BP Bill for Russian Asset Grab Hits $8bn

BP yesterday upped its controversial investment in Russian oil and gas to almost $8bn by agreeing to pay an extra $1.35bn to its chosen merger partner for a stake in another oil company.

In a complex series of deals BP is paying a total of $7.7bn (£4.8bn) to gain access to reserves of 6.8bn barrels of oil and leapfrog Shell to become the world's second largest private sector producer.

The deals, forming the largest transaction in Russian corporate history, involve BP and AAR, made up of banking group Alfa and industrial group Access-Renova, joining forces to create BP-TNK, itself the tenth largest global oil and gas producer.

BP, which is paying AAR $6.35bn for the TNK deal, has now agreed to give it a further $1.35bn to take its 50% interest in separate oil company Slavneft into the merged TNK-BP group, subject to regulatory approval expected by May.

Lord Browne, BP's chief executive, said: "The creation of TNK-BP represents great progress towards meeting BP's long-term commitment to Russia. In just seven months, a truly major oil and gas company has emerged as an operating and competitive reality. The addition of the Slavneft interest into TNK-BP represents an important step in the building of the company's future."

BP's Russian venture - conducted with partners with whom Lord Browne fell out and who remain clouded by suspicion of corruption - has already caused concern, and eyebrows were raised yesterday by the increased costs of the TNK merger.

The UK's largest company is paying AAR an immediate $2.6bn in cash for its stake in the new company - $200m more than originally agreed in June. It is also paying three tranches of $1.25bn in BP shares on the anniversaries of yesterday's closure. The extra cash element comes about because BP is "for the moment" excluding its interest in Sakhalin - an island off the Siberian coast near Japan courted by the oil majors for its huge gas reserves - from the TNK-BP group.

This interest is held jointly with another Russian oil group, state-owned Rosneft. The two share a licence agreement to develop reserves off the island but have yet to convert the arrangement into a formal joint venture.

Some Moscow observers suggested the issue of Sakhalin pointed to serious friction within the TNK-BP merger, with the Russians attempting to squeeze more cash out of the deal and BP keener on long term commitments. Dismissing the arguments, BP officials insisted that a proper joint venture with Rosneft would be concluded "within a year at the outside" and could then be incorporated into TNK-BP.

They indicated that BP would recoup the bulk of the extra $200m cash paid to AAR when that happened. But Rosneft, BP's partner since 1998, is said to be anxious to stick to BP alone at Sakhalin.

AAR, meanwhile, and yet another Russian oil company, Sibneft, paid $2bn at a government auction last December to take a 70% controlling stake in Slavneft. But TNK already owned the latter's prize asset, the Migyan oilfield.

The latest addition to BP's Russian stable brings proven reserves of 1.6bn barrels of oil on top of TNK's 5.2bn, boosting BP's own reserves by a third. Of the combined total, 4.2bn barrels are expected to be recovered before licences are renewed - if at all.

Slavneft also brings two Russian refineries to add to TNK's five and more than 570 petrol filling stations on top of TNK's more than 2,100 in Russia and the Ukraine.