What a difference a couple of years can make.
Just over two years ago, in a dispute often cited as a reason never to invest in Russia, Mikhail Fridman and other major shareholders of TNK were threatening to scuttle global oil giant BP's $471 million investment in Sidanco.
Now, the two sides are all smiles after clinching the largest equity deal in Russian history.
On Tuesday, BP announced it was putting $6.75 billion into another trailblazing oil venture, this time with TNK's owners to create a global top 10 oil producer valued at $18.1 billion and put BP on equal footing with ExxonMobil and Royal Dutch/Shell as the world leaders in terms of proven hydrocarbon reserves.
"We are very proud to be part of the biggest deal in Russian history," Fridman told reporters Tuesday.
"It sets a new standard for the Russian market. It is a reflection of the political change that has taken place in Russia over the past three years. ... Russia has stopped being associated with instability and nontransparency."
The new company, yet to be named, will combine TNK, Sidanco and other major oil and gas assets. BP and TNK's major shareholders -- Fridman's Alfa Group and Viktor Vekselberg's Access-Renova -- will each own 50 percent of the new company under terms carefully crafted to give both sides equal management control and prevent the wrangling over assets that once almost sent BP hightailing it out of the country.
The deal is the first major transaction to make good on growing global interest in Russian oil and could pave the way for other major foreign investments in the sector as instability in the Middle East leads to a push to diversify supplies. Russian oil companies have been slashing costs way below world averages and implementing steep production hikes at a time when overall growth is slowing for multinationals.
"It seems to me BP has recognized ... that Russia will take a leading position in the global oil market," Vekselberg said.
The creation of the company ties BP with fast-growing TNK, which has been boosting annual output by an average of 10 percent in recent years, and gives the supermajor an initial production increase of 13 percent and boosts its overall reserves by 30 percent.
BP CEO John Browne sought to convince investors in a webcast conference that all the necessary safety nets were in place to reduce the risk of making an investment in a country that, just a few years ago, he had slammed for being the opposite of America, where "laws, not men" governed.
"This is a major strategic step into a country with massive oil and gas reserves and immense potential for future growth," Browne said Tuesday. He said Russia was now BP's sixth new "profit center" at the core of its future growth.
BP Group vice president Robert Dudley, Alfa chairman Fridman and Renova chief Vekselberg were visibly pleased Tuesday after finally hammering out a deal signed after all-night negotiations that capped nearly two years of on-again, off-again bargaining and due diligence probes.
The company puts together BP's 25 percent stake in Sidanco and its shares in Rusia Petroleum, which holds the license to the massive Kovykta gas field in eastern Siberia, which is ideally located for supplying energy-hungry China. BP also brings its Sakhalin 5 exploration license and its Moscow network of retail stations. From Alfa and Access-Renova come TNK, its stake in Sidanco and in Rusia Petroleum and in the Rospan gas field, as well as the Sakhalin 4 and 5 exploration licenses. The new company will have reserves of at least 5.2 billion barrels and will produce some 1.2 million barrels per day, according to BP estimates.
Slavneft, which TNK recently acquired together with Sibneft, is not part of the deal. Neither is BP's stake in LUKArco, a joint venture with LUKoil.
Dudley said clinching the deal just two years after BP and TNK were locking horns over Siberian oil firm Sidanco illustrates the rapid progress that Russia and its businessmen have made in improving the investment climate.
"The pace of reforms in the past two years gives us the confidence to make this investment, an investment which we do not take lightly," he said, citing in particular improvements to the tax system and to laws regulating bankruptcy procedures.
He said the rift over Sidanco actually helped bring the two companies closer together.
BP entered Russia in 1997, paying $471 million for a 10 percent stake in Sidanco, which at the time was controlled by Vladimir Potanin's Interros. Two years later it was ready to move out, up in arms over an aggressive attack on that asset from TNK, which took over Sidanco's biggest field in bankruptcy procedures BP claimed TNK had illegally rigged in its favor.
BP's rancor over that deal, which led it to write off $200 million of its investment, even spread to Washington, where the British behemoth conducted an aggressive lobbying campaign challenging the legality of past dealings by TNK's shareholders. It also fought on Capitol Hill to prevent U.S. Eximbank from extending a loan to TNK, but lost.
But by 2001, the two companies had reached a peace settlement, and TNK returned the field it had grabbed from Sidanco. Later, TNK even agreed to boost BP's stake in Sidanco to 25 percent and give it management control.
