Rosneft agreed to buy TNK-BP, a 50-50 venture between BP and a group of billionaires, for US$54.8 billion in the third-biggest oil acquisition ever.
By absorbing Russia's third-largest oil firm, state-run Rosneft will match the output of Exxon Mobil and control more than 40 per cent of Russia's crude output.
President Vladimir Putin, who has sought to reassert government control over the world's largest oil and gas industry, said yesterday's accord was important for the economy.
"This deal is in line with the Russian government's strategy of reversing the privatisation of oil and gas resources that took place in the 1990s," said Andrey Golubov, a finance lecturer at Cass Business School in London. The deal put Rosneft "on par with global giants like Exxon Mobil".
Rosneft, led by chief executive Igor Sechin, would buy BP's 50 per cent stake in TNK-BP for US$26.8 billion in cash and shares and had an initial agreement to acquire the billionaires' half of the company for US$28 billion in cash, a statement said.
BP will take a 19.75 per cent stake in Rosneft and two seats on the board. The deal is BP's biggest for 13 years and chief executive Bob Dudley's boldest move yet to transform the company after the 2010 Gulf of Mexico oil spill.
"Rosneft is a company working to become a global leader," Dudley said. "BP looks forward to being able to contribute to Rosneft's success and add value through our participation on the board."
The only oil and gas acquisitions that have been bigger than this deal are Exxon's US$80 billion merger with Mobil in 1998 and BP's US$56 billion purchase of Amoco the same year.
BP will receive US$17.1 billion in cash and 12.8 per cent of Rosneft's shares for its half of TNK. It will reinvest US$4.8 billion in the government's shares of Rosneft, leaving it with US$12.3 billion in cash, 19.75 per cent of the state-backed firm and two board seats.
About half of the Russian government's revenue comes from the oil and gas industry. Once Rosneft buys all of TNK-BP, its output alone would exceed that of every Middle Eastern country except Saudi Arabia.
BP has sold about US$33 billion in other assets since 2010 as it focuses on more profitable crude oil production following the Gulf spill that erased about a third of the company's market value.
This deal releases BP from a difficult nine-year relationship with its billionaire partners in TNK-BP, which accounted for about 25 per cent of BP's global output and returned US$19 billion in dividends.