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Hayward faces test of mettle over TNK-BP

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Hayward faces test of mettle over TNK-BP

By Ed Crooks, Energy Editor

Published: June 6 2008 03:00 | Last updated: June 6 2008 03:00

The struggle for control of TNK-BP is the first big test for Tony Hayward’s leadership of BP.

Since taking over as chief executive from Lord Browne a year ago, he has focused on reforming the company’s structure and operations to cut costs and raise performance. The threat to BP’s future in Russia is forcing him to take on a huge strategic challenge as well.

There are good reasons for him to hope that he can achieve at least a qualified success. BP needs Russia, but Russia also needs companies like BP.

If he fails, however, BP will face a much darker future.

The 2003 deal to form TNK-BP, owned 50:50 by BP and the Alfa-Access-Renova (AAR) group of Russian billionaires, was Lord Browne’s last great strategic triumph.

With 26 per cent of the world’s proved gas reserves and 6 per cent of the world’s oil, Russia is a country where every big international company wants to operate. The creation of TNK-BP put BP ahead of all its rivals.

TNK-BP last year provided a quarter of BP’s oil production, a fifth of its oil and gas reserves, and a third of its reserves of oil alone. It has also made a vital contribution to building up those reserves, keeping BP’s headline reserves replacement ratio above 100 per cent of its production in recent years.

The latest attacks on TNK-BP are different from the politically inspired pressure applied to other international oil companies in Russia.

At TNK-BP, it is the conflict between BP and the Russian shareholders that is at the heart of the company’s problems.

However, the dispute is being fought in the context of more obviously political manoeuvring over BP’s future in Russia.

Last year, TNK-BP was forced to agree to sell its stake in the vast Kovykta gas field in eastern Siberia to Gazprom, after being threatened with losing its licence for the field. As part of that deal, BP, TNK-BP and Gazprom agreed to set up a joint venture to operate inside and outside Russia. Negotiations over the details are still under way.

Although the AAR tycoons have continually denied they want to sell their stakes in TNK-BP, it is generally assumed by analysts that the dispute will be resolved by Gazprom or Rosneft, the state-controlled oil company, buying them out and taking control.

One suggestion is that TNK-BP could be folded into Gazpromneft, Gazprom’s oil division, in which BP would then be allowed a 25 per cent stake.

Whatever the outcome, it seems likely that the conflict between BP and AAR cannot be settled without a resolution of the negotiations with Gazprom.

The pressure on TNK-BP, including calls from AAR for the removal of Robert Dudley, its American chief executive, seems likely to worsen the terms of that eventual solution for BP.

That perception has been weighing on BP’s shares, which have fallen by 5 per cent this year, compared with a 1 per cent drop for Shell.

Over the past three years, as the price of oil has doubled, Shell’s shares have risen by 14 per cent, BP’s by less than 2 per cent.

BP could always pack up and leave Russia, as ExxonMobil has chosen to leave Venezuela.

But at a time when international oil companies are struggling to get access to reserves anywhere in the world, walking away from such a resource-rich country would be a huge risk.

Speaking yesterday at the annual meeting of Rosneft, in which BP has a 1 per cent stake, Mr Hayward reiterated BP’s commitment to Russia as “one of the world’s greatest hydrocarbon provinces”.

Losing Russia would be such a significant strategic setback it would inevitably revive the idea of BP’s vulnerability to takeover. There would not be many potential bidders, but Exxon could be one.

However, Neil McMahon of Sanford Bernstein, the investment company, says it may not come to that. Russia’s oil production has been falling and there are grave doubts about its ability to meet the expected growth in demand for its gas both at home and abroad.

Gazprom and Rosneft on their own have neither the financial resources nor all the technical capabilities to develop all of Russia’s vast resource base, particularly in the daunting conditions of the Arctic seas. So the country will still need foreign investment. Some pundits in Moscow argue thatRussia does not need to develop its resources so quickly, so foreign companies can be treated badly without any adverse consequences. But the Russian government’s recent proposals for tax breaks for oil companies suggest that Vladimir Putin, the prime minister, recognises there is a problem.

“You could get a deal between BP and Gazprom that gives Gazprom a position in BP’s international liquefied natural gas business, which is a big win for Russia because it increases its global dominance in gas,” Mr McMahon says.

“And it could send a signal to international oil companies that as long as they don’t mess the Russians about too much, they will be able to stay in the country and earn a reasonable return.”

If he can secure such a deal, Mr Hayward will have passed his first test as well as anyone could have hoped.

Escalating strains between BP and TNK-BP’s Russian shareholders

*March 19 – Police and security service agents raid BP’s and TNK-BP’s Moscow offices as part of a spying investigation. A TNK-BP employee is arrested, briefly detained and charged with industrial espionage.

*March 25 – BP recalls 148 specialists hired by TNK-BP because of visa problems, in an attempt to pre-empt questions over their status.

*May 5 – A court in Tyumen, Siberia, issues an injunction barring the 148 specialists from working at TNK-BP after Tetlis, the Moscow brokerage, files suit against their employment agreement, claiming their salaries are an unfair dividend to BP. The move comes after the visa problems had been resolved.

*May 20 – Security services agents raid BP’s Moscow office for the second time in two months. The raid comes immediately after talks in Paris between Tony Hayward, BP’s chief executive, and TNK-BP’s Russian shareholders AAR end in deadlock.

*May 26 – Vedomosti, the Russian business daily, publishes an interview with Robert Dudley, TNK-BP’s chief executive, in which for the first time he publicly acknowledges strains between BP and the company’s Russian shareholders.

*May 29 – AAR demands the removal of Mr Dudley during talks in Cyprus with Mr Hayward. They claimed he was running the company in BP’s interests only. BP rejects the call.

* May 30 – A local department of the Interior Ministry summons Mr Dudley for questioning on June 4 as part of a criminal investigation into tax evasion. The meeting is later postponed to next week.

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