BP puts giant Russian joint venture up for sale

LONDON (Reuters) - BP put its half-share of its huge Russian joint venture up for sale on Friday, a bold step that would abandon nearly a third of BP's output, cut it loose from hostile partners and let the Russian state tighten its grip on the world's biggest oil industry.

A sale of its half stake in TNK-BP could raise around $30 billion for BP, which would help to fund the ongoing cost of cleaning up the 2010 Gulf of Mexico oil spill and allow it to invest in higher growth deals.

It also signals a reorganization of the oil industry in Russia, the world's top producer, where Vladimir Putin returned to the presidency this year with stern views about foreign firms holding strategic assets.

TNK-BP is Russia's third largest oil producer, and BP's stake represents one of the biggest foreign investments ever made in the country. It has earned BP huge profits but has long been plagued by acrimonious legal battles between BP and its Russian partners, the AAR consortium of billionaires.

For BP, selling out would mean giving up annual dividends which hit $3.7 billion last year and losing around 30 percent of its oil and gas production, but it would free it to explore higher-growth ventures elsewhere.

The London-based group said it had received "unsolicited approaches" but declined to name its suitors.

Given the Kremlin's desire to exert influence over the oil sector, analysts and bankers immediately identified state-backed players, and especially Rosneft, as the most likely buyers.

"We believe that the eventual buyer will have to be Russia - a 2 million barrels per day company (1 million barrels per day net to BP) is just too strategic for Russia to let fall into foreign hands," said Oswald Clint, oil analyst at Bernstein.

Last week, powerful former deputy prime minister Igor Sechin was appointed chief executive of Rosneft with - a source close to the group said - a goal to transform the company into a national champion capable of competing on a global scale.

AAR and Rosneft declined comment.

Analysts welcomed the potential sale and shares in BP traded up 2.3 percent at 404 pence at 5:16 a.m. EDT (0916 GMT).

"BP should exit and reinvest in more profitable areas with less political risk, if it can achieve something close to fair value for the stake," Iain Reid, oil Analyst at Jefferies, said.

BP had previously said TNK-BP was a core asset. The proposed sale is an admission that attempts to reach an accommodation with AAR had failed.

"We've worked hard to come up with a solution but haven't been able to do so," a source close to the situation said.

LUCRATIVE HEADACHE

BP and AAR have had disputes almost since the creation of TNK-BP in 2003. In 2008, BP Chief Executive Bob Dudley, then CEO of TNK-BP, was forced to flee Russia under what he described as a campaign of harassment from AAR.

Last year, tension flared after BP signed an Arctic exploration deal with Rosneft. An arbitrator later ruled that deal was in contravention of the TNK-BP shareholder agreement, under which the British firm was barred from dealings in Russia outside the joint venture.

BP offered to buy AAR out for around $32 billion, with a plan to subsequently sell the stake on to Rosneft, to settle the spat, BP sources said at the time. But the deal fell apart and AAR initiated legal proceedings against BP.

On Monday, one of the AAR billionaires, Mikhail Fridman, resigned as chief executive of TNK-BP, citing a breakdown in relations with BP and reigniting the debate around TNK-BP's future.

BP sources said they believed the resignation was a tactic to force BP to buy out AAR's stake in the venture, and in a newspaper interview published on Thursday, Fridman said he would consider a sale.

Previously, AAR has mooted buying out BP and sources close to AAR have said they would be prepared to pay $25 billion for the stake.

Valery Nesterov, oil analyst at Troika Dialog, estimated the value of BP's 50 percent stake in TNK-BP at "at least $30 billion", while Denis Borisov, oil analyst at Nomos Bank said a price of around $25 billion was more likely.

BP invested almost $8 billion in cash, shares and assets to form TNK-BP with AAR in 2003 to expand into Russia, one of the few major resource-holders where foreign oil companies could invest at the time.

It has yielded BP $19 billion in dividends in total - on average around 10 percent of BP's annual profits - in spite of high Russian taxes on oil production.

FEW BIDDERS

Although BP said it received more than one approach, analysts saw few serious private sector bidders for the stake, even if the Kremlin permitted them, which is uncertain.

The foreign players which could afford to pay around $30 billion - Exxon Mobil, Royal Dutch Shell Plc and Chevron - are unlikely to want to partner with wily local players like Fridman, and TNK-BP's low growth prospects limit its appeal.

Shortly after the venture was formed, Russia became more hostile to foreign and private-sector investment. The Kremlin's preference to reserve larger fields for state-controlled groups has limited TNK-BP's ability to expand.

In recent years, Western oil companies have begun to team up with state-backed players like Rosneft and Gazprom to develop major new fields - often offshore - where growth prospects are greater.

Analysts were also skeptical about the strategic logic of Russian private sector players such as LUKOIL or Surgutneftegaz bidding, even if the Kremlin were to allow it.

However, even state players may have problems bidding. Gas export monopoly Gazprom has big investment obligations and Troika's Nesterov said Rosneft could also struggle to raise the cash needed to buy BP's 50 percent stake.

A sale of the stake would free BP up to expand in Russia without the constraints imposed by the TNK-BP shareholders' agreement, potentially signing major exploration deals of the sort it attempted to cut with Rosneft last year.

The strategy of churning low-growth assets to reinject cash into more prospective ventures is one that Dudley has espoused to investors since being appointed in the wake of the oil spill.

(Additional reporting by Melissa Akin, Megan Davies, Katya Golubkova, Denis Pinchuk and Douglas Busvine in Moscow and Neil Maidment in London; Editing by Peter Graff)

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