The TNK company came into existence in 2003, at a time when British Petroleum and AAR entered into what the two companies believed was a long-term cooperation agreement to develop their joined assets located in Russia and in Ukraine. The two companies, BP and AAR had equal 50-percent stakes in TNK. To begin the relationship, British Petroleum invested around USD8 billion into the joint venture. Over the years, TNK has become a considerable asset for British Petroleum, paying BP more than USD19 billion from the company’s creation, or about USD2 billion per year. As of 2011, TNK accounted for 27 percent of British Petroleum’s stated reserves, and the company’s production comprised a whole 29 percent of BP’s total extraction figure.

AAR undeniably also received tremendous benefits from its alliance with British Petroleum, including the advantages of having a brand of international recognition, as well as the availability of cutting edge production and project execution technology. Of equal significance was British Petroleum’s ability to attract international financing to sustain the project of TNK within Russia. The reasons for British Petroleum’s decision to work with AAR in particular had to do with the vast influence commanded by the founders of that company, who had substantial equities in various Russian commercial entities and were eager to adopt Western business practices.

The integration of the two companies within TNK produced a vertically-merged business arrangement that boasted both downstream and upstream assets. As such, TNK became the third biggest player on the hydrocarbons market in Russia and in Ukraine, having ownership of reserves in the richest oil and gas areas of Western and Easter Siberia, the Volga region, and in the Urals. With the company’s successful and progressive development within Russia, TNK was making plans for global expansion in its own right. The company was also expecting to expand its activities on the natural gas market.

TNK as a company allowed British Petroleum to enter smoothly the Russian energy market, considered to be among the biggest in the entire world. As such, the size of the Russian energy market has been estimated at USD208.9 billion, a figure that represents 25.6 percent of the European market. Even while British Petroleum operated in Russia through the TNK entity, the company in fact was able to utilize its own brand at a number of service stations. More importantly, access to Russian oil allowed British Petroleum to achieve a considerable level of diversification in terms of the geographic distribution of its portfolio. Just like the United States, Russia became a market of critical importance for the global oil producer.

After the disaster in the Mexican Gulf, British Petroleum needed to raise capital for relief efforts and for compensation to the victims of the oil spill. To that end, the company pursued divestment initiatives to raise nearly USD30 billion by selling its assets first in the United States, Canada, Egypt, and then later in Venezuela and Vietnam. The assets in the latter two countries were sold by British Petroleum to TNK for USD1.8 billion. This transaction was profitable for both entities: while British Petroleum acquired the money for carrying on its remedial operations in the Gulf of Mexico, TNK received an opportunity to grow outside of the borders of Russia. In this respect, the Russian entity’s present strategy relative to international projects is centered on the upstream segment. The company is also looking to expand into Brazil.

At the same time, the shareholders of TNK appear to have had differing visions as to the growth of the company. While British Petroleum viewed TNK as a mechanism for gaining access to the region of Russia and Ukraine, AAR saw TNK as a company designed for international projects and competition. Throughout the duration of the alliance between British Petroleum and AAR, the Russian side at times criticized BP for having artificially limited the role of TNK to that of a regional branch company, which curtailed the joint venture’s full potential for expansion.

In particular, BP blocked TNK’s attempt to participate in oil projects in Iraq and to buy out a refinery in Lithuania formerly owned by Yukos. While British Petroleum did offer plausible explanations for avoiding the two international deals – in the case of Iraq, BP was of the view that the projects were not worth the political risk, and in the case of the refinery in Lithuania, BP stated that the selling price was unjustifiably high. Even though British Petroleum did sell its assets in the upstream sector of Vietnam and Venezuela in 2010, some market analysts believed that move to be motivated by BP’s urgent need for cash, and not by the company’s acquiescence in the international strategy of the TNK group. Even after the Vietnamese and the Venezuelan deal, BP and AAR had unsettled disagreements.

Throughout their history, the two entities entered into clashes many times. The ownership structure of the joint entity naturally led to the shareholder’s inability to compromise. While British Petroleum wanted to replace AAR with Gazprom in 2007, the company issued threats of court action against the change of the company’s corporate organization. The clash led to the departure of key British Petroleum officials from Russia, which in the eyes of AAR appeared to justify the rectitude of its position. What many analysts believe to be the nail in the coffin of the relationship between BP and AAR was AAR’s blocking of British Petroleum’s deal with Rosneft for arctic exploration. While BP wanted to circumvent its TNK partner by entering into an agreement directly with Rosneft, the deal fell apart in August of 2011. Because of internal disagreements between BP and AAR, Rosneft opted to work in the arctic together with ExxonMobil.

