A decision to challenge Russian billionaire Mikhail Fridman over his purchase of a dozen North Sea gasfields was taken at the highest levels of the British government amid expectations that Moscow is likely to face tougher sanctions over the conflict in Ukraine.
The stance, adopted after a recent meeting of the National Security Council, which is chaired by the prime minister and includes his top defense staff, reflects the concern that U.K. oil and gas production could be affected by the international crackdown on Russia.
Ministers have concluded there is unlikely to be any swift reversal of sanctions on Russian companies and individuals and, to the contrary, western economic penalties are more likely to be increased.
The decision also highlights broader concern voiced by senior U.K. ministers about the potential vulnerability to a Russian takeover of other North Sea assets as falling oil and gas prices encourage some existing operators to offload their operations.
The showdown burst into the open at the weekend when Ed Davey, the U.K.'s energy secretary, intervened in Mr Fridman's 5 billion euro purchase of RWE Dea, the oil and gas arm of Germany's RWE. He said he was "minded" to require the Russian businessman to sell Dea's North Sea gasfields to "a suitable third party".
Mr Fridman's investment vehicle, LetterOne Group, which formally bought the assets on Monday, promptly threatened to take legal action.
A senior western oil executive said the UK was entering "uncharted territory" by intervening publicly in a corporate transaction over fears of the effect of future sanctions against Russia.
The U.K. government's concern centers on the risk of a repeat of what happened when sanctions were imposed on Iran, which led in 2010 to the shutdown of the North Sea's Rhum field, co-owned by BP and the National Iranian Oil Company. Output only restarted last October.
Mr Davey had last year resisted a demand from the buyers for a "letter of comfort" reassuring them that they would not be caught out by future sanctions.
A senior coalition figure said the move was a sensible contingency ahead of potential future sanctions — which could include energy — rather than a unilateral attempt to turn up the pressure on Russia.
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"The point is that we can't guarantee that there won't be (further sanctions) . . . there are a raft of players around the world that could put sanctions in place," said another government figure.
Meanwhile, U.S. and European leaders held a video conference on Tuesday to discuss the Ukraine crisis. France said western powers agreed that a "strong reaction" would be necessary from the international community if a ceasefire in Ukraine agreed last month in Minsk was violated.
Philip Hammond, the U.K. foreign secretary, flies to Kiev on Thursday, where he will argue for existing sanctions against Russia to be prolonged and discuss a "menu of possible additional measures".
The U.K.'s position on Mr Fridman's deal was criticized by Sir Alan Duncan, a former minister, who said Britain's priority should be to encourage the North Sea's development amid moves by operators to cut costs and staff in the wake of a near 50-percent fall in oil prices.
"We should be pleased that they [LetterOne] are willing to do the deal," said Sir Alan, a former oil trader. "Banning them in anticipation of future events is neither legal nor moral."
Another former Tory minister said he sensed an "anti-Russian" mindset from some of Mr Davey's comments.
"Mr Davey better make sure he has very good legal advice if he wants to stay out of court," said Jonathan Fisher QC, a lawyer at Devereux Chambers. "You can't simply block something on the anticipation of future economic sanctions."
LetterOne, based in Luxembourg, argues that the Rhum field is not a relevant analogy, contending that no sanctions have been imposed on the group — unlike the National Iranian Oil Company. It argues it has set up a mechanism to cope with that eventuality, using a Netherlands-based entity.
The Dea assets are part of a portfolio that the group's new $10 billion fund, L1 Energy, will use as a cornerstone to build an international oil and gas business. Mr Fridman has recruited Lord Browne, former chief executive of BP, to run L1 Energy.