BP faces being frozen out of Arctic exploration by Rosneft

BP's much-trumpeted Arctic exploration venture collapsed yesterday after the oil major failed to strike a compromise between its existing Russian partners and the state oil giant Rosneft. The company now faces the prospect of being left out as Rosneft looks to other potential partners.

The Rosneft pact was forged as BP attempted to recover from the Deepwater Horizon oil spill in the Gulf of Mexico, an event that made it the subject of both public and political opprobrium in the US.

The deal, which would have seen Rosneft pick up about 5 per cent of BP and the UK group acquire around 9.5 per cent of the Russian company in a $16bn (£10bn) transaction, was meant to provide a new avenue for growth as the two companies tapped Russia's oil-rich Arctic continental shelf.

But yesterday, it emerged that Rosneft walked away as the deal deadline expired, after months of wrangling with the four billionaire investors in the Alfa Access Renova (AAR) consortium, which owns half of TNK-BP, the UK group's existing venture in the country.

The Russian oil giant was said to be exploring the possibility of joining forces with one of BP's rivals, and talking to Exxon Mobil, Royal Dutch Shell and other oil companies as it looks to exploit the Arctic reserves.

A Royal Dutch Shell spokesman said the company had a relationship with Rosneft that pre-dated the BP share-swap agreement, adding that the group was "talking about potential exploration with Rosneft in the offshore Arctic." For its part, BP put on a brave face. "In recent months, BP has conducted detailed negotiations with AAR and Rosneft to seek a reasonable and businesslike solution that would allow the agreements to proceed to the satisfaction of all parties. Such a solution has not been found at this time, although talks will continue," BP and AAR said in a joint statement.

BP's chief executive Bob Dudley added that the group "remains committed to Russia, to working constructively with AAR in TNK-BP and to our existing good relationship with Rosneft. All parties have worked hard to reach an acceptable resolution, as we believe it could offer significant benefits to BP shareholders, to Rosneft, AAR and Russia," he said.

Mr Dudley added that BP and AAR had agreed to focus on TNK-BP, saying: "At the same time, we look forward to continuing our work with Rosneft in our Sakhalin joint venture, running our new German refining business and considering other future projects."

The troubles began when AAR objected to the BP-Rosneft pact on the grounds that it violated the TNK-BP shareholder agreement. The Russian billionaires secured an injunction, and earlier this month an arbitration tribunal ruled that BP could proceed with the deal but only if TNK-BP played a part. Rosneft, however, had previously said that TNK did not have the requisite expertise in deepwater projects.

BP and Rosneft attempted to solve the problem by offering to buy out the AAR consortium, and made an eleventh-hour offer of $32bn, including $9bn in BP shares, according to a source with knowledge of the negotiations. But the talks are believed to have faltered, owing to AAR's reluctance to lift the injunction without a guarantee that Rosneft would proceed with the buyout of the consortium's stake in TNK-BP.