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TNK-BP deal goes ahead

BP AND Alfa Group and Access-Renova (AAR) have completed the deal to combine their Russian and Ukrainian oil and gas businesses, forming TNK-BP.

Last month, rumours intensified that other oil majors will soon follow suit. In a mid-September report, the Wall Street Journal claimed ChevronTexaco and ExxonMobil are planning to launch rival bids for 25% of Yukos-Sibneft. Yukos dismissed the rumours as speculation. It said it has no written or verbal agreements to sell a substantial block of company shares, nor is it aware of any such agreements signed by its shareholders.

TNK-BP, the country's third-largest oil and gas firm, will produce around 1.2m barrels a day (b/d) from its main oilfields in western Siberia and the Volga Urals. Completion of the company's acquisition of Slavneft will increase oil output by about 160,000 b/d.

On 29 August, BP said it would immediately pay AAR $2.6bn in cash for its stake in the new company, plus three annual tranches of $1.25bn in BP shares. BP also reached an agreement with AAR to incorporate AAR's 50% interest in Slavneft into TNK-BP in return for a cash payment by BP of $1.35bn, subject to adjustments. The company will be owned and managed 50:50 by BP and AAR.

Stephen O'Sullivan, head of research at UFG, which advised BP on the deal, says TNK-BP's immediate priority is to rationalise its portfolio, selling off assets that do not meet its investment criteria. It must also ensure that it maintains strong medium-term production growth, he adds.

The signs so far have been impressive. Last month, Robert Dudley, the chief executive of TNK-BP, said the company had raised its year-on-year crude oil production growth forecast for 2003 to 12% from 11% (based on the combined assets of TNK and Sidanco).

Although no forecasts have been made beyond 2003, TNK-BP estimates it can return around 40% of its 12,000 idle wells - around half of which are in the giant Samotlor field - to production. TNK-BP expects to start this programme around the end of the first quarter of 2004.

Adam Landes, oil and gas analyst at Renaissance Capital, agrees that maintaining the momentum in upstream growth is a priority. There is some evidence that it is already accelerating production growth markedly, but it needs to show it can do that on a sustained basis. He adds that successfully blending the two corporate cultures, enforcing adequate corporate-governance standards and ensuring minority shareholders are dealt with fairly are other important near-term challenges.

The transaction excludes BP's share in its Sakhalin interest (in blocks 4 and 5), which it originally intended to contribute to the new company. The formation of a Sakhalin joint venture with its licence partner, Rosneft, is still under negotiation, but the Sakhalin interest could be contributed to TNK-BP at a later date, BP claims.

The company adds that the exclusion of Sakhalin, together with interest and other minor adjustments, accounted for the slight rise in its initial cash payment to AAR to $2.6bn, up from the $2.4bn estimate announced in June.

Completion of the Slavneft deal, which is subject to the approval of the regulatory authorities of the European Union, Russia and Belarus, is expected before the end of the year. The deal will be effective from May 1 2003.

As of 31 December 2002, under Russian accounting standards, the Slavneft group reported total net assets of $0.89bn, and 2002 profit after tax (before exceptional items and minority interest) of $430m.

TNK/AAR holds around 50% of the Slavneft group. The Slavneft interest is held jointly with Sibneft and was acquired through a number of transactions, including the Slavneft privatisation in December.

Although it is predominantly an upstream business, TNK-BP also operates five refineries in Russia and Ukraine, with installed capacity over 1m b/d and more than 2,100 filling stations across the two countries.

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