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Allegations in Russia Could Hurt BP Venture

Allegations in Russia Could Hurt BP Venture

Published: June 27, 2008

BP’s grasp on its extensive oil assets in Russia became more tenuous Thursday after its Russian partners said that a general shareholders’ meeting for a joint venture had been held in violation of Russian law.

The Russian partners said the board elected at that meeting was illegitimate. If upheld by a court, that stance could cripple BP’s ability to manage its pumping assets and refineries in Russia.

The hugely profitable venture that BP, based in Britain, bought into in 2003 — before the Russian government tilted toward a more nationalistic stance in its petroleum industry — is the only major oil company in Russia partly controlled by foreigners.

Industry analysts said BP had faced pressure from both the state and its private sector partners to reduce its equity stake to a minority position. Most recently, the pressure has come from within the company’s boardroom by the Russian partners, who contend BP mismanaged the venture, called TNK-BP.

On Thursday, the billionaires who are the Russian partners issued a statement saying their four candidates for the board of TNK-BP Holding would not assume their positions, though they were elected at the shareholders’ meeting along with five other candidates. The statement cited irregularities in drawing up the candidate list at a board meeting on June 3.

Their absence could deprive the board of the nine members required for a public company in Russia, opening the possibility that a court could declare it illegal.

“The decision to form a new board of directors including nine people is improper,” the Russian partners’ consortium, AAR, said, adding that AAR might contest the board’s election in court.

TNK-BP Holding is an umbrella company for TNK-BP’s property in Russia and is the most important subsidiary, with about 80 percent of the assets. TNK-BP Ltd., which is registered in the British Virgin Islands and immune from Russian securities law, owns 95 percent of TNK-BP Holding and also has minor assets in Ukraine and in Russia that are held separately. Still, a loss of control over the TNK-BP Holding board would be a serious blow for BP.

BP maintained that it had not lost control. Vladimir B. Buyanov, a spokesman for BP in Russia, said that the board “was elected according to law and is active.” At the shareholder meeting, TNK-BP also announced annual revenue for 2007 of $24.9 billion and net profit of $5.7 billion.

This is hardly the first problem for BP in Russia, which is nonetheless seen as adept at maneuvering to retain its position here. BP pumps a quarter of its worldwide output from Russia.

Last year, BP and its partners, under pressure, sold a large Siberian natural gas field to the Russian state-controlled gas monopoly, Gazprom. The government had cited violations of a drilling license.

A year earlier, Royal Dutch Shell was pressured to sell a controlling stake in the world’s largest oil and natural gas development, Sakhalin-2, to Gazprom. In that case, the government cited environmental damage in a pipeline project.

In the current dispute, shareholder rights are at issue. The Russian shareholders cite performance problems and say BP-appointed managers neglected the interest of other shareholders and minority owners. Some industry analysts say Gazprom is again a likely buyer if BP decides to sell.

Settling the dispute is a priority for BP globally. The company has no other major projects coming on that could take the place of TNK-BP if production dropped over the short term.

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