Bula Resources still facing choppy waters

ANYONE who thinks the uncertainties surrounding Bula Resources' developments in Russia will evaporate, now that the two Russian directors have agreed to resign, needs to don quite a different thinking cap. Sure, the extraordinary general meeting, scheduled for tomorrow, will not discuss proposals to oust them. Instead, it will be quietly adjourned and discussions about the extraordinary stillborn deals with the Russians will be put off to another day.

At that extraordinary general meeting the shareholders will be asked to approve what is, in effect, a climbdown from the stated position of Bula. The resources company justifies its about face because of the uncertainty in pursuing the legal option, particularly as there were counter suits in the pipeline.

No one could deny that the outcome of the legal option, regardless of perceived rights, is uncertain. And it would be hard to argue with Bula's contention that management time, would be absorbed with litigation.

However, there is a cost to bear, and that will have to be carefully considered by the Bula shareholders. They will have to agree to the proposed compromise deal, with the two Russian directors, Mr Alexander Marichev and Ms Tatyana Kirillova, who are major shareholders in Russian Corporation, a former partner of Bula in Russia. The two will resign if the deal is approved.

The dispute has been simmering since Bula entered into an agreement with the Russian Corporation to acquire an option over 51 per cent of the shares in Aki-Otyr, a Russian joint stock company, with licences to produce oil from the Shapshinskoye and Ryamnoye oilfields. Bula initially got legal advice that the Russian Corporation was the registered owner of 51 per cent of Aki-Otyr and that these shares had 51 per cent of the voting rights.

Then a bizarre series of events seemed to turn that advice on its head. Subsequent legal advice said Russian Corporation - did not have voting rights over 22.25 per cent of Aki-Otyr as this block was not paid for. Then a Russian court ruled that as the payment was not made, the agreement to allow Russian Corporation to buy 51 per cent of Aki-Otyr was cancelled. This was followed by an Aki-Otyr e.g.m. which decided that Russian Corporation was not entitled to exercise any voting rights over the 51 per cent of Aki-Otyr. However, in another twist, Russian Corporation alleged that the e.g.m. was invalid.

Bula did act when the uncertainty arose over the title to the Aki-Otyr shares by putting 71.0 million of the 90.3 million new Bula shares into escrow. Russian Corporation sued for these shares to be released and Bula counter sued. The compromise deal now involves the dropping of all litigation between the two parties.

Russia Corporation has agreed to executive transfer forms which will allow the 71.9 million Bula shares to be sold on the market for Bula's benefit. In return, Bula is to pay Russia Corporation $2.1 million (£1.32 million) over an 18 month period.

The two transactions broadly equate in financial terms but all Bula is getting back is its own shares while Russia Corporation is getting cash. Bula shareholders might find that hard to stomach, particularly as Russia Corporation is giving Bula a company called Roskora which is the registered owner of 51 per cent of Aki-Otyr which, ironically, does not appear to have clear title.

The settlement, Bula says, improves the prospects for a successful conclusion to the negotiations with Aki-Otyr on the exploitation of the oilfields which are estimated to contain 525 million barrels of proven and probable recoverable oil reserves.

If a deal is hammered out, Bula will end up paying much more for its entry into the Russian market. In the absence of a deal, Bula faces a £8 million write off, representing the acquisition costs in respect of Aki-Otyr. Either way, it is likely to prove to be an expensive exercise for Bula, which should shatter any illusions that Bula is now facing a tranquil period.