Intrigue in Russia Ensnares 

BP Venture

BP PLC’s partners in a Russian oil venture sought the ouster of the unit’s chief executive, escalating a dispute that could shape the future of the British energy giant and the role of foreign companies in Russia under the country’s new president.

The British company Thursday refused its Russian partners’ demand to remove TNK-BP Ltd. CEO Robert Dudley, a BP appointee.

The feud threatens to undermine TNK-BP, a pioneering 50-50 venture in Russia which accounts for nearly a quarter of BP’s oil production and close to a fifth of its reserves. TNK-BP is Russia’s No. 3 oil producer. Of the major global oil companies, BP has bet the most on Russia, winning praise in the past from Russian officials. BP Chief Executive Tony Hayward has made numerous trips to Russia in recent months to try to hammer out a deal on the future of TNK-BP.

The outcome of the dispute could also provide insight into the economic policies of Russia’s new president, Dmitry Medvedev. Under his predecessor, Vladimir Putin, the Russian state clawed back control of the nation’s energy sector from two classes of investors: wealthy Russian businesspeople known as oligarchs, and foreign companies that poured billions into Russian energy ventures. The TNK-BP dispute pits one class against the other, and Kremlin watchers are closely following whether Mr. Medvedev will take sides.

At a meeting with Mr. Hayward in Cyprus, the three billionaires who own 50% of TNK-BP said Mr. Dudley, a BP veteran, was favoring the interests of the British company, according to a statement released by the Russian shareholders. They demanded he be replaced. Mr. Hayward rebuffed them, and then declined to take part in a regularly scheduled board meeting, leaving it without a quorum.

Worsening Tensions

BP and the Russian partners — billionaires Mikhail Fridman, Viktor Vekselberg and Len Blavatnik — agreed to hold more discussions next week. Some people close to the talks said tensions that have threatened to hurt the operations are likely to worsen now, though one person close to the Russian shareholders said further talks could help narrow the differences.

The Kremlin’s intentions in the case remain unclear. Industry executives say the Kremlin could pressure BP’s Russian partners to sell out to a state-controlled company like OAO Gazprom, a titan in natural gas. BP, meanwhile, is negotiating a potentially broader partnership with Gazprom. Publicly, the Russian shareholders deny plans to sell.

Some observers believe that after several years of pressuring foreign investors such as Royal Dutch Shell PLC to give up control over major energy projects, the Kremlin now is looking for a way to signal a less-confrontational approach. Foreign expertise and technology could help the Kremlin reverse a slide in crude-oil production this year that has contributed to record-high prices.

In 2006, Shell sold control of a major project in Russia to Gazprom after Russian environmental regulators threatened to shut it down. The regulatory problems, which were widely seen as a pressure tactic by the Kremlin, cleared up within weeks after Gazprom took over.

In recent months, TNK-BP itself has been the subject of official probes, including an industrial-espionage case that saw one low-level TNK-BP employee arrested. People close to the company also warn that continuing management tensions could complicate borrowing plans and other vital activities.

“It’s…the fate of the venture that’s playing out,” said one person close to the company.

The Russian shareholders said in their statement that they hoped the disagreements over management of TNK-BP wouldn’t affect its production and corporate governance.

BP believes its Russian partners are trying to gain de facto management control to strengthen their hand in possible negotiations on a sale to Gazprom, according to people close to the British company.

The Russian shareholders deny that, arguing BP is mismanaging the company to their detriment, according to people close to them.

“The No. 1 priority is to remove Dudley as chief executive because he’s acting in the interests of only 50% of the shareholders,” said a person close to the Russian partners. “We want someone who will pursue the interests of all shareholders, not just run TNK-BP like a BP subsidiary.”

A person close to Mr. Dudley dismissed that charge, saying, “he has been scrupulous in defending the interests of every…shareholder.”

Shareholders’ Agreement

The Russian partners cooperate under a shareholders’ agreement governing their 50% stake. Mr. Fridman’s Alfa Group controls 25%. Mr. Vekselberg made headlines for buying a collection of Faberge eggs to return to Russia several years ago. Mr. Blavatnik, who emigrated from the Soviet Union to the U.S., lives in London and views his TNK-BP stake as more of a financial investment that would be for sale at the right price, according to people close to the company.

Thursday’s meeting was meant to reduce tensions.

Ahead of Thursday’s session, BP had formally requested the ouster of one of the Russian shareholders’ top executives in the company, Executive Director German Khan, as well as the Russian heads of the legal and security departments. Mr. Dudley has accused all three of insubordination, according to people close to the company. Mr. Khan is a partner in Mr. Fridman’s Alfa Group. A person answering the phone at Mr. Khan’s office declined to comment. The other executives couldn’t be reached.

The management conflict was aggravated by a dispute over the role of several hundred foreign staffers who work alongside the more than 60,000 Russian employees at TNK-BP. Early this year, 148 foreign specialists employed by BP and assigned to TNK-BP were forced to stay home because of visa problems. Once those were cleared up, TNK-BP security refused them entry to the company’s Moscow office, defying orders from Mr. Dudley, according to two people close to the company. Early this month, an order from a Siberian court meant the specialists had to remain away from work. BP suspects the Russian shareholders were behind that order, an allegation the partners deny.

Cutting Work Permits

In April, Mr. Khan filed a request with immigration authorities to cut the number of work permits needed for TNK-BP to employ foreigners, including top executives like Mr. Dudley, according to an immigration official. Mr. Dudley’s order to the legal department to request more work permits was ignored, according to people close to the firm. Mr. Dudley has asked immigration officials to rescind the unauthorized request from Mr. Khan, but so far hasn’t been successful, the immigration official said. People close to the firm said Mr. Dudley and other top foreigners might end up without valid employment permits when they expire July 30.

The Russian shareholders also are maneuvering to gain control over the boards at key TNK-BP units, some of which are publicly traded, according to people close to the company.

“There’s pressure being applied from all sides,” said Roland Nash, head of research at Renaissance Capital, a Moscow brokerage. “That’s the step before the negotiations actually start.”

He said a resolution might include a broader deal involving Gazprom and BP, sending a signal that the Kremlin welcomes foreign investors. Mr. Hayward is due to meet top Russian officials at an economic forum in St. Petersburg late next week.

Write to Guy Chazan at [email protected] and Gregory L. White at [email protected]

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