TNK's Vekselberg was keen on Tuesday to stress the new level of trust the two companies had built by working together.
"The negotiations were long and hard. But in the end we decided that the positives in the future ahead of us outweighed the negatives in our past. The trust we have since built is a serious foundation for the development of the company," Vekselberg said.
Analysts said the fact that BP was increasing its exposure to Russia despite getting burned in the past made the deal even more significant.
"BP was once a victim of poor corporate governance, but instead of being deterred from investing, they have gone on and made this deal," said Stephen O'Sullivan, head of research at United Financial Group.
"This deal is much more significant because it is not a wide-eyed newcomer coming in. It sends a signal that Russia is a very different place under Putin than it was under Yeltsin," he said.
Browne said in the webcast conference that the deal was designed to give BP maximum leverage to avoid the shenanigans of the past.
He cited as examples a board structure that gives both sides an equal number of board seats and veto power over major decisions. The deal also outlines arbitration procedures that will be enacted should the two sides fail to reach agreement.
Also balancing the two sides' interests is an agreement whereby Alfa and Access-Renova, or AAR, nominates the chairman of the board of the new company, who will not have veto rights, while BP nominates the CEO. The CEO also has the right to forward candidates for the position of the company's chief financial officer, Dudley told journalists.
BP will also install its own people in middle management in the new company, he said.
Another way to make sure AAR toes the line is by not paying the whole $6.75 billion all at once. BP will pay an initial $3 billion in cash, but the remainder will be paid in three annual tranches of $1.25 billion in BP shares on the anniversary of the deal and valued at market prices 30 days before that date.
At current rates, the $3.75 billion in stock would give Fridman, Vekselberg and Access chief Len Blavatnik roughly 2.5 percent of BP.
Fridman said the alliance would give the new company clout to expand into Eastern Europe and China not currently enjoyed by a solely Russian-owned company.
The deal also locks AAR into the new company until 2007. Before then it is not allowed to sell any part of its 50 percent stake in the company, Browne said.
The deal must still be approved by Russia's Anti-Monopoly Ministry for it to go ahead. The ministry declined to comment on the deal.
Staff Writers Valeria Korchagina and Simon Ostrovsky contributed to this report.
Just over two years ago, in a dispute often cited as a reason never to invest in Russia, Mikhail Fridman and other major shareholders of TNK were threatening to scuttle global oil giant BP's $471 million investment in Sidanco.
Now, the two sides are all smiles after clinching the largest equity deal in Russian history.
On Tuesday, BP announced it was putting $6.75 billion into another trailblazing oil venture, this time with TNK's owners to create a global top 10 oil producer valued at $18.1 billion and put BP on equal footing with ExxonMobil and Royal Dutch/Shell as the world leaders in terms of proven hydrocarbon reserves.
"We are very proud to be part of the biggest deal in Russian history," Fridman told reporters Tuesday.
"It sets a new standard for the Russian market. It is a reflection of the political change that has taken place in Russia over the past three years. ... Russia has stopped being associated with instability and nontransparency."
The new company, yet to be named, will combine TNK, Sidanco and other major oil and gas assets. BP and TNK's major shareholders -- Fridman's Alfa Group and Viktor Vekselberg's Access-Renova -- will each own 50 percent of the new company under terms carefully crafted to give both sides equal management control and prevent the wrangling over assets that once almost sent BP hightailing it out of the country.
The deal is the first major transaction to make good on growing global interest in Russian oil and could pave the way for other major foreign investments in the sector as instability in the Middle East leads to a push to diversify supplies. Russian oil companies have been slashing costs way below world averages and implementing steep production hikes at a time when overall growth is slowing for multinationals.
"It seems to me BP has recognized ... that Russia will take a leading position in the global oil market," Vekselberg said.
The creation of the company ties BP with fast-growing TNK, which has been boosting annual output by an average of 10 percent in recent years, and gives the supermajor an initial production increase of 13 percent and boosts its overall reserves by 30 percent.
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BP CEO John Browne sought to convince investors in a webcast conference that all the necessary safety nets were in place to reduce the risk of making an investment in a country that, just a few years ago, he had slammed for being the opposite of America, where "laws, not men" governed.
"This is a major strategic step into a country with massive oil and gas reserves and immense potential for future growth," Browne said Tuesday. He said Russia was now BP's sixth new "profit center" at the core of its future growth.
