By 2 February, 2011 0 Comments Read More →

The Rosneft-BP Deal Will Be Scrutinized by Arbitrators in Stockholm

Today a British court decided to suspend the multi-billion transaction of Rosneft and British Petroleum (BP). Under the terms of the BP-Rosneft $16bn share swap, Rosneft is to take a 5 per cent stake in BP. In exchange, BP will raise its holding in Rosneft from 1.25 per cent to 10.8 per cent.

Both BP and Rosneft hope to benefit from the deal. Rosneft, the largest Russian oil company, needs new technologies, particularly for deep-water drilling. Many Russian commentators note that Rosneft is also interested to have backing of BP in the aftermath of Yukos case. The lion’s share of Yukos assets now belongs to Rosneft.

On the other hand, BP plans to expand its exploration and plans to reduce its operations in the United States, following the he disastrous oil spill in the Gulf of Mexico which estimated to cause around £26bn damages. BP also agreed with Rosneft to set up a joint operating company to explore the Russian Arctic. However, BP has been invloved in Russia for many years through TNK-BP, the third largest oil company in Russia. It is TNK-BP which threatens the new Rosneft-BP arrangement.

TNK-BP is of enormous importance to BP. It currently represents more than a quarter of its oil production. TNK-BP is controlled 50/50 by BP and a group of Russian billionaires – Mikhail Fridman, Len Blatvatnik, German Kahn and Viktor Vekselberg (Alfa-Access-Renova Group). Since 2008 the company was shaken by number of shareholder disputes. Although BP retained its 50% share, it had to give more power to its Russian partners. In 2009, Russian billionaire Mikhail Fridman was appointed as TNK-BP’s CEO replacing BP’s appointee.

The Russian shareholders of TNK-BP from the beginning opposed the new Rosneft-BP joint venture. They argue that the deal violates BP’s commitment to TNK-BP. Alfa-Access-Renova Group consider that all deals in Russia should be conducted through TNK-BP which should have been included in talks. In response, BP insisted that an injunction will not harm TNK-BP. BP argued that it would not violate the shareholder agreements, and itimely notified its Russian partners of its plans.

On this basis, Alfa-Access-Renova Group obtained an injunction from London High Court on 1 February. The injunction-related proceedings were heard in private. The details of the order became knows from BP’s press release:

The Court today issued an order, the terms of which were agreed by the parties, that the parties use their best endeavours to have an arbitral tribunal constituted on an expedited basis, with a view to deciding the questions which were before the court today, by 25 February 2011. In accordance with the Court order the share swap agreement with Rosneft will not be completed pending this expedited arbitration hearing.

The parties agreed to resolve their dispute by means of arbitration in Stockholm. As most shareholder disputes, the Stockholm proceedings will also be held in private. Boiledenergy down to personalities, the dispute in Stockholm will be between Igor Sechin, the Russian energy tsar and a close associate of Vladimir Putin, and Mikhail Freedman, the CEO of TNK-BP and Russia’s third richest man. Most likely, Alfa-Access-Renova Group and BP will settle their dispute before the Stockholm tribunal decides the dispute.

Using arbitration to put pressure on partners in joint venture agreements in a common tactics not only in Russia-related disputes. However, it is less common for Russian-based businessmen to initiate foreign arbitration proceedings to undermine the interests of Rosneft run by powerful Russian officials.

Yaraslau Kryvoi

About the Author:

Prof Yarik Kryvoi, MCIArb is the founder and co-editor of the CIS Arbitration Forum. He is the Senior Research Fellow in International Economic Law and Director of the Investment Treaty Forum at the British Institute of International and Comparative Law (BIICL). He holds law degrees from Harvard, Moscow and St Petersburg. He has been teaching and practicing international arbitration in Russia, the United States and England for over ten years and is listed as arbitrator by several arbitration institutions. Prof Kryvoi also served as a Co-Chair of the International Courts Committee of the American Bar Association's Section of International Law. He also serves a tutor at the Chartered Institute of Arbitrators in London. See full profile at kryvoi.net.

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