BP's deal with Rosneft on the verge of collapse

BP's controversial $16bn share swap and arctic exploration deal with Russia's Rosneft was thrown into disarray last night, with an independent arbitration panel ruling it could not go ahead. The ruling dealt a potentially fatal blow to BP's most ambitious attempt to move beyond the crisis of its Gulf of Mexico oil spill last year.

The Kremlin-backed deal would have seen Rosneft pick up around 5 per cent of BP, which in turn was going to acquire around 9.5 per cent of the Russian group as part of a $16bn share swap. The agreement – billed as a "global strategic alliance" by the companies – would have also seen the two join forces to explore an area roughly the size of the North Sea in Russia's oil-rich Arctic continental shelf.

But the agreement was stopped last night by an arbitration panel called to intervene in a dispute between BP and local shareholders in its TNK-BP venture, which long predates the Rosneft deal. The shareholders – collectively known as the Alfa-Access-Renova consortium or AAR – launched the challenge just weeks after the Rosneft agreement in January, contending that the proposal violated the TNK-BP shareholder agreement.

AAR claimed that the Rosneft pact rode roughshod over the agreement as it specified that either party's business in Russia had to be conducted through the TNK-BP venture unless all sides agreed otherwise. A British judge granted an interim injunction blocking the tie-up earlier this year, and the two parties went into arbitration before a tribunal in Stockholm.

Last night, BP said the tribunal had ruled the injunction should continue. The oil group, which had announced the alliance amid much fanfare in January, said it was "disappointed" by the ruling, but that it remained committed to Russia. The company, which also said it looked forward to finding a way to "resolve its difference with its Russian partners", now plans to apply to the tribunal to seek a ruling on whether it can proceed with just the share swap element of the deal.

AAR's chief executive, Stan Polovets, said the consortium expected BP to "fully and absolutely" honour the ruling, adding: "Wilfully ignoring the provisions of the shareholder agreement was a serious misjudgement by BP that has severely damaged the relationship between the TNK-BP shareholders. It has also harmed BP's reputation in Russia."

The panel's judgment will embarrass both the BP chief executive, Bob Dudley, and politicians in the UK and in Russia. The alliance, seen as a personal triumph for Mr Dudley as he attempted to steer the oil giant away from the US, was announced at a ceremony in London, with Mr Dudley and Igor Sechin, the Russian deputy prime minister and Rosneft's chairman, signing the deal in the presence of the Energy Secretary, Chris Huhne.

The pact triggered controversy in the US, where BP's reputation suffered in the wake of the Gulf of Mexico disaster. One lawmaker, the Democratic congressman Edward Markey, grabbed the headlines when he said: "BP once stood for British Petroleum. With this deal, it now stands for Boloshi Petroleum."

The arbitration panel's ruling may cause BP problems in Russia. Earlier this month, the Russian Prime Minister, Vladimir Putin, expressed his surprise at the snag after the initial agreement in January. "I was absolutely not aware [such a move was possible]. I met with the BP head and he did not say a word about it," he said.