Tribunal blocks BP plan for Rosneft share-swap

British oil giant to seek compromise deal with Russian partners

BP's plans for a $10bn (£6bn) tie-up with Rosneft suffered another blow yesterday when a London arbitration panel ruled that the oil major's share-swap proposal cannot proceed.

The tribunal extended the injunction prohibiting the deal "until further notice", but gave BP leave to talk to Rosneft about an extension of itsexclusivity period, due to expire on 14 April, after which the Russian state-owned company could hold talks with rival suitors.

BP's plan for an Arctic exploration programme with Rosneft has already been vetoed by the panel convened to rule on complaints from BP's partners in its Russian joint venture, TNK-BP.

According to the four billionaire oligarchs making up the AAR consortium which owns the other half of TNK-BP, the Rosneft deal violates the TNK-BP shareholder agreement specifying that all Russian activities be conducted through the joint venture.

No further tribunal hearings are yet scheduled, though both sides have been asked to submit further evidence on the question of whether BP's plans for a share-swap – minus the Arctic exploration activities – are purely an investment opportunity and thus do not constitute competition with TNK-BP in Russia. In the meantime, the share-swap deal cannot go ahead.

Stan Polovets, the AAR chief executive, welcomed the ruling as "fair, balance and thoughtful" and said the Russian investors remained committed to co-operating with the tribunal.

BP stressed the ruling was "purely and simply a deferral". "We will continue with the arbitral process for a final ruling in our favour," a spokesman said. "There are a number of ways to resolve the differences, so we will now also be exploring possibilities for a reasonable commercial solution with all parties."

BP is requesting a meeting next week of the TNK-BP board. Although a series of meetings before the arbitration failed to reach a compromise, commentators say that with the tribunal erring towards upholding the AAR objections, the time has come for negotiations to begin in earnest. "They are going to have to come and talk about a compromise," one BP-watcher said.

But it could be tricky to find a solution that works for all three parties. Even if BP and TNK-BP could find a middle ground, Rosneft may be harder to convince. In February, the group's chief financial officer, Peter O'Brien, unguardedly rejected TNK-BP's involvement, pointing out the Russian company's lack of relevant technology, experience and personnel.

It is also not yet clear how far recent shifts in the political balance in Moscow might affect the BP/Rosneft deal. Last week President Dmitry Medvedev ordered the removal of government ministers from state-owned company boards, a move widely interpreted as the opening steps of a complicated dance with Prime Minister Vladimir Putin ahead of next year's presidential elections. Mr Medvedev's targets include Igor Sechin, one of Russia's deputy Prime Ministers, the Chairman of Rosneft and a key backer of the BP deal. "The mood music has changed," a source said.

The debacle over the Rosneft deal comes at a tricky time for Bob Dudley, the BP chief executive who only took over last October after his predecessor, Tony Hayward, lost his job over the Gulf of Mexico oil spill. The collapse of such a high-profile deal is a major embarrassment for Mr Dudley, raising questions about his judgment with some in the City.

But supporters say Mr Dudley deserves credit for his bravery, with respect to both the Rosneft deal and the wider strategy to boost BP's exploration activities and forge links with the national oil companies that hold increasing sway in the global industry.

Russian business experts also counsel against snap conclusions. "At the moment things are not great for BP – no one doubts that – but it is inevitable that BP and Rosneft will end up with some sort of arrangement in the future," one senior source said. "This deal might be dead in the water, but in Russia deals often fail, and then act as a stepping stone to something else."