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Sep 4th 2008
From Economist.com

BP and its Russian partners appear to make up and vow to move on

AFP
LITTLE more than a week after Russia’s government had declared itself ready for a new cold war, one big foreign investor has emerged intact from a nasty dispute with its local partners and the authorities. TNK-BP, an oil company that produces 1.6m barrels a day and which is owned jointly by Britain's BP and Russian private investors, AlfaAccessRenova (AAR), was for months paralysed by war in the boardroom. The Russian investors, unhappy at the way the company has been run by Bob Dudley, an American appointed by BP, blocked the renewal of work permits for many foreign staff. This included Mr Dudley, who since late July has tried to direct TNK-BP from a secret location abroad. Despite denials, Russia’s tax and immigration inspectors seemed to be helping AAR. BP looked poised to join the ranks of foreign oil companies forced to sell stakes in big projects, on the cheap, to Kremlin-friendly concerns.

On Thursday September 4th, however, the two sides agreed to make up. BP’s 50% stake appears to be safe. Mr Dudley will go at the end of this year, to be replaced by a BP nominee who must be approved by the board. One AAR director and one BP director will also depart, making way for three independents. Much could depend on how independent these individuals really are. The squabbling management committee will be shrunk and the most disruptive members thrown out. In time, as much as 20% of the venture could be sold in an initial public offering (IPO)—if both partners, plus Russia’s regulators, agree.

The fight had centred on how TNK-BP was run. AAR, with its short-term outlook and expectation of fast-growing returns, was dismayed to see a dynamic company turning into a Big Oil bureaucracy. BP, meanwhile, focused on the long-term through investment in new fields. So long as it could book a quarter of its reserves and a fifth of its oil output via the Russian venture, BP cared little about slower growth. In any case, the money was rolling in—it has recouped its initial $8 billion investment and made another $2 billion in little more than five years.

BP has agreed that the new boss will be a Russian-speaker who has worked in the country. He will have to pay rather closer attention to output growth and the share price than did Mr Dudley. Yet BP has paid a small price in agreeing to a shift in company strategy, at least compared with a potential loss of its investment.

For all the talk of an aggressive Kremlin bent on nationalising any oil asset that its jaundiced eye chances upon, TNK-BP does not look to be a repeat of the Yukos affair or the mugging of Shell and its Japanese partners at SakhalinII. In those cases, Russia’s rulers and state companies were actively engaged; AAR, by contrast, had the help of a few friendly mid-level state officials. That was enough to land TNK-BP in bother with the taxman and to make Mr Dudley's job impossible. But the Russian investors still lack the clout to appoint their own boss or to force BP to sell—hence the need for a negotiated solution.

And yet no guarantee exists for BP of a happy future in Russia. Disputes could flare again, as a fundamental difference in outlook exists between it and the Russian investors. BP will still worry that AAR might use fair or foul means to get what it wants. The IPO, if it happens, would cut BP’s stake to below 50% and perhaps leave it vulnerable. And while the Kremlin apparently stayed on the sidelines this time, Gazprom or Rosneft could one day make AAR an offer it cannot refuse. If that happens, do not expect either state champion to settle for shared control of Russia’s third-biggest oil producer.