As recently as in 2007, British Petroleum wanted to replace AAR with Gazprom. In view of Gazprom’s considerable role as an importer in the gas sectors of many Asian countries, British Petroleum needed to have an approval from the Russian gas giant for accessing those markets in an effort to sell the gas produced at its Kovykta field. AAR did not have any need to sell out at that time, however. Additionally, the initiative of British Petroleum was opposed by the Russian government. In particular, it was argued that the integration of Gazprom and British Petroleum into a single company would be detrimental to the role of Rosneft as the dominant player on the oil market. Since AAR had no interest in the transaction, the negotiations did not progress for long, and the field at Kovykta was sold out to Gazprom for USD700 million.

The relationship between AAR and BP was marked by numerous problems, especially in view of the fact that the former group sought to aggregate its influence by means of judicial intervention. While the upshot of AAR’s legal maneuvering was in fact the strengthening of its position as the lead player within TNK, BP did not wish to sell out its stake in the Russian venture, which it still considered important for its interests.

In 2008, the two companies had major disagreements as to the mode of corporate organization that was to prevail at TNK. AAR wished to receive control levers to TNK, to reduce the number of non-Russian employees of the company, and to enjoy greater representation on the boards of directors of subsidiary companies. AAR executives also leveled charges against Robert Dudley, who headed TNK, to the effect that he extended greater preferences to BP than to AAR. The culmination of the dispute was a threat of legal challenges, which it was possible to avoid only after the companies entered into a settlement agreement in the fall of 2008. As a consequence of the dispute, Robert Dudley resigned from TNK’s leadership and was replaced by Mikhail Fridman, the chair of Alfa Group.

At the same time, the settlement agreement calmed the fears of company investors that BP would withdraw from the venture altogether. In January 2010, a joint press conference was held, where BP’s chief executive officer Tony Hadley and Mikhail Fridman announced that the conflict between the two parties came to an end.

Nevertheless, the relationship of the parties never fully recovered, as British Petroleum persisted in allegations of discrimination of its own employees. Following a raid on TNK’s offices by Russian security forces, Robert Dudley left the country.

The efforts of British Petroleum to engage in joint arctic exploration with Rosneft in 2011 were jettisoned when AAR threatened to instigate a legal action to prevent the circumvention of its interests. In particular, AAR asserted that British petroleum was acting underhandedly by ignoring the contract that was made between the two entities. According to AAR, the parties’ agreement meant that BP could not be cooperating with any other Russian company, absent being obligated to share with AAR half of the project revenue. The fact of losing a gigantic contract for arctic exploration to its chief rival ExxonMobil over an internal conflict with AAR was the last straw for British Petroleum, and the company started to look for a way out of the troublesome partnership.

While Rosneft in fact first came to British Petroleum seeking the company’s offshore expertise that TNK lacked, AAR successfully argued in the Stockholm arbitration court that for BP to deal with another Russian company going around its joint venture with AAR would be violative of the parties’ agreement. As such, BP’s deal with Rosneft was judicially blocked.

Taking advantage of the legal delays confronting its competitor, ExxonMobil put in a better offer to Rosneft for the arctic projects. Specifically, the American company agreed not only to advance USD3.2 billion for exploration activities, but also to include Rosneft into upstream ventures in the U.S. and Canada. Further, just as British Petroleum did, ExxonMobil put in the package the bonus of creating the St. Petersburg research and development center for the arctic.

British Petroleum was not able to offer the Russian company the involvement in North American ventures. The corporate unity of the American oil producer also swayed Rosneft to work with ExxonMobil. By the end of summer 2011, it was clear that the joint enterprise of Rosneft and British Petroleum would never get off the ground.

Following the collapse of the deal, British Petroleum confronted an onslaught of legal claims in Russia brought by minority shareholder Andrey Prokhorov. A court in Siberia ordered that damages in the amount of USD3 billion be paid on account of the failed transaction.

