For the lack of a few billion dollars, a BP renaissance falls apart

Why at this point does it look like Bob Dudley’s 11th-hour effort to resurrect BP’s global image has failed? Because he and his Russian oligarch partners could not bridge more or less a $10 billion difference in their respective valuations of their joint Russian oil company, according to people in the deal: BP offered $27 billion to buy out their Russian partners, who wanted about $35 billion.

For Dudley (pictured above) and BP, the stakes seem higher than the few billions it would have required them to accomplish the shouting, pounding and haggling that are the normal fare of Russian negotiations. BP has largely drifted since last year’s Gulf of Mexico oil spill, which robbed the company of decades of good will and oil properties built in the United States, the source of a quarter of its worldwide production. The 54-year-old Dudley, who took over as CEO last year, saw a blockbuster tie-up with Russia’s state-owned Rosneft as just the thing to pull BP out of its doldrums. BP would buy 10 percent of Rosneft, Rosneft would buy 5 percent of BP, and both would go explore and produce oil in the virgin oilfields of the embarrassingly oil-rich Arctic Sea.

Alas, BP’s longstanding partners in Russia — four oligarchs who call themselves AAR — objected, sued in Europe, and won, blocking the deal. BP has a standing deadline tomorrow to complete the tie-up. Though the oligarchs stand to gain much, the heat is mostly on BP and Dudley. Over the last few days, he has tried to buy out AAR’s 50 percent share.

Today they came down to the hard bargaining. BP "offered to buy AAR out at an insultingly low price," said one actor on the Russians’ side. In recent weeks, the generally accepted estimate of the value of TNK-BP has been about $60 billion. So BP’s offer was just under half. The oligarchs themselves saw the value a bit higher — at about $70 billion.

Since deals usually are struck somewhere in the middle, one would imagine that if BP had raised the offer to $30 billion or perhaps a bit more, there would have been a deal.

There is still time. Both sides are declaring the talks over, which often can signal that the serious stage is only beginning. If Dudley fails, it will be a difficult setback to recover from — where else can he take the company with such rich oilfields? Some talk is that, depending on how badly BP’s shares are pummeled in the market, BP could end up the target of a hostile takeover. Dudley’s job too could be on the line.

As for what the Russians will do, AAR CEO Stan Polovets said, "AAR is a long-term strategic investor in TNK-BP and has no plans to exit. TNK-BP is a great company with excellent management and great growth prospects." A BP spokesman did not respond to an email.