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Battle for TNK-BP turns into all-out war logo

The Observer

Battle for TNK-BP turns into all-out war

A highly public and personal campaign of legal actions and words is being waged over control of the Russian oil giant, and neither BP nor partner AAR is about to back down. But a solution must be found

At a packed news conference in London in October 2003, the then chief executive of BP, Lord Browne, stood up and declared of his new Russian partner, AAR: ‘We continue to build trust and less and less view each other’s motives with suspicion.’

He had just unveiled the largest ever foreign investment in Russia, which would total almost $8bn (£4bn), to set up TNK-BP. More incredible to those crowded into the room was the identity of the men who stood next to him on the platform as newly anointed partners. BP had only just settled a long-running dispute with the same four oligarchs, led by Mikhail Fridman, over another oil joint-venture which had gone sour. But this time, Browne declared, it would be different, although he did concede later to journalists when pressed: ‘In business, trust is never 100 per cent.’

Fast forward almost five years, and the two sides are at war, one which is both highly public and personal. BP’s outgoing chairman Peter Sutherland has branded AAR a ‘corporate raider’. Fridman, cofounder of the Alfa Group conglomerate, hit back by likening Sutherland to Nazi propagandist Joseph Goebbels.

The dispute escalated last Thursday when Robert Dudley, the BP-nominated chief executive of the venture, was forced to leave the country, complaining of ‘sustained harassment’. Ostensibly the reason was that his visa had expired, with AAR refusing to extend his contract.

BP insists Dudley will continue to run the business from a secret location abroad. AAR, made up of the Russian conglomerates Alfa Group, Access Industries and Renova, says it will not recognise his authority. It is extraordinary that no one knows who is running Russia’s third-largest oil company, with a market value of $32bn.

Each side has instructed lawyers to initiate myriad proceedings against the other, so much so that every lawyer in Moscow seems to be involved. It would be fair to say that trust between the two sides is zero per cent.

This month, BP withdrew the last of its 148 expatriate specialists assigned to TNK-BP following visa restrictions. Police have also raided TNK-BP’s Moscow offices, and have hauled Dudley in for questioning. And last week, BP for the first time publicly accused the Russian authorities of colluding with its partners. Sutherland said: ‘It saddens me to say that nowhere in our recent history have we been treated as we are currently being treated in Russia where our fellow shareholders – called AAR – have been orchestrating a campaign of harassment in order to gain control of our joint-venture TNK-BP. There has even been manipulation of elements of the Russian state as part of this campaign.’

The four oligarchs behind AAR are among the most powerful – and rich – businessmen in Russia, who came to prominence in the wake of the chaotic privatisations of the oil and metals industries in the Nineties. Fridman’s fortune is estimated at more than $20bn, making him the 28th richest person in the world. Born in Ukraine, his first foray into business was to set up a student co-operative of window cleaners.

Viktor Vekselberg, a fellow Ukrainian, who heads up Renova group, is worth over $10bn and owns about a fifth of Rusal, the world’s largest aluminium company. Famously, he paid the Forbes publishing family about $90m for a collection of Fabergé Easter eggs that once belonged to the Russian Tsar Alexander III. Len Blavatnik, founder of Access Industries who went to school with Vekselberg, is the third oligarch behind AAR and is worth about $7bn; the quartet is completed by Fridman’s right-hand man and old college friend German Khan, worth $13.9bn.

The crisis is a heavy blow to BP chief executive Tony Hayward, who is still working to assert his authority after he succeeded Browne a year ago. TNK-BP is central to BP’s fortunes. BP’s share of TNK-BP’s production represents a quarter of the group’s total output. More importantly, in a world where it is becoming difficult to find new oil, the venture also provides about a third of BP’s total reserves. BP is expected to report record second-quarter profits this week on the back of soaring oil prices. But the dispute in Russia will dominate proceedings.

Put simply, the battle is over control of TNK-BP. AAR complains that BP is running the venture as its own subsidiary, rather than for the benefit of all shareholders. BP has blocked plans for TNK-BP to expand overseas, AAR says, instead using the venture primarily to bolster BP’s flagging reserves portfolio. Although TNK-BP has increased production by a quarter since 2003, growth has flattened out recently.

AAR also complains that the share prices of rival Russian oil companies have increased by a much larger amount. The Russian shareholders want TNK-BP to become a global oil major, independent of BP. They also want a full stock market listing, most likely in London, to make it easier for the venture to buy other companies using its shares.

By contrast, BP wants to use TNK-BP to expand its presence in Russia and has no interest in creating a company that would compete with it globally. These positions seem diametrically opposed and, so far, neither side has shown any sign of giving way.

