When wrong-footing four oligarchs can cost $10 billion

BP, faced with Shakespearean-scale woes from Louisiana to Moscow, went to extra-legal lengths to avoid exploring Russia’s oil-rich Arctic alongside its four oligarch partners. Now that it’s been told it must if it wishes the benefits of the potential bonanza, does BP truly intend now to accept just half the upside that buttressed the Arctic venture’s original logic? The answer is yes and no — BP will proceed with the venture, but with a reasonable possibility of another attempt to buy out the oligarchs, according to a person involved in the process, though the latest news much increases the pricetag.

Recall that, after opting to scale back his ambitions in the U.S., BP CEO Bob Dudley (pictured above) announced a blockbuster deal for an ownership tie-up with Russia’s state-owned Rosneft, with which BP would explore the Arctic together. Only, BP already had a long-standing exclusive Russian partner — the oligarchs, who collectively call themselves AAR — and they objected. Two European tribunals took AAR’s side, thus embarrassing Dudley and, more important, jeopardizing his big return to the big leagues. On Friday, a London arbitration panel said the deal can proceed after all — if Dudley does it through BP’s partnership with AAR.

With a deadline looming next Monday, perhaps  Dudley is calculating that swallowing the bitter pill of much-lesser profit in the Arctic is a necessary step in reviving BP’s and his own credibility after last year’s Gulf of Mexico oil spill and the mystifying continued incompetence of its Russian affairs. Dudley may also reckon that even half the Arctic’s potential riches is sufficient to exchange 5 percent of BP’s shares for around 10 percent of Rosneft’s, which is the entry fee for access to the Arctic.

Chris Weafer, Ural-Sib Bank’s chief analyst, predicts that Prime Minister Vladimir Putin’s office will now step in to facilitate Dudley’s thought processes along with those of Rosneft, if it hasn’t so already. The deal is that strategically important for the Russian state. Weafer believes that Putin will tell Rosneft not to exercise its option to nix AAR’s participation in the Arctic. Rather, the unknown is what to do with the oligarchs from here. Says Weafer:

The only question is whether the AAR shareholders will be part of that revised deal; for how long; and, if not, who takes them out and for how much?

I am told by a person close to the deal who does not wish to be identified that a buyout of the oligarchs is still very much a reasonable possibility. But, as Weafer ponders, for how much? Last month, negotiations fell apart when Dudley offered $27 billion, the oligarchs wanted at least $35 billion, and one or the other party, or both, walked out in a huff. Back then, the leverage was with AAR, and one figured that $30 billion or so would have settled the deal. Now AAR’s cards are even better, which makes one think that $35 billion or so will be the starting number, and that a final figure in the neighborhood of $40 billion may be necessary to close the deal, or a whopping 50 percent higher than BP’s math last month.

Weafer suggests that one can get creative — BP and Rosneft could manage the buyout together, or they could arrange for some other "viable alternative," meaning some other partner to step in to help. Whichever the case, look for Dudley to close a deal at a much higher cost than he could have a month ago.