BP Group vice president Robert Dudley, Alfa chairman Fridman and Renova chief Vekselberg were visibly pleased Tuesday after finally hammering out a deal signed after all-night negotiations that capped nearly two years of on-again, off-again bargaining and due diligence probes.
The company puts together BP's 25 percent stake in Sidanco and its shares in Rusia Petroleum, which holds the license to the massive Kovykta gas field in eastern Siberia, which is ideally located for supplying energy-hungry China. BP also brings its Sakhalin 5 exploration license and its Moscow network of retail stations. From Alfa and Access-Renova come TNK, its stake in Sidanco and in Rusia Petroleum and in the Rospan gas field, as well as the Sakhalin 4 and 5 exploration licenses. The new company will have reserves of at least 5.2 billion barrels and will produce some 1.2 million barrels per day, according to BP estimates.
Slavneft, which TNK recently acquired together with Sibneft, is not part of the deal. Neither is BP's stake in LUKArco, a joint venture with LUKoil.
Dudley said clinching the deal just two years after BP and TNK were locking horns over Siberian oil firm Sidanco illustrates the rapid progress that Russia and its businessmen have made in improving the investment climate.
"The pace of reforms in the past two years gives us the confidence to make this investment, an investment which we do not take lightly," he said, citing in particular improvements to the tax system and to laws regulating bankruptcy procedures.
He said the rift over Sidanco actually helped bring the two companies closer together.
BP entered Russia in 1997, paying $471 million for a 10 percent stake in Sidanco, which at the time was controlled by Vladimir Potanin's Interros. Two years later it was ready to move out, up in arms over an aggressive attack on that asset from TNK, which took over Sidanco's biggest field in bankruptcy procedures BP claimed TNK had illegally rigged in its favor.
BP's rancor over that deal, which led it to write off $200 million of its investment, even spread to Washington, where the British behemoth conducted an aggressive lobbying campaign challenging the legality of past dealings by TNK's shareholders. It also fought on Capitol Hill to prevent U.S. Eximbank from extending a loan to TNK, but lost.
But by 2001, the two companies had reached a peace settlement, and TNK returned the field it had grabbed from Sidanco. Later, TNK even agreed to boost BP's stake in Sidanco to 25 percent and give it management control.
TNK's Vekselberg was keen on Tuesday to stress the new level of trust the two companies had built by working together.
"The negotiations were long and hard. But in the end we decided that the positives in the future ahead of us outweighed the negatives in our past. The trust we have since built is a serious foundation for the development of the company," Vekselberg said.
Analysts said the fact that BP was increasing its exposure to Russia despite getting burned in the past made the deal even more significant.
"BP was once a victim of poor corporate governance, but instead of being deterred from investing, they have gone on and made this deal," said Stephen O'Sullivan, head of research at United Financial Group.
"This deal is much more significant because it is not a wide-eyed newcomer coming in. It sends a signal that Russia is a very different place under Putin than it was under Yeltsin," he said.
Browne said in the webcast conference that the deal was designed to give BP maximum leverage to avoid the shenanigans of the past.
He cited as examples a board structure that gives both sides an equal number of board seats and veto power over major decisions. The deal also outlines arbitration procedures that will be enacted should the two sides fail to reach agreement.
Also balancing the two sides' interests is an agreement whereby Alfa and Access-Renova, or AAR, nominates the chairman of the board of the new company, who will not have veto rights, while BP nominates the CEO. The CEO also has the right to forward candidates for the position of the company's chief financial officer, Dudley told journalists.
BP will also install its own people in middle management in the new company, he said.
Another way to make sure AAR toes the line is by not paying the whole $6.75 billion all at once. BP will pay an initial $3 billion in cash, but the remainder will be paid in three annual tranches of $1.25 billion in BP shares on the anniversary of the deal and valued at market prices 30 days before that date.
At current rates, the $3.75 billion in stock would give Fridman, Vekselberg and Access chief Len Blavatnik roughly 2.5 percent of BP.
Fridman said the alliance would give the new company clout to expand into Eastern Europe and China not currently enjoyed by a solely Russian-owned company.
The deal also locks AAR into the new company until 2007. Before then it is not allowed to sell any part of its 50 percent stake in the company, Browne said.
The deal must still be approved by Russia's Anti-Monopoly Ministry for it to go ahead. The ministry declined to comment on the deal.
Staff Writers Valeria Korchagina and Simon Ostrovsky contributed to this report.