Emerging Markets: BP, AAR, and TNK-BP (also see Emerging Markets 7.1)
TNK-BP is a joint venture (JV) company that is 50% owned by BP and 50% owned by the
AAR consortium, which represents three major Russian business groups: Alfa, Access, and
Renova. Founded in 2003, TNK-BP is a major oil company in its own right. It is Russia’s
third largest oil producer and among the ten largest private oil companies in the world.
Producing about 1.9 million barrels of oil per day, TNK-BP provides about 25% of BP’s oil
production and 40% of its reserves. It pays about $2 billion dividends each year to BP. Such
a cash cow with huge reserves would seem to be—in the words of Bloomberg Business-
week—a “godsend.” Unfortunately, TNK-BP has turned out to be an unending saga of
headaches, conflicts, and intrigue between BP and its three Russian oligarch partners:
Mikhail Fridman (founder of Alfa Group and chairman of the board of TNK-BP), Len
Blavatnik (founder of Access Industries), and Viktor Vekselberg (founder of Renova
Group). Two episodes stand out.
Episode I
In 2008, the Russian partners publicly aired two grievances. First, TNK-BP relied on
too many BP’s expatriate (expat) consultants, whose fees were a “rip off”—extra dividends
to BP but excessive costs to TNK-BP. Second, and more importantly, the Russians wanted
TNK-BP to pursue opportunities outside of Russia and Ukraine, but BP insisted on
fencing TNK-BP within Russia and Ukraine to prevent TNK-BP from becoming a global
competitor. A memo from the American CEO of TNK-BP at that time, Bob Dudley, barred
managers from entertaining deals in countries blacklisted by the US State Department, such
as Cuba, Iran, and Syria. “TNK-BP is an independent Russian company,” noted Fridman, “and
should be subject to Russian laws,” which would bless deals in these countries. In fact, given
its Russian background, TNK-BP might be particularly well-suited to exploit opportunities
in these “rogue” countries labeled by the US government. The board room dispute quickly
spilled out to grab media headlines. The Russian partners claimed that TNK-BP should be
free to grow into an independent, global oil company (at least the JV agreement did not ban
this).
Rapid-fire developments took place in 2008. In January, the visas of BP’s 148 expats
working at TNK-BP were declared invalid. In March, the Moscow offices of both BP and
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TNK-BP were raided by police. Shortly after, a TNK-BP manager was arrested for alleged
espionage. In April, a little-known minority shareholder filed a court case blocking BP’s
expats from working at TNK-BP. In June, the high drama on who was in charge in this 50/50
JV reached a bizarre climax. In a Moscow hearing with Russian immigration officials
regarding the proper number of visas for TNK-BP’s foreign workers, two delegations
showed up, both claiming to represent TNK-BP (!). Tim Summers, TNK-BP’s chief operating
officer and a BP representative, claimed that visas for 150 foreign workers would be
needed. But Vekselberg, a director and 12.5% shareholder of TNK-BP, said that only 71
visas would be necessary. Officials supported Vekselberg’s case and thus forced some expat
employees to leave Russia almost immediately for good.
BP framed the dispute as oligarchs’ time-honored practice to grab control of
companies by political pressures and argued that the outcome would be a test of the rule of
law in Russia. BP also implied that the Russian government might be behind the oligarchs’
aggressive moves. In an article published in Financial Times on July 7, 2008, Fridman
dismissed political motivations and characterized the dispute as “a traditional, commercial
dispute about different ambitions of the strategic development of the business” (see
Emerging Markets 7.1). Accusing BP of being opportunistic, Fridman wrote that BP treated
TNK-BP as if it had been a wholly owned subsidiary instead of a JV. BP allegedly treated
Russians as “subjects,” as opposed to shareholders of equal rights. The article noted that BP
cared more about its oil reserves than costs or profits. The punch line? Dudley’s ouster as
TNK-BP’s CEO. Under such tremendous pressures, Dudley had to quickly flee the country. A
Russian court even barred him from performing his job for two years for allegedly violating
local labor laws. In September 2008, Fridman, in addition to his position as chairman of the
board, became interim CEO of TNK-BP.
