Global Economics

Endgame for BP's Russian Venture?


The struggle for control of joint venture TNK-BP escalates into open warfare with a restriction on worker visas

Every war creates refugees. So it was in Russia yesterday, where the first victims from the bitter boardroom battle which has erupted between BP and the Russian billionaires with whom it owns TNK-BP began trickling out of the country.

According to sources close to the situation, a handful of foreign employees of Russia's third-largest oil producer were forced to leave after their visas were not renewed. They could be the first of many.

Robert Dudley, the American chief executive of TNK-BP, fired off an email to his almost 100 foreign workers, whose permits expire at various times this month, warning: "We are very likely to see the temporary relocation of some of our expatriate staff from Russia."

The development, which Mr Dudley called "unfortunate and harmful", was the most dramatic since the four Russian billionaires who own half of TNK-BP launched an elaborate campaign to oust him and take greater control of the group. Mr Dudley, the chief operating officer Tim Summers and the finance director James Owen are also in the firing line and could be forced to leave if their visas are not renewed.

At stake is control of one of the world's top-ten oil producers. Since it was formed in 2003 through a 50-50 alliance between BP and Alfa Access Renova (AAR), the consortium of oligarchs which includes Viktor Vekselberg, Len Blavatnik, Mikhail Fridman, and German Khan, TNK-BP has been governed by an uneasy structure that gave neither side control. That arrangement has now broken down entirely and, barring an 11th-hour resolution, BP is at risk of losing its grip on the top of the company within days. AAR's strategy seems to be to make BP so uncomfortable that it capitulates in some way. "What this is all about is an attempt to renegotiate the shareholder agreement and how the company is governed," said an oil industry source. The ultimate endgame, however, remains unclear.

BP knows that losing control or being forced out of TNK-BP, which provides about 15 per cent of its profits and 25 per cent of its production, would be disastrous, so it has dug in its heels. High-level talks between BP and AAR continue, even as Mr Dudley fights a rearguard action against a campaign being waged from within TNK-BP by Mr Kahn and Mr Vekselberg, both executives with the group.

Relations between the two sides could not be much worse. Last month, the BP chairman Peter Sutherland said its dispute with AAR was "over control, and perhaps ultimately ownership of the company". He added: "This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s." Mr Fridman hit back by accusing Mr Sutherland of using Nazi-style "Goebbels propaganda". Something has to give. In the background lurk Gazprom and Rosneft, the state oil giants which are thought to be interested in buying out either BP or the Russians. TNK-BP is the only major resource group in Russia not controlled or part-owned by the Kremlin. Few think it will stay that way, even though the heads of both Gazprom and Rosneft have said they have no interest in buying into TNK-BP.

The Prime Minister, Dmitry Medvedev, meanwhile, characterised the dispute as a disagreement among investors that should be solved within Russia's legal framework. He downplayed the notion that the Kremlin was pulling the strings in the background.

"Any additional strengthening of the role of the state, increasing its presence in the economy, is not foreseen," he said. "On the contrary, we will take action to reduce the presence of the state in the economy." Many are watching the situation for an indication of whether Mr Medvedev will deliver on his promise to curb corruption and impose greater rule of law.

Despite the speculation, the bust-up boils down to a fairly straightforward clash of shareholders with starkly diverging interests in one of the world's largest oil companies. In that context, the AAR consortium has been diligently trying to cast itself as a purely financial, private equity-style investor displeased with TNK-BP's cash generation and dividend policy.

At a strategy presentation in February, Mr Dudley admitted that the low-hanging fruit of the early years, during which TNK-BP was able to achieve big leaps in production and profitability, largely through increasing efficiency in existing fields, had been picked. What was now required, he argued, was an aggressive investment plan that would pay off perhaps five years down the road. In the short term, that means much less free cash, and smaller dividends. He said the group planned to invest $4bn in 2008, up from just $900m in 2004.

This is the crux of the issue and has led TNK-BP to the brink of being stripped of up to 250 key foreign workers, although it will be only temporarily for some of them. Already, 148 BP staff on secondment to TNK-BP have been barred from working in Russia by a court order relating to their immigration status. Many of those caught in the crossfire have specialised technical knowledge and work on group strategy. One former BP employee was arrested for alleged espionage. Last month, Mr Dudley was called to give evidence to Russian officials about possible labour law violations. AAR, meanwhile, has boycotted meetings of the board and of investors, and has called repeatedly for Mr Dudley's removal.

TNK-BP's 90-plus foreign workers — about 40 of them ex-BP staff — have to renew their visas each year. Earlier this year, Mr Dudley told his legal team to apply for about 150 visas — because some workers need more than one, depending on their job and nationality. However, responsibility for handling the request fell to Mr Khan, one of the disgruntled AAR shareholder-managers who had clashed with Mr Dudley over the way he ran the company. Instead of 150 visa applications, Mr Khan asked for only 63. Mr Dudley did not find out about the subterfuge until much later, at which point he went over Mr Khan's head and requested 150 visas from immigration officials.

Faced with two different requests, the Russian authorities were unsure which to process. AAR, represented by Mr Vekselberg, won the argument. TNK-BP received permission to apply for 71 visas, fewer than half the number it needs to keep all its foreign workers in Russia.

The other problem is timing. Visa processing often takes six weeks, and those of TNK-BP's expat staff are expiring every day. None will be ready by the end of this month, so BP is trying desperately to resolve the issue. At worst, it could be faced with a leadership vacuum, with TNK-BP's chief executive and other senior directors forced out of Russia, leaving a group that turned over $35bn last year in the hands of investors diametrically opposed its current management.

It is unclear what other tools AAR shareholders may deploy to bend BP to their will. In his letter to staff yesterday, Mr Dudley admitted: "I hope the visa and work permit issues can be resolved satisfactorily in due course, although there is presently no clear indication how, at what level and by when such resolution may occur."


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