LONDON/MOSCOW Rosneft (ROSN.MM) is poised to secure a tighter grip on Russia's oil industry by buying BP's (BP.L) 50 percent stake in TNK-BP TNBP.MM, the country's third largest producing company.
The British oil company's board was expected to consider a cash and stock offer worth over $25 billion on Friday that would allow it to exit a profitable but troublesome joint venture.
The offer is not tied to asset deals or exploration tie-ups with Rosneft, although sources said those may follow.
Rosneft has already made a tentative offer to BP's equal partners in TNK-BP, the AAR consortium owned by four Soviet-born tycoons, that could be worth up to $28 billion.
"If and when BP reaches any agreement it will make an announcement at the appropriate time," BP said in a statement.
Some British newspapers reported that BP's chief executive Bob Dudley would be recommending the offer to his board.
"The offer is in. It's a split of the two," (cash and shares). It's a clean offer and there's no other plan on the table," said one source.
"If he thinks it's the best offer Dudley will recommend it but the board may say we need to reconvene and consider this aspect or that. It's not an automatic tick in the box."
Sources have said a three-way deal that could soon emerge, with some details to be hammered out during a visit to London this week by Rosneft Chief Executive Igor Sechin.
They said BP and the four tycoons could emerge with minority stakes in an enlarged Rosneft plus billions of dollars in cash in exchange for the highly profitable company.
The combined group would dominate Russia's increasingly state-controlled oil industry.
President Vladimir Putin has been regaining state control of assets that passed cheaply to a small group of businessmen when privatized in a hurry in the 1990s.
Rosneft's absorption of another oil firm, Yukos, and the imprisonment of its former owner Mikhail Khodorkovsky in the mid-2000s was the biggest step in this process until now.
That was also masterminded by Sechin, who was deputy chief of staff at the Kremlin - Putin's gatekeeper - at the time.
Citing this background, sources said that although BP would likely get stock in Rosneft as part of its package, the tycoons might not, and that a structure of deferred payments of more cash could be on the cards for the AAR partners.
A stock purchase by BP could also allow Putin to show some of his critics that he is diversifying, not concentrating, ownership in the oil industry, analysts have said.
A reminder of that pressure on him came from a Russian cabinet meeting on Friday.
First Deputy Prime Minister Igor Shuvalov said Rosneft's prospective buyout of TNK-BP would not deflect the government from reducing the state's stake in the country's largest oil company from the current 75.2 percent by the end of 2014.
"Regardless of Rosneft's further activities in acquiring assets, our strategic goal of privatization remains," Shuvalov said after a cabinet meeting chaired by Prime Minister Dmitry Medvedev. "We will proceed very carefully, as our president has said, paying attention to the quality of investors and maximizing the proceeds that are raised."
MORE OUTPUT THAN EXXON
A combined Rosneft-TNK-BP would produce well over 4 million barrels of oil and gas a day - more than U.S. No.1 Exxon Mobil (XOM.N), the biggest producer among the world's investor-owned oil companies.
To finance a deal worth over $50 billion if both parties get bought out, about $15 billion could be met by a loan Rosneft has been negotiating with international banks.
It could get another $3 billion from Russian banks, but one financial source said "there is a point where raising debt would have a negative impact on Rosneft's credit rating."
Some of the offer will be in stock, sources have said. Rosneft already holds over 12.5 percent in treasury stock - worth over $9 billion based on Friday's stock market valuation of $74 billion, and it could issue more.
Sources have also said that the AAR side of the deal could involve deferred payments over a number of years.
Finally, the TNK-BP business itself has strong cashflow and little debt, allowing the partners to rake off $4 billion a year in dividends in recent times.
Bankers told ThomsonReuters LPC that Rosneft's $15 billion loan request had not changed since this week's developments. The loan package consists of bridge loans to be refinanced with bond issues and a term loan that will be held by banks. A total of 10 banks have already joined the deal and the loan could be concluded in three to four weeks.
Rosneft declined to comment. AAR has declined to comment since abandoning its own plan to buy out the BP stake this week and leaving Rosneft as the only bidder. BP would not comment beyond its statement.
Shares in BP climbed 3 percent on Wednesday and added a further 0.7 percent on Thursday and 0.5 percent on Friday to 454.3 pence, trading at their highest levels since April.
Investors see potential for BP's fraught history in Russia to take a positive turn, even if their half of the deal does not go through. The stock underperforms its peers by most financial measures because of uncertainty in Russia and with regard to its liabilities for the U.S. Gulf oil spill.
The AAR part of the deal is a re-hash of a plan that fell through last year, under which BP and Rosneft offered to buy out the tycoons and sign a tie-up deal to explore in the Arctic together.
Relations between BP and the tycoons Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik have long been fraught. The soured further last year when AAR 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 deteriorated further, with Fridman quitting as CEO of TNK-BP in May this year.
BP put its stake up for sale the following month in an attempt to bring the issue to a close.
(Additional reporting by Douglas Busvine, Melissa Akin, Alexei Anishchuk and Vladimir Soldatkin in Moscow and Sarah Young in London; Editing by Will Waterman and Anna Willard)