August 4, 2008
Jane Armstrong, The Globe and Mail

In the battle between BP PLC and four Russian billionaires for control of one of the country's largest oil companies, the Russians appear to have scored the first knockout.

TNK-BP's chief financial officer, James Owen, quit Monday, the first top executive to resign since a bitter boardroom dispute flared between BP and its Russian partners in the joint venture.

Mr. Owen's resignation comes less than two weeks after chief executive officer Robert Dudley left Russia after months of legal tangles with authorities over his visa.

At the time, all BP would say about Mr. Dudley's mysterious whereabouts was that he was in an undisclosed central European location. But BP said it is confident he could steer the company from outside Russia.

That assurance now sounds far less certain. With Mr. Dudley gone and Mr. Owen on the way out, chief operating officer Tim Summers is the last foreign manager at TNK-BP's Moscow headquarters.

“There'll be a fundamental management change after this chain of events,” said Vladimir Matias, managing director of Asset Capital Partners in Moscow. “The signal is very clear; this won't be cosmetic.”

The loss of two of TNK-BP's top executives is the latest twist in the soap operatic saga that has gripped the troubled joint venture for the past year.

Five years after BP merged with Alfa-Access-Renova (AAR) to form TNK-BP, the company is wallowing in acrimony and bitter infighting.

This is even as its shareholders have grown richer from the venture, which has delivered a total return of $36-billion (U.S.) since 2003. It's estimated that each of the four Russian shareholders takes home $10-million a day from the venture. The Russian government hasn't done so badly either, taking in about $70-billion in taxes and duties.

The dispute is seen as a test of the investment climate under rookie Russian President Dmitry Medvedev, who has promised to crack down on corruption and strengthen shaky property rights and the rule of law.

Last week, Mr. Medvedev weighed in on the boardroom battle at TNK-BP, appearing to side with foreign investors.

“We've had enough of inspections and all sorts of raids. … In general, our law enforcement and state institutions should stop terrifying business,” Mr. Medvedev told ministers at a meeting broadcast on state television. The President added: “You can consider that the signal has been given.”

Despite Mr. Medvedev's warning, it's not clear whether BP can weather the pressure and regain control of the joint venture.

In a statement, Mr. Owen said he was quitting because the dispute makes it difficult for him to work independently, as his role demands. He will leave at the end of this month.

“I greatly regret that we are losing Jim,” Mr. Dudley, 52, said in the statement. “He will be very hard to replace.”

The dispute, according to TNK-BP's Russian partners, is solely about control of the company. AAR has accused BP of running the Russian company as a subsidiary of BP, ignoring AAR's desire to expand overseas, and relying on far too many overpaid, expatriate technical staff from BP.

In recent months, AAR's big gripe has been falling shareholder dividends, which dropped by nearly 50 per cent from 2006 to 2007.

The Russian shareholders blame Mr. Dudley's management, and have demanded he be fired and replaced by an independent executive from outside BP's ranks.

“TNK-BP under Robert Dudley has badly underperformed its peers over the past three years, and this is unacceptable,” Stan Polovets, chief executive officer of AAR, said in an e-mail exchange from Los Angeles. “This is a battle for the strategic direction of a 50-50 joint venture,” he added.

This might seem plausible if the messy dispute was occurring anywhere but Russia, a country with a storied past of using state apparatus to intimidate and harass foreign investors. Royal Dutch Shell PLC, an Anglo-Dutch energy company, learned this lesson when it was forced to sell its interests in the Sakhalin oil and gas project after months of government pressure.

Indeed, Russian authorities – including police, tax, migration and labour officials – have all paid visits to TNK-BP's Moscow office in the past year.

Officials have denied visas to foreign workers and prohibited technical specialists from working. The FSB, a successor of the KGB, raided the company's Moscow headquarters last spring.

The drama is being watched closely by foreign investors, many of whom remain leery about the prospect of doing business in Russia. Earlier this month, BP's chairman Peter Sutherland publicly accused its partners of colluding with Russian authorities to weaken BP's position. Others speculate the Kremlin is keen on nationalizing the company.

“It saddens me to say that nowhere in our recently history have we been treated as we are currently being treated in Russia where our fellow shareholder – called AAR – has been orchestrating a campaign of harassment in order to gain control of our joint venture TNK-BP.”

AAR has dismissed these accusations, saying the government raids were coincidence, and a fact of life when doing business in Russia.

Most observers – and even many Russians – don't buy the coincidence theory.

“Russia will not tolerate decisions being made outside Moscow about its strategic industries such as oil and gas,” said a former Russian oil executive who did not want to be named. “I think Russia is making it quite clear right now … that these are the rules.”

For its part, BP executives say they won't be chased out of Russia.

“We will not be intimidated by strong-arm tactics,” BP CEO Tony Hayward said. “The other shareholders want to tear up the agreement they willingly signed in 2003. … We are not prepared to do that and will vigorously defend our rights using all legal means at our disposal.”

For now, Mr. Dudley's hasty departure appears to be a victory for TNK-BP's Russian shareholders. Few believe Mr. Dudley can run the company, which employs almost 65,000 people, from outside Russia.

It wasn't always thus. Five years ago, the future looked bright for BP when it announced the deal to join forces with AAR, a consortium of four Russian tycoons led by Mikhail Fridman.

But AAR claims the joint venture was beset with conflict from the beginning.One AAR insider described the dispute as a classic clash of cultures. BP entered the venture to gain access to Russian oil fields. AAR sought out the deal to gain foreign expertise. The relationship soured when oil production flattened and dividends fell.

Mr. Polovets said AAR is now determined to see Mr. Dudley removed.

As for BP, it's hard to see how it can recover control of TNK-BP with its CEO out of Russia. Last week, Mr. Hayward and Mr. Fridman met in Prague, but both said nothing was resolved. Both sides have hired a raft of lawyers. No new talks are planned, an AAR spokesman said on Friday.

Others predict that the Russian state will broker an end to the impasse, with either state-owned Gazprom or Rosneft buying a stake in TNK-BP.

But BP said it's confident the bitter boardroom feud can be patched up through talks. “We cannot be sure how things will pan out in Russia, but I can tell you that we're committed to trying to find a solution that's acceptable to all parties,” Mr. Hayward said. “Whether that's possible, we'll see.”