2013.

BP said it will agree not to dispose of any of the Rosneft shares acquired in the transaction for at least 360 days following the completion of the transaction.

BP chairman Carl-Henric Svanberg said: “This is an important day for BP. Russia is vital to world energy security and will be increasingly significant in years to come. Russia has also been an important country for us over the past 20 years. Our involvement has moved with the times. TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia.

“Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns. We consider that this is a deal which will deliver both cash and long term value for BP and its shareholders. It provides us with a sustainable stake in Russia’s energy future and is consistent with our group strategy.”

BP’s group chief executive, Bob Dudley, said:

“This investment builds on BP’s track record of value creation in Russia. It is consistent with our strategy of deepening our positions in the world’s most prolific oil and gas regions.

“BP intends to be a long term investor in Rosneft – an investment which I believe will deliver value for our shareholders over the next decade and beyond.

“Rosneft is a company working to become a global leader in the sector. It is developing its substantial asset base with new technologies and improving its management processes and corporate governance. As a major investor BP looks forward to being able to contribute to Rosneft’s success and add value through our participation on the Board. In this regard BP is supportive of Rosneft’s intention to pursue further equity in TNK-BP in due course.”

Morgan Stanley & Co Ltd is acting as principal financial advisor to BP on the proposed transaction while UBS Investment Bank is acting as financial advisor and corporate broker to BP. Goldman Sachs International, Lambert Energy Advisory Ltd and Renaissance Capital have also each acted as financial advisors while Credit Suisse Securities (Europe) Ltd has provided a fairness opinion to BP’s board on the proposed transaction. Linklaters LLP are acting as principal legal advisors on the proposed transaction.

Producing 1.987 million barrels of oil equivalent last year, TNK-BP is a vertically integrated Russian oil company with a diversified upstream and downstream portfolio in Russia and Ukraine. It operates in nearly all of Russia’s major hydrocarbon regions, including West Siberia (in the Tyumen, Khanty-Mansiysk, Yamal-Nenetsk and Novosibirsk Regions), the Volga-Urals (in the Orenburg and Saratov Regions) and East Siberia (in the Irkutsk Region).

In 2011, Rosneft produced 2.45 million b/d of oil and had proved developed reserves of 9.96 billion boe and proved undeveloped reserves of 8.39 billion boe.