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. Last Updated: 07/27/2016

BP Seals Historic TNK Tie-Up, Minus $600M

LONDON -- BP, Europe's second-largest oil company, agreed on Thursday to invest $6.15 billion in its joint venture with Tyumen Oil Co., $600 million less that initially planned, in part because of debt its partner took on to purchase additional assets.

The company will pool its Russian assets with those of TNK and pay $2.4 billion in cash and $3.75 billion in stock to buy half the venture, the London-based company said in a statement.

BP in February said it would pay $6.75 billion for the stake.

The cash payment was reduced from the $3 billion announced earlier this year, in part because of financing for Tyumen's acquisition of a stake in Slavneft, BP said. Talks on including Slavneft in the venture continue.

If Slavneft's assets are included at a later date, however, BP said it expected to pay more. Analysts said that additional amount could reach $1.5 billion, but industry sources say BP has balked at the price being asked by TNK's owners, investment groups Alfa Group and Access-Renova.

BP CEO Lord Browne is increasing investment in Russia, the world's second-biggest oil exporter, as projects in the Middle East face delays. "This is one important element in the process of strategic renewal within BP," he said.

The agreement on the final terms of the transaction was announced during President Vladimir Putin's four-day state visit to Britain.

British Prime Minister Tony Blair said this week that the BP venture would make Britain the biggest foreign investor in Russia.

BP's rival, Royal Dutch/Shell, and its partners Mitsui & Co. and Mitsubishi Corp. of Japan in May approved a $10 billion project to tap deposits off Sakhalin and build the country's first liquefied gas plant.

Shell has 55 percent of the venture, which plans to sell oil and LNG to Taiwan and the U.S. West Coast.

Shell and BP will each get more than 10 percent of their production in Russia by 2007, according to Deutsche Bank.

"BP's venture has still to be proven successful," said Ruben Mikkers, who helps oversee the equivalent of $12.9 billion at Robeco Groep NV in Rotterdam, including BP and Shell shares. "The bet BP is taking is a bit bigger than Shell."

BP said "Western principles" of corporate governance will apply to the Tyumen venture.

The BP venture includes fields in Western Siberia that were first developed in the Soviet era.

Among these is the Samotlor field that produced 3 million barrels of oil per day in the 1970s and spurred an oil boom that made Russia the world's top producer.

The field was damaged when Soviet engineers attempted to maintain production by injecting water into the reservoir, Deutsche Bank said. It now pumps 19 barrels of water for every one of oil.

The BP venture has proven reserves of 5.2 billion barrels, 8.6 percent of Russia's total, as well as exploration rights in Siberia and Sakhalin. Including potential developments, the reserves may total 26 billion barrels, according to Wood Mackenzie Ltd., an Edinburgh, Scotland-based consultant.

(Bloomberg, Reuters, MT)