In the end, while the Russians needed BP’s expertise, BP also needed to access TNK-
BP’s crude in Siberia, which was far easier and safer to get at than the complicated and
unsafe deep water drilling in places such as the Gulf of Mexico. In April 2010, the
devastating oil spill took place. In July 2010, Dudley—although disgraced in Russia—was
promoted to become the new BP CEO. As the new CEO, Dudley quickly flew to Moscow and
became more accommodating to the Russian partners. With a changed attitude, BP now
agreed that TNK-BP could expand abroad. In October 2010, BP sold assets worth $1.8
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billion in Venezuela and Vietnam to TNK-BP—a milestone for TNK-BP that finally broke out
of Russia and Ukraine. As a Russian company, TNK-BP might indeed be better positioned to
do well in “tricky” countries such as Venezuela and Vietnam. To BP, these sales raised
immediate cash to help defray the cleanup and compensation costs in the Gulf of Mexico,
and it did not have to sell to competitors. Overall, Episode I seemed to have a (relatively)
happy ending.
Episode II
Only a couple of months after the ending of Episode I, Episode II began. In January
2011, BP announced a new $16 billion strategic alliance with Russia’s state-owned Rosneft.
Creating the first cross-shareholding alliance between international and Russian oil
companies, the deal would enable BP to own 9.5% of Rosneft’s shares and Rosneft to own
5% of BP’s shares. Both sides would jointly explore a new offshore oil field on the Russian
Arctic continental shelf in the Kara Sea. Rosneft is Russia’s second largest oil company,
which produces 2.4 million barrels of oil a day (behind Gazprom but ahead of TNK-BP). This
new alliance had the full support of the Russian government—after all, Rosneft’s chairman
of the board Igor Sechin was the sitting Deputy Prime Minister. All seemed well...but here
was the catch: The Russian partners at TNK-BP jumped out and sought to block the deal.
Their argument was that per the TNK-BP JV agreement, BP could only pursue further
business in Russia through the JV. In other words, AAR’s rights of first refusal were violated.
In simple terms, “if you want to marry a new wife,” a furious Fridman argued, “you have to
divorce the old one first.” The Russian government was mad about BP too. “I met with BP’s
head and he did not say a word about it,” said (then) Prime Minister Vladmir Putin.
Basically, BP had lied to Rosneft that it had no third-party obligations.
According to the Economist,
At the least, it seems a woeful misjudgment on BP’s part. The company says it had no
idea that its deal with Rosneft would result in such a legal tussle, so it felt no need to
mention the terms of its shareholder agreement with TNK-BP to its new Russian
partners. Perhaps Mr. Dudley gambled that getting into bed with Rosneft would silence
TNK-BP.
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Such a gamble backfired badly. AAR initiated legal challenges by initiating
arbitration proceedings to block BP’s deal with Rosneft.* In March 2011 a Swedish
arbitration tribunal supported AAR and dealt a blow to the Rosneft deal, which became
known as “Rosnyet.” In May 2011, BP admitted failure and reaffirmed that it remained fully
committed to TNK-BP as its “primary business vehicle in Russia”—which, in human
marriage terms, sounded like acknowledging AAR as its legally married spouse after being
caught for indulging in an extramarital affair.
However, BP’s headache did not end. In September 2011, its frustrated other
partner Rosneft struck a new strategic alliance deal with Exxon Mobil. They would jointly
explore the same icy blocks of the Arctic Kara Sea that slipped from BP’s hand. Things then
got worse. The very next day, BP’s Moscow offices were raided by police again. Having
managed to alienate both the Russian government and Rosneft—just imagine Kremlin’s fury
after the collapse of the deal—on the one hand and AAR on the other hand, “BP appears to
have little protection against being pushed around in Russia,” noted the Economist. In
October 2011, a severely weakened BP agreed to let Fridman to formally serve as CEO, thus
enabling him and AAR partners to essentially run the show at TNK-BP.
Despite the ordeals, challenges, and hard feelings, both BP and AAR remained
committed to the success of TNK-BP. One has to be totally naïve to believe that they would
live “happily ever after.” So stay tuned for Episode III…
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