MOSCOW Russian state oil company Rosneft was closing in on control of privately-held TNK-BP TNBP.MM on Wednesday, sending its powerful boss to London for talks with 50 percent shareholder BP (BP.L) after the tycoons who own the other half agreed to sell.
Industry and financial sources in London, Moscow and elsewhere painted a picture of a potential three-way deal that could emerge over the coming weeks.
They said both the British oil company and the four Soviet-born tycoons could emerge with minority stakes in an enlarged Rosneft ROSNG.UL (ROSN.MM) as well as billions of dollars in cash -- all in exchange for a highly profitable company which has been valued at over $50 billion.
The combined group would dominate Russia's increasingly state-controlled oil industry, and would be producing well over 4 million barrels of oil and gas a day - more than U.S. No.1 Exxon Mobil (XOM.N).
According to two sources familiar with the matter, Rosneft agreed on Tuesday to pay the tycoons' AAR consortium $28 billion. However, financial sources said it was unlikely all of this would be in cash, especially if Rosneft intends to buy out BP as well.
Some $15 billion could be met through a loan agreement Rosneft has been negotiating with international banks for weeks and it can get another $3 billion from Russian banks, said the financial sources.
However, "There is a point where raising debt would have a negative impact on Rosneft's credit rating," said one banker, while another said $20 billion was the most Rosneft can borrow without putting a strain on its ability to refinance later.
Rosneft, AAR and BP all declined to comment, while a senior minister said Rosneft had not yet requested the necessary government approval for a deal. BP's shares closed up 3 percent on the news at 452 pence as investors digested the prospect its years of Russian difficulties could now be behind it.
SECHIN FLIES IN
BP's decision in June to put its own stake up for sale put pressure on the oligarchs to sell their half of the business because, analysts said, the first to sell to Kremlin-backed Rosneft was likely get the higher price.
An exclusivity period during which only AAR could have bought BP's stake expires at the end of Wednesday, and Igor Sechin, the company's CEO and Russian most powerful energy official, was visiting London on Wednesday for talks with Europe's second largest oil company, according to a source familiar with his schedule.
BP has invited bids for its stake by Thursday morning. With AAR looking to sell, it appears unlikely that it would submit a credible rival bid for BP's stake in TNK-BP. Another source familiar with British company's actions said that as of Wednesday afternoon, BP had not received any offers for its stake.
Rosneft is widely expected eventually to secure overall control of TNK-BP, and a minority stake in an enlarged Rosneft for BP and its partners could create the appearance of serving Russia's privatisation agenda, analysts and bankers say.
A deal agreed by all sides could open the way for BP to revive a plan to explore in the Arctic in conjunction with Rosneft - a plan scuppered by the tycoons last year,
"I think that they go and buy out the oligarchs - and BP retains its stake in TNK-BP at least for now. Then BP becomes Rosneft's strategic shareholder, and BP is free to go into the Arctic," said one energy analyst with a Western bank who requested anonymity.
Relations between BP and the Soviet-born tycoons soured last year when AAR - which groups Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik - blocked the proposed co-operation between BP and Rosneft, saying it violated a TNK-BP exclusivity agreement.
An attempt to resolve the dispute was thwarted when AAR turned down a $32 billion offer for its stake from BP and Rosneft in May 2011.
Relations, which had long been shaky due to disputes over the direction of the business, deteriorated further, with Fridman quitting as TNK-BP's chief executive in May of this year.
BP put its stake up for sale the following month in an attempt to bring the issue to a close and focus management on another pressing issue - a resolution on billions of dollars of potential fines and compensation payments with U.S. authorities over the 2010 U.S. Gulf oil spill.
The move presented the four 'oligarch' co-owners of TNK-BP with the unpalatable prospect of going into business with Kremlin-backed Rosneft and without the international expertise that BP has brought to the venture.
Although AAR also showed interest in buying BP's stake in TNK-BP, banks were attracted to finance a Rosneft bid given Sechin's strong personal ties to Russian President Vladimir Putin.
Any deal will be subject to government approval but Sechin, in public comments last week, made it clear that Rosneft's ambition to invest in TNK-BP enjoyed Putin's backing.
One opponent of a Rosneft buyout, Deputy Prime Minister Arkady Dvorkovich, said that the government had yet to receive an application to approval a deal.
"I know that commercial discussions are under way and, as I understand, a memorandum of understanding has been signed - but no legally-binding agreement," Dvorkovich was quoted by RIA-Novosti news agency as saying.
The Kremlin declined to comment. A Kremlin source said Putin had no meetings planned over the next few days to discuss TNK-BP.
(Additional reporting by Megan Davies, Vladimir Soldatkin and Gleb Bryanski in Moscow and Michelle Meineke and Andrew Callus in London; Editing by Greg Mahlich and Marguerita Choy)