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In Dispute With BP, Kremlin’s Hand Is Seen

In Dispute With BP, Kremlin’s Hand Is Seen

Published: July 19, 2008

MOSCOW — BP’s billionaire Russian oil partners have characterized their dispute with the British oil giant as a shareholder revolt — in the spirit of Kirk Kerkorian’s hounding General Motors or Carl C. Icahnholding Yahoo’s feet to the fire.

Shareholder activism is an improbable role for the Russian oligarchic partners. Even more improbable, critics say, is their ally: the Russian government.

Industry analysts say the dispute will likely be resolved with a state company taking control of the venture, TNK-BP — the third-largest energy company in Russia — by buying out either BP or its partners.

“It’s a game of chicken, and they think BP will blink first,” Alex Turkeltaub, a managing partner at Frontier Strategy Group, a risk advisory company, said in a telephone interview from the United States.

The Kremlin has been methodically reasserting control over the oil industry since effectively renationalizing the Yukos oil company from private owners just as oil prices began to spike in 2004. Subsequently, the Anglo-Dutch company Shell, the Russian company Russneft and TNK-BP have all been compelled to sell assets or renegotiate deals.

But unlike other proponents of resource nationalism — like Hugo Chávez of Venezuela orEvo Morales of Bolivia, who sent his army to seize natural gas fields in that country — the Kremlin uses more sophisticated methods to regain control.

Claiming poor performance, the Russian shareholders want BP to fire Robert Dudley, the chief executive of TNK-BP. They also want to expel other foreign managers from the company and the country.

Mr. Dudley had a suitcase packed on Friday and said he was prepared to leave the next day if the Russian authorities did not extend his visa, which was set to expire on Saturday. But the immigration authorities granted a 10-day extension, saying they would study whether Mr. Dudley had a valid employment contract, demonstrating the Moscow authorities’ ability to play endless mind games with British executives.

Mr. Dudley, in an interview Friday, said he put little credence in the Russian partners’ complaints about TNK-BP’s performance. But he declined to elaborate on what was truly behind the dispute and stopped short of accusing the Russian government of orchestrating the campaign of regulatory pressure.

“I hear these arguments about performance and they ring hollow to me,” Mr. Dudley said, noting the high dividends that TNK-BP has paid since its creation in 2003.

The company has delivered a total shareholder return of $36 billion since its founding, helping BP’s bottom line and propelling the Russian partners higher up the Forbes list of the world’s wealthiest people.

Leonard Blavatnik, a New York financier of Russian descent, has earned $4.5 billion on his 12.5 percent share of TNK-BP, accounting for more than his net gain in wealth from 2003 to 2008, according to the magazine’s ranking.

Stan Polovets, the representative of the consortium of Russian partners, denied that the government had any hand in the dispute.

“Look at any private equity firm, Blackstone or TPG,” he said. “They would all ask the management to step down if they are not happy with how the company is performing.”

Nonetheless, BP seems to be edging ever closer to losing control.

The joint venture was hailed at its creation as a triumph of Russian business and globalization. But the authorities here quickly soured on it as oil prices rose and the price of entry paid by the British began to seem paltry compared to the profits BP was making.

Seeking to renegotiate the deal, oil analysts say, Russia is now using shareholder activism to weaken BP’s negotiating positions. It used the tax code to weaken Yukos, once Russia’s largest private oil company, and environmental regulations to weaken Shell, once the largest foreign investor in the country through its Sakhalin I oil and gas project.

The Russian partners stepped up their shareholder activism in March. Since then, BP has recorded 14 government actions against it.

The F.S.B., a successor agency to the K.G.B., raided the venture’s office. Labor officials barred BP geologists from working. Prosecutors summoned Mr. Dudley on a tax matter. Immigration officials denied visas to foreign workers, including Mr. Dudley. And lawsuits challenging BP’s appointees to the boards of subsidiary companies are being heard in Russian courts.

The turmoil has wide implications for oil output in Russia, the world’s second-largest producer after Saudi Arabia. TNK-BP pumps 1.4 million barrels of oil a day.

Initially, BP had opened talks for a partnership agreement with Gazprom, hoping to remain in the venture as a minority shareholder in a state-controlled company, as Shell had done. Rosneft, the state oil company, is also seen as a potential buyer.

BP’s chief executive, Tony Hayward, has met with Aleksei Miller, the chief executive of Gazprom, and Igor Sechin, a deputy prime minister and chairman of Rosneft.

Fueling speculation that BP may be close to a deal with Rosneft, Mr. Sechin had positive words for the company. “Over all, we support the work of BP in Russia,” he said after his meeting with Mr. Hayward. “They have introduced new corporate government principles, technology, personnel training and transparency, which makes us very happy.”

But as these meetings with state and state-controlled company officials went forward, the Russian partners have maintained that the dispute is purely commercial.

“It is a traditional, commercial dispute about different ambitions for the strategic development of the business,” Mikhail Fridman, one of the shareholders, wrote in an opinion article in The Financial Times this month. “We are frustrated by BP’s narrow view of its capabilities.

“It is not in the interest of the company or all its shareholders, including minorities.”

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