Market analysts are unanimous in holding that the acquisition of TNK by Rosneft will open to both the Russian oil giant and British Petroleum new expansive vistas. As far as British Petroleum stands, the buy-out will make it free from the paralysis that held it bound for many years in Russia. Another consequence of the sale will be that the company acquires a stake within Rosneft, which will be the biggest oil producing company in the world by volume as a consequence of the merger. Further, since Rosneft enjoys tremendous recognition on the Russian market, BP will be guaranteed a sustainable stream of income, as well as vast reserves of hydrocarbons. The Russian company Rosneft, in its turn, will acquire the expertise and managerial knowhow of British Petroleum, which is among the most technologically advanced oil producers on the planet.

The arrangement made for the sale of British Petroleum’s stake to Rosneft also means that the company will emerge from its mesalliance with AAR without any substantial negative consequence. Legal threats made in 2008 caused an exodus of key company officials from Russia. Next, offensive legal tactics completely undermined the arctic venture and left BP saddled with substantial damages. That the deal with Rosneft is expected to go through without interruptions is in and of itself a remarkable accomplishment.

While oil industry observers anticipated that British Petroleum would quit the Russian market altogether after the company’s clashes with AAR in 2008, BP proved itself to be more tenacious than some believed. After all, there is nothing unusual about AAR’s use of litigation. The use of the legal toolbox in fact was nothing more than a manifestation of the company’s adherence to Western business principles. Besides, AAR had previously brought legal actions against other large companies, including JP Morgan Chase. That court battle, begun in 2009, is still ongoing.

At the same time, British*Petroleum must be weary of its status as a minority shareholder within Rosneft, which may in some time lead to an unenviable situation similar to that of TNK.

The business progress of British Petroleum has been most affected as a consequence of the oil spill in the Gulf of Mexico and the uncertainty about the company’s future in Russia. Only recently, BP executives were of the view that AAR actually jeopardized the company’s oil reserves. Clearly, obtaining a satisfactory resolution to one of the two major problems for the company will allow British Petroleum to regroup and focus on more important issues than resolving internal strife.

Following the sale, British Petroleum increased its dividends by 12.5 percent to USD0.09 per share. The profit of British petroleum, registered at USD5.2 billion, was also bigger than what many analysts expected for the third quarter of the year.

As a result of the transaction, AAR stands to receive USD28billion in cash. Nevertheless, the payment guarantees that British Petroleum will continue its participation on the Russian market in full measure and to the benefit of the biggest Russian state-owned oil company. The exit from TNK for AAR is not expected to affect that holding company adversely, since AAR has investments in many different industries aside from oil and gas. On the other hand, an exit from Russia would have been detrimental to British Petroleum because it would have diminished its reserves and undercut future opportunities for international projects.

In the new scheme, British Petroleum’s divestment of TNK assets will be offset as a result of BP’s assuming the position of the number two stockholder in Rosneft, preceded only by the Russian state itself. The takeover of TNK will result in Rosneft’s becoming the biggest oil producer by volume, with estimated production at 4.6 mmboe/d, according to last year’s extraction statistics. In its turn, British Petroleum will have a 19.75 percent stake in Rosneft. The company will also be represented on the board of directors of the Russian oil conglomerate with two of its directors. The total number of Rosneft’s directors is currently nine people, and it is therefore evident that British Petroleum will not have as much control over the operations of Rosneft as it had over the activities of TNK. Still, the willingness with which British Petroleum gave up its TNK assets shows that the company considers higher future returns from a joint project to have priority over the status of being in charge.

British Petroleum’s ownership of a significant percentage of Rosneft’s shares will allow BP to gain from Rosneft’s future explorations. As of the start of the year, the estimate for Rosneft’s recoverable reserves was 154 billion barrel of oil equivalent, which is the highest figure for any company in the global hydrocarbons sector. In the long-range perspective, the benefits from BP’s relationship with Russia are apparent, since the Russian petroleum concern will continue producing oil at very high levels for many decades into the future.

Unlike in the TNK venture, in the alliance of BP and Rosneft, there are no exclusivity provisions. As such, British Petroleum will be free to pursue separate offshore projects on its own. While the contracts for exploration and production in the Kara Sea and the Black Sea have already been auctioned off to ExxonMobil, it is very probable that BP’s status as a minority owner will positively reflect on Rosneft’s subcontractor choices in bids for other large-scale projects that will be undertaken in the years ahead.

