Examples of Negotiation in Business: When “Shrink to Grow” Pays Off

Expanding the pie in business negotiations (even when the business isn't expanding)

By PON Staffon / Win-Win Negotiations

In the business world, a drive to build new partnerships keeps organizations from stagnating. But it’s important to consider how existing partners will be affected by your expansion efforts, a lesson that oil and gas company British Petroleum (BP) learned through trial and error.

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A deal runs out of gas

In the article “Adventures in Russia: BP and Exxon Navigate Dark Waters” in our November 2011 issue, we described how BP CEO Robert Dudley negotiated a partnership with Rosneft, a state-owned Russian oil company, in early 2011. The deal included a $16 billion share swap between the companies and a proposed joint venture in the Arctic Ocean. Dudley was pursuing a “shrink to grow” strategy of selling run-down oil fields in favor of more promising frontiers, write Andrew E. Kramer and Stanley Reed in the New York Times.

The Unraveling of the Agreement

But the negotiated agreement didn’t hold. BP co-owned an oil company called TNK-BP with a group of Russian businessmen known as AAR. Relations between BP and AAR were notoriously stormy; Dudley, who once headed TNK-BP, had actually gone into hiding for months after a dispute with his Russian “oligarch” counterparts.

Through an injunction, AAR successfully blocked the BP-Rosneft deal on the grounds that BP was obligated to pursue Russian projects through TNK-BP. AAR had thwarted a similar deal between BP and another major Russian oil company, Gazprom, in 2007.

A Swedish arbitration court ruled that BP and Rosneft would have to include TNK-BP in the exploration part of their deal. BP ultimately failed to meet a renegotiation deadline with Rosneft, which ended up giving ExxonMobil rights to the same Arctic waters that BP had coveted.

Negotiation Advice: If at first you don’t succeed…

Almost two years later, BP attempted another deal with Rosneft—and this time, it appears the British company may have gotten it right.

In October 2012, BP announced that it had agreed to sell its 50% stake in TNK-BP to Rosneft as part of a package of deals worth $55 billion. In exchange for TNK-BP, the Russian government will grant BP a 19.75% stake in Rosneft and about $12.3 billion in cash.

The negotiated agreement would allow BP to pursue its long-desired drilling opportunities in the Russian Arctic and pay the billions in penalties it owes the U.S. government for the 2010 Gulf of Mexico oil spill. Rosneft will remain Kremlin controlled, though BP will gain two seats on the Russian company’s board. In a related deal, Rosneft paid AAR $28 billion in cash for the other half of TNK-BP.

The Result of a Win-Win Approach to Negotiation: Strengthened ties

The agreement effectively reduces BP’s investment in Russia, but the company’s new connections to the Kremlin through Rosneft should help it drum up profitable Russian business, write Kramer and Reed.

Betting that Russia’s president, Vladimir Putin, will continue to dominate Russian politics for years to come, BP was motivated to strengthen its ties to him and his inner circle and to break away from the 1990s-era AAR oligarchs, whose power has waned, by selling TNK-BP.

The intertwined deals among BP, Rosneft, and AAR were a proverbial win-win-win. BP gained its freedom and a healthier cash flow. Rosneft advanced to become the largest publicly traded oil company on the planet. And the members of AAR further fattened their wallets.

Advice for Dealmaking Business Negotiations

For business negotiators, BP’s end of the deal demonstrates that sometimes it is necessary to take one step backward in order to take two steps forward: to forge promising new partnerships, you may need to let go of older ones that are preventing you from meeting your goals.

Related Win-Win Negotiations Article: How to Bargain for a Mutually-Beneficial Agreement

Discover how to handle complicated, high-level business negotiations in this free report, Win-Win or Hardball? Learn Top Strategies from Sports Contract Negotiations, from Harvard Law School.

Originally published in Negotiation Briefings January 2013 issue, “When ‘shrink to grow’ pays off: BP’s new Russian partnership.”