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BP and TNK-BP: The dispute

14 October 2008

The TNK venture was jointly created in 2003 by BP, Western Europe’s second biggest energy group, and four Russian shareholders, from the Alfa-Access-Renova (AAR) group. Disputes began last year as both groups began battling for dominance.

Tony Hayward, BP's chief executive
Tony Hayward, BP's chief executive

Tony Hayward, who took over from BP’s chief executive Lord Browne in 2007, became responsible for dealing with these issues. The struggle for control has been Hayward’s first big challenge as leader of BP. This dispute was predicted by many, as companies that are split 50/50 will always fight over who is the boss.

BP relied on TNK for much of its growth during 2003-2005, and last year, TNK still produced a quarter of BP’s oil production. BP needs Russia. It is hard to get access to reserves, and leaving a country, such as Russia, which is full of resources would be a massive mistake for BP. Russia also needs companies such as BP. Gazprom and Rosneft do not have the ability to develop all of Russia’s resources, so foreign investment is needed. However, Russia’s oil production has been failing and hence may not be able to meet growing demand for oil in the future.

The disputes became serious in March 2007 between the two co-owners. Robert Dudley, who has run TNK since the joint venture was established in 2003, was summoned regarding possible tax evasion at Slavneft. The BP-backed chief executive was also questioned concerning a breach in labour regulations. A Court order also barred the 148 BP specialists hired by the company from appearing at work.

The Russian shareholders of AAR group, Mikhail Fridman, Viktor Vekselberg, German Khan and Len Blavatnik attempted to have Dudley removed after BP rejected the demand for his dismissal. The shareholders believed Dudley was running the venture exclusively in the interests of BP. Many believed these accusations to be unfounded, an attempt by Russian shareholders to remove Dudley from the company, trying to increase Russian representation on the board, before their 50% share was sold to Gazprom or Rosneft. The Russians denied this accusation stating that they weren’t seeking control they merely wanted BP to stop running TNK-BP as its own subsidiary. Certain sources claimed the shareholders had no intention of selling their stake, unless the company was valued at $60 billion, a premium to its current market capitalisation.

Analysts claimed that a state-controlled company buying out the Russian billionaires could resolve the dispute. A deal between BP and Gazprom would give Gazprom a position in BP’s LNG business, as well as increasing Russia’s global dominance in gas.

Emails sent in June between AAR and BP, show that the Russian shareholders believe they should be given the option of swapping their stake in TNK-BP for BP shares. This would result in the Russians owning 10% of BP’s equity.

Peter Sutherland, BP chairman accused the Russian partners of returning to the corporate raiding activities that were prevalent in Russia in the 1990s. Vladimir Putin, the previous Russian president, before he was succeeded by Dmitry Medvedev, supported these accusations and claimed that the leaders of the country seem unwilling or unable to stop them. The lack of intervention by the Kremlin will have a negative impact on Russia, as a country to invest in.

On July 17th, days before Russian authorities were due to decide whether to grant Dudley a new visa, Dudley left Russia to lead the company as chief executive from a secret location somewhere in Central Europe. Dudley also claimed to have suffered from sustained harassment following alleged tax violations. The UK oil group believed the Russian shareholders to be involved in these attacks. A belief which has been strongly denied by the Russians. Without Dudley in position, BP will now have to work harder to defend its rights. A Moscow court on the week of the 11th August has banned Dudley from working in Russia for two years.

TNK-BP’s foreign staff members were under pressure over visas and their compliance with labour laws. The Russian billionaires were aiming to reduce the number of BP staff working on a contract basis at the company.

A preliminary deal was signed on the 28th August between BP and Russia. BP has kept its 50% stake in TNK-BP a highly profitable business, supplying 25% of the company’s oil and gas production. BP remains the biggest foreign oil group in Russia by a considerable amount. However, in return for this 50% share, the Russian billionaires have insisted that Dudley leaves by the end of the year. Dudley will be offered a job at BP. Although this is likely to cause problems elsewhere in the BP empire, given the seniority of Dudley. The two Russian shareholders in executive positions, Khan and Vekselberg, are allowed to stay at present, despite allegations from BP that they organised government agencies to harass foreign managers in order to secure control. As before, BP will nominate the new chief executive. The individual must have experience of working in Russia and be a Russian speaker. A board of 11 directors, consisting of four directors from each side and three independents must unanimously approve the choice.

Although the months of dispute appear to have ended, it is still unknown how effective the deal struck between BP and TNK-BP will be. Of particular concern is how independent the three directors will be. BP needs to retain as many managers as possible as otherwise BP-appointed staff are unlikely to want to stay. Especially considering in the past the Russian shareholders have tried to reduce the number of BP staff working on a contract basis. Employees will leave if they feel they are not being represented and do not have job security. A lot of effort will be needed to restore trust between both parties as well as in restoring faith to 65,000 demoralised workers who may have lost confidence in the company following the disputes.

BP has been able to keep its 50% share, despite many foreign companies, such as Shell, losing control of Russian assets. Regarding oil, companies have little choice as to where to invest, but companies in different fields should perhaps look to other countries, rather than Russia, given the evident risks
More recently it has been announced that two more vice-presidents of BP’s Russian venture will be leaving. Tom Wright, TNK-BP’s executive vice president for planning and performance management, and Steve Riddlington, the company’s vice president for finance and treasury are expected to leave in October, continuing the outflow of foreign managers, and further increasing Russia’s representation on the board. The reason they are leaving is unknown. It is believed that a shareholders’ meeting will take place in December to re-elect the board and add an extra member.

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