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BP counts cost of Russian dispute

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BP counts cost of Russian dispute

By Ed Crooks in London and Catherine Belton in Moscow

Published: July 18 2008 20:29 | Last updated: July 18 2008 20:29

When?Robert?Dudley, TNK-BP’s chief executive, warned on Thursday that a legal action brought against him by 16 Russian employees would “tear the company apart”, he expressed BP shareholders’ greatest fears.

Mr Dudley later glossed his remark to explain he meant the dispute with the Alfa-Access-Renova group of Russian tycoons that are BP’s partners in TNK-BP would “destroy value, [not] the entire company”.

But the prospect of progressive decline in the 50:50 joint venture that provides a fifth of BP’s reserves and a quarter of its production is enough to make any investor nervous.

TNK-BP, seen as a strategic triumph when it was created in 2003, has turned into a trap. BP’s shares have under-performed its peers by 4 per cent since the dispute with AAR flared up in March.

At a time when in other respects BP appears to have been heading in the right direction, with new projects coming on stream and operational achievement improving, that performance is particularly disappointing.

So it is not surprising that there is talk among some investors that BP should just exit Russia by the least painful route it can find.

Stan Polovets, AAR’s chief executive, believes BP’s shareholders can be persuaded it is in their interests for BP to accept the changes to TNK-BP proposed by the Russian side, including the removal of Mr Dudley.

He met shareholders, including Blackrock and Fidelity, on a recent visit to London, to explain AAR’s position.

“Like any private equity investor that is not happy with a company’s performance and strategy, we want to make changes,” he said. “If our recommendations are accepted, they could lead to the creation of value for all shareholders.”

BP, of course, does not see it that way. If it accepts AAR’s recommendations, its influence over TNK-BP will be undermined. If it continues to resist, however, it is clear that the attacks on the value of the joint venture will keep coming.

There is little sign that TNK-BP’s performance has suffered. Indeed Alistair  Graham, BP’s chief liaison with the joint venture, said 2008 had so far been its best year ever.

Production rose in the three months to June for a third successive quarter at a time when output in Russia’s oil industry as a whole has been falling.

BP argues, however, that if the dispute drags on, TNK-BP’s performance is bound to be affected, and the effects will show next year.

This is an important time for TNK-BP, with several big projects due to come on stream next year and in 2010.

Mr Graham said that the absence of some project managers who had already been forced out as a result of the dispute could have an impact on the efficiency of drilling projects and production growth.

AAR has also challenged TNK-BP’s capital spending programme, challenging its plan to invest about $4.4bn this year, and calling for a cut to $3.5bn.

Mr Graham said: “We want to increase capex to bring on new fields, but AAR have rejected that.”

Another person close to TNK-BP said that decision-making on future projects had ground to a halt”.

Many industry experts believe BP has been out-fought by the sharper and more aggressive Russian tycoons. Mikhail Fridman and his partners in AAR have deep pockets, and have no shareholders to keep happy. He has shown in the past he is prepared to settle in for a long fight.

But Tony Hayward, BP’s chief executive, is determined to battle on. Conceding would be a crushing defeat that is also likely to be costly for shareholders.

“Companies like BP are built to take on this kind of challenge,” says Jon Rigby, an analyst at UBS. “If it does walk away, it would be damaging to the reputation of the management and so to the value of the business.”

The struggle between BP and AAR continues, with the Russian authorities playing a central role. On Friday, Mr Dudley won a temporary reprieve from immigration officials who granted a him a 10-day visa just one day before he would have been forced to leave the country.

However, state labour inspectors kept up the pressure, transferring to court a case against him for alleged violations of employment laws, which could lead to his suspension.

With both sides entrenched and determined not to give ground, and still no sign the Kremlin is prepared to step in and resolve the dispute, shareholders can expect the turbulence to continue, for months and quite possibly even for years.

EDITOR’S CHOICE

Lex: TNK-BP – Jul-15

TNK-BP told to provide files on foreign staff – Jul-15

Copyright The Financial Times Limited 2008

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