But why is AAR now portraying itself as the downtrodden shareholder in a venture it was perfectly happy to sign up to back in 2003? It is unlikely to be a coincidence that the ‘lock-in period’ which AAR signed to prevent it selling its stake in the venture expired at the end of last year. Analysts have long suspected AAR wants to cash in and sell up to Gazprom or Rosneft. This may yet happen, but the dispute is more complicated than that.

Alexander Burgansky, analyst from Renaissance Capital, says that since the joint-venture was formed, the AAR shareholders have become more ambitious and are looking to expand internationally all their businesses, including TNK-BP. Another reason, he says, is that AAR knows that in Russia, priority will always be given to state-owned companies such as Gazprom or Rosneft, meaning that for the company to grow, it must look overseas.

But the spat has become much more than a conventional dispute between two shareholder groups. As is so often the case in Russia, the rule of law has been wielded by one group against the other. Technically, AAR is right when it says that Dudley’s work contract has expired; a law passed last year requires all directors to have their contracts renewed each year. But the reason it has expired is because AAR has refused to renew it. Because the Russian legal system has so many rules, so much bureaucracy and, often, corruption, the law becomes a useful proxy weapon.

Bob Amsterdam, a lawyer who specialises in Russia, says the dispute is a ‘very regressive step’ for Russia. ‘I don’t know how many conferences on corporate governance have to be held in Russia before people realise this idea of a rule of law is a myth.’

Browne knew, of course, that going into Russia was far from risk-free. For oil companies operating in such places as the Middle East and Africa, risk is an occupational hazard. And, in many ways, the deal has been a huge success: in 2004, the year after the venture was formed, TNK-BP generated income of almost $5bn, going a long way to paying off BP’s original outlay.

Amsterdam claims that BP has also profited from other instances of ‘corporate raiding’, so cannot claim to be blameless. In 2006, it took a $1bn stake in Russian oil firm Rosneft after it inherited the lucrative assets of Yukos, which was destroyed by a state-orchestrated tax evasion campaign.

Neither side looks ready to back down or talk about compromise. Both insist that the day-to-day operations of TNK-BP are not affected but if the dispute goes on much longer, this is unlikely to remain the case.

Last week, unveiling results for the first half of the year, chief operating officer Tim Summers – Dudley was no longer in the country – finished his presentation with an ominous understatement: ‘Shareholder issues may impact performance during 2009.’ It is in neither side’s interests for profits to suffer, which may be one factor that will force a truce.

The Kremlin, headed by President Dmitry Medvedev, made a point of praising BP as the dispute developed, yet it insists it will not intervene. But with Gazprom and Rosneft keen to work with BP in Russia, the Kremlin may have to step in to prevent BP from being stripped of its interests there. Burgansky from Renaissance Capital says: ‘It’s hard to see how BP will not be looked after when a solution is found.’

But it’s too early to say what that solution will be, and when it will come.

Britain versus Russia: The main players in the TN-BP row

The beginning

TNK-BP was created in September 2003, when BP and a consortium of Russian shareholder groups – Alfa Group, Access Industries and Renova (AAR) – pooled their Russian oil assets.

BP ploughed $8bn into the venture, representing the largest-ever foreign investment in Russia. AAR and BP each own 50 per cent, but BP nominates the chief executive to run it.

TNK-BP is the third-largest oil company in Russia. Almost a third of BP’s reserves are held by its TNK-BP stake. About a quarter of BP’s total production also comes from the venture.

The players

Alfa Group, one of Russia’s largest conglomerates, is run by Mikhail Fridman. It also has interests in telecoms, vodka and banking. The other three oligarchs who make up AAR are Viktor Vekselberg, Leonid Blavatnik and German Khan.

BP had a separate long-running dispute with AAR before the TNK-BP deal was struck, over the British company’s investment in another venture. Referring to this dispute, when the TNK-BP venture was unveiled the then chief executive, Lord Browne, declared: ‘We continue to build trust and less and less view each other’s motives with suspicion.’

The dispute

AAR complains that BP treats the venture as its subsidiary, running the company for its benefit rather than that of all shareholders. The Russians claim that BP has blocked international expansion of TNK-BP.

A ‘lock-in’ period preventing AAR from selling its stake expired at the end of last year. This has prompted some analysts to speculate that AAR is angling to sell to Russian state-owned gas giant Gazprom.

Last month, BP branded its Russian partners as ‘corporate raiders’. Last week, TNK-BP chief executive Robert Dudley was forced to leave Russia after his visa had run out, following other BP appointees who have left the country.

The future

No one knows what will happen next. BP says Dudley will continue to run the country from abroad, but with the two sides at war, it won’t be easy. The Russian government, which has insisted it will not intervene, could yet step in to broker a deal. Analysts say a merger with Gazprom or Rosneft is a possibility.

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