After the acquisition, British Petroleum will be receiving from Rosneft some 900,000 barrels a day, a slightly smaller figure that the 980,000 barrels that it got from TNK. The company will also receive from Rosneft around 5.4 billion barrels of reserves, compared to only 4.8 billion barrels of reserves that it could claim from its participation in TNK. Increased levels of reserves indicate the company’s more serious investment commitment. With respect to the production figure, it is possible that the innovative approaches introduced by BP will optimize Rosneft’s efficiency. By 2008, better management mechanisms allowed TNK to increase its production efficiency by about one third. According to Igor Sechin, the company is bringing to the Russian market the best practices from the global oil industry.

British Petroleum is expected to introduce better systems of oil production that will allow the company to gain access to heavy oil, as well as shale gas. As of 2011, it was estimated that hard-to-reach reserves at the fields of Rosneft in Western Siberia contained 13.2 billion barrels of oil. In addition, Rosneft’s technological capacity will certainly be enhanced over time. Some of the expertise will also be gained from ExxonMobil that will participate in the offshore drilling project in exchange for a 33.3-percent stake in the arctic development venture.

 It is expected that it will be much easier for BP to cooperate with Rosneft than with the second TNK partner. British Petroleum and Rosneft have already worked with each other previously, including at the Sakhalin project, in developing Russia’s continental shelf, and in running a refinery venture in Germany at Ruhr Oel GmbH. The Russian government has also been generally supportive of BP’s integration into the Russian oil market. British Petroleum was the first foreign company to hold over 49 percent in a Russian oil venture. Further, the presence of BP directors and managers within Rosneft will promote the adherence of the Russian company to transparent and responsible corporate governance precepts. Among other synergies, BP’s access to international funding mechanisms will allow Rosneft to expand its resource base.

TNK’s assets have for the most part been located in Siberia and in the Urals region. In some cases, Rosneft’s fields are located adjacent to the fields of TNK. Furthermore, the operations of TNK in Venezuela can be joined with Rosneft’s operations.

In the Rosneft acquisition, British Petroleum did not want to sell its stake in the company for anything but equity interest in the Russian oil producer. Earlier, in 2011, the company already tried to acquire Rosneft’s stake as part of the arctic deal.

At the same time, analysts fear that BP’s 19.75-percent stake in Rosneft will be woefully inadequate for the company to command any meaningful independent decision-making authority in Russia. However, it cannot be denied that the previous arrangement that British Petroleum had was not a workable one. AAR withheld the payment of dividends to BP in 2011 in satisfaction of the expenses incurred in the legal battles and the arbitration award. The 50-50 ownership arrangement within TNK caused paralysis to the company’s decision-making organs. Furthermore, it was said that BP’s independent operation on the Russian market would always be subject to some type of control and oversight by state authorities. Further, there is nothing wrong with having a minority stake in large Russian oil and gas ventures for foreign investors. France’s TOTAL, for instance, has only a 20-percent stake in NOVATEK.

British Petroleum indicated that it is satisfied with the arrangement of having a nearly 20-percent interest in the biggest oil company in the world. While British Petroleum is not likely to have the deciding vote for every proposal of Rosneft, BP’s presence on the board of Rosneft will help ensure responsible corporate governance practices. According to Robert Dudley, the investment the company made in Rosneft will be a decade-long commitment. BP’s CEO acknowledged that the future of the global oil industry is with national oil companies in the different countries. For its part, Rosneft is making progress at modernizing its assets to achieve efficient operations.

TNK accounted for more than 25 percent of the reserves and production of BP. Hence, the company’s sale to Rosneft will deprive BP of the significant profits it had. In 2011 alone, BP received some USD4 billion from its stake in TNK. The fortunes of British Petroleum nevertheless remain bright after its alliance with Rosneft. The company is expected to get around USD3 billion on annual terms from Rosneft. Dividend payments from Rosneft are projected at USD700 to USD900 million. Furthermore, with Rosneft’s international expansion to such countries as Venezuela, acquiring the ownership of nearly a fifth of its stock is bound to bring significant returns to British Petroleum.

The combined cost of TNK’s acquisition for Rosneft is expected to stand at USD55 billion. The increase in the volume of Rosneft’s corporate indebtedness has caused alarm on the part of some industry experts. Analysts have come out with figures of as much as USD71 billion as the total debt of Rosneft following TNK’s acquisition. At the same time, it will not be a problem for Rosneft to pay off the debt resulting from the acquisition at its current levels of revenue. Rosneft’s 2011 net income stood at USD12.5 billion, which was up USD10.4 billion over the preceding year’s result. In the current year, the income of Rosneft is expected to reach USD16.7 billion with average oil prices at USD110 per barrel.