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TNK-BP/HRT deal testament to opportunities in Brazil, lawyers say

8 November 2011

As BP’s Argentine sale collapses and the dispute between TNK-BP and BP over a deal in the Arctic rolls on, lawyers working on TNK-BP’s purchase of a stake in Brazil’s HRT Participações em Petroleo are calling it a testament to the potential of the Brazilian oil & gas sector.

TNK-BP, an equal joint venture between BP and Russian investors acting through the Alfa-Access-Renova (AAR) consortium, signed a US$1 billion joint operating agreement with HRT on 31 October. Once the deal is approved by Brazilian regulators, Russia's third largest oil producer will own 45 per cent of a group of oil exploration blocks in Brazil’s Solimões basin. 

Lawyers working on the deal agree that the investment shows prospective foreign investors that there is an important independent alternative available to them in Brazil’s oil exploration and production industry, next to state-owned oil company Petrobras and the large, international oil companies that continue to dominate the sector. HRT, which owns oil and gas concessions in Brazil and Namibia, is still tiny in comparison, but has found itself a niche market in focusing on onshore exploration while other companies are most interested in Brazil’s offshore reserves.

“This is an extraordinarily significant transaction because, to my knowledge, it is the first investment by one of the world's largest international oil companies in a major concession operated by a Brazilian independent,” says Vinson & Elkins partner Boyd Carano, who is acting on behalf of HRT.

Campos Mello Advogados partner Luiz Antonio Lemos, who represented the buyers alongside DLA Piper, says: “It demonstrates the interest of the players in the Brazilian market, and of the importance of Brazil as a whole.”

Explaining some of the motivations behind pursuing the joint operating agreement with TNK-BP, Jorge Pedroso, in-house counsel for HRT, says: “TNK-BP is a major vertically integrated oil & gas company, Russia’s third largest oil producer and among the 10 largest private oil companies in the world. Its know-how in onshore E&P technology brings us the opportunity to improve our achievements on this field.” He adds that he believes the move helps TNK-BP in its expansion beyond Russia, and is therefore mutually beneficial.

Structuring the agreement required a lot of man-hours, not just because of the size of the deal but also due to its complexity. “There were so many interests and concerns to be discussed and in an investment of this magnitude, the human resources it requires are quite common,” says Lemos.

Carano says drafting the contract was complicated as it had to include “agreements for the joint operation and ownership of a potentially huge asset throughout its development, from the exploration stage through production and commercialisation,” as well as a transfer of concession rights from HRT’s existing partner [PetroEnergia] to HRT and then to TNK-BP. He adds that the contract also includes a put/call option for the possible future transfer of majority ownership and operatorship from HRT to TNK-BP based on an agreed-upon valuation methodology.

HRT’s Pedroso says the main challenge was drafting “a partnership agreement embracing a huge area with 21 blocks in different stages of operations”, but also points to the “cultural differences between two relatively young companies” as factors that made the deal a difficult task. However, he says the company is confident that it has reached “a win-win agreement that could be instrument to drive the relationship between TNK and HRT from now on”.

According to Lemos, TNK-BP’s in-house team in Moscow coordinated the legal work on their side, and was “essential to an efficient contract negotiating process”, which took around seven months. Campos Mello entered the deal through the cooperation agreement it has with DLA Piper, which has traditionally represented TNK-BP.

On the other side, Vinson & Elkins worked together with HRT’s in-house team, assembled by the company’s CEO, Marcio Mello. Several Brazilian firms were also consulted for advice on certain aspects of the transaction. Vinson & Elkins’ Washington, DC office first represented HRT in an international arbitration against a UK company in 2009.

AAR, the consortium of Russian investors in TNK-BP, was represented by Skadden, Arps, Slate, Meagher & Flom LLP.

Even by Brazil’s standards this is still a major deal, and represents a significant step forwards for both companies. Established in 2008 by oil consultancy company HRT Petroleum through a US$275 private placement in the US, HRT has since quickly expanded its profile through a successful IPO in 2010 (hiring Milbank, Tweed, Hadley & McCloy LLP and Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados), and a move into Africa, for which it hired Mattos Filho, Simpson Thacher & Bartlett LLP and Fraser Milner Casgrain.

TNK-BP previously invested in Latin America when it agreed to buy BP’s production and pipeline assets in Venezuela and Vietnam earlier this year, as part of BP’s large-scale divestment operations to raise funds for compensation pay outs, following the oil spill in the Gulf of Mexico. Linklaters advised BP in that deal, although it was unclear at the time of publication what firms TNK-BP hired.

The latest transaction is now with Brazil’s energy regulator, ANP, awaiting approval of the transfers of the participating interests in the Solimões concessions, which the parties expect to come through in the next couple of months.

The acquisition has been agreed during a tumultuous time for both BP and its Russian joint venture. The two are at odds over a failed Arctic oil deal with Rosneft, and TNK-BP is accusing BP of breaching the shareholders agreement.

That dispute, however, has not stopped the joint venture from moving into Brazil. Meanwhile BP has just seen the collapse of an Argentine oil deal where it planned to sell its 60 per cent stake in Pan American Energy, to Bridas, a venture between China's CNOOC and the Argentine Bulgheroni family.

Source: Latin Lawyer