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Russian Group Suggests Ending TNK-BP Fight by Buying BP’s Stake

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Russian Group Suggests Ending TNK-BP Fight by Buying BP’s Stake 

By Dan Lonkevich and Halia Pavliva

Russia’s AAR, owned by billionairesViktor VekselbergMikhail Fridman,German Khan and Len Blavatnik, is ready to buy the half of TNK-BP that it doesn’t already control, Stan Polovets, the group’s chief executive officer, said yesterday in an interview in New York.

At stake is a venture that accounts for a fourth of London- based BP’s reserves and 20 percent of its output. The partners have clashed over management of TNK-BP. The dispute comes after Royal Dutch Shell Plc, Europe’s second-biggest oil company, was forced in 2006 to cede control of its biggest project in Russia to the country’s natural-gas monopoly, OAO Gazprom.

“This is a continuation of the struggle for control of the British share,” said Ariel Cohen, an expert on Russia and energy at the Heritage Foundation in Washington. “The real question is: Who is going to be ultimate owner of BP’s stake?”

The Russian shareholders could wind up selling the stake to state-owned Gazpromneft, an affiliate of Gazprom, he said. Russian Prime Minister Vladimir Putin, who was the country’s president for eight years, said on May 30 in Paris that he warned BP and its partners that a 50-50 venture would lead to “constant friction about who is on top.”

AAR has sought to oust TNK-BP CEO Robert Dudley, saying he has put BP’s interests ahead of the venture’s.

Shell was forced to cede control to Gazprom of its $22 billion Sakhalin-2 oil and gas project, amid threats by regulators to revoke the permits on environmental grounds.

Government Influence?

There is “no pressure, not at all” from the government on AAR to buy BP’s stake, Polovets said. The government isn’t expected to intervene in the dispute, he said, declining to comment on whether AAR consulted with the Kremlin on the matter.

“This quarrel highlights the lack of predictability for Western investors in Russia,” Cohen said.

The government has denied any involvement in the dispute amid media speculation that state-run OAO Rosneft or Gazprom are vying for a stake. BP spokesman David Nicholas declined to comment on whether the U.K. company would consider selling its TNK-BP stake or buying AAR’s.

AAR said on July 6 that it’s being sued for 8.5 billion rubles ($362 million) by BPfor alleged breach of a tax deed of covenant. The Russian group is prepared to sue its British partners, Polovets said, declining to comment further.

Presidents Met

Russian President Dmitry Medvedev and U.K. Prime Minister Gordon Brownmade no progress to resolve the dispute when they met for the first time on July 7 at the Group of Eight summit in Japan. Brown said he brought up the issue at the meeting. The U.K. and the European Union have warned about damage to investor confidence from BP’s treatment in Russia.

“The fundamental issue is that BP treats TNK-BP as its subsidiary and not as a joint venture,” disregarding rights of Russian partners, Polovets said.

The removal of Dudley “is an unconditional demand,” Polovets said. “It’s not a question of if he will be dismissed, but when.”

AAR is unwilling to sell its stake, Polovets said.

“This company is so undervalued,” Polovets said. “We are very frustrated that we haven’t made any acquisitions within the last five years.”

Lukoil Comparison

AAR is disappointed that TNK-BP hasn’t performed as well as rival producer OAO Lukoil. “TNK-BP and Lukoil started out at the same level, about $15 billion or $16 billion,” Polovets said. “Now they are $98 billion and we’re $38 billion.”

BP shares, which rose 0.25 pence to 539 pence yesterday in London, have dropped 12 percent this year. That compares with a 9.3 percent decline by Shell and 4.7 percent drop by major U.S. oil companies.

The next TNK-BP board meeting will be in September, Polovets said. “Hopefully between now and September there will be discussions between the partners and we come up with a resolution before then,” he said.

AAR would like to see TNK-BP sell shares to the public, Polovets said. An initial public offering would increase the value of the company and provide a currency to make international acquisitions, he said.

To contact the reporters on this story: Dan Lonkevich in New York at[email protected]Halia Pavliva in New York at[email protected].

Last Updated: July 14, 2008 22:01 EDT

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