In the latest twist in the battle between BP (BP) and its Russian shareholders—Alfa, Access, and Renova—BP announced on July 24 that Robert Dudley, chief executive of its Russian affiliate, TNK-BP, was temporarily leaving Russia. Dudley had been under pressure from BP's Russian partners and from the Russian authorities. His Russian visa was set to expire on July 29, and it was questionable whether it would be renewed. BP says that it supports Dudley and that he will continue to run TNK-BP from outside Russia. BP won't disclose where Dudley will be based.
How much control he will be able to exercise from afar seems open to question. Two major Russian shareholders, German Khan and Victor Vekselberg, are also top executives at TNK-BP. BP's worry is that if the Russian shareholders gain day-to-day control of the company, they will sell off assets, such as its oil services unit, and squeeze the company for as much cash as possible. A key dispute between BP and the Russian partners is the Russians' demand for high cash payouts, while BP says more money needs to be invested in TNK-BP's oil fields to prevent a decline in output. The partners and BP have each received about $10 billion in dividends since 2003. "At heart, we believe the current situation at TNK-BP is driven by the desire of the [Alfa, Access, and Renova] partners to get more cash out of BP now. That conflicts with BP's objectives to expand TNK-BP in the longer term and has resulted in the battle for control," writes Dresdner Kleinwort (DHX) analyst Colin Smith in a recent note.
The Russian shareholders want Dudley ousted because, they say, he sides with BP, not with TNK-BP's investors. Under the original joint venture agreement of 2003, however, the Russian partners agreed that BP would appoint the chief executive of the venture.
If BP Loses its Russia Stake?
In his statement, Dudley was conciliatory and sounded fatigued. "I shall seek to provide continuity of management in the best interests of all shareholders, pending a resolution of the differences between Alfa, Access, Renova, and BP," Dudley said. "I will endeavor to continue to serve the best interests of all shareholders and hope that administrative pressure on the group will now ease. I hope this will enable our employees to continue with our business, outside of the media glare, while the shareholders seek to resolve their differences." A BP spokesman said Dudley had made a personal decision because of the pressures he had been under.
Smith, the London-based Dresdner analyst, makes the case that the loss of TNK-BP would not be a disaster for BP. TNK-BP accounts for 24% of BP's production and 19% of its reserves but only a declining 13% of earnings. Even without TNK-BP, the London giant would remain second among major international oil companies, behind only ExxonMobil (XOM), in its reserves-to-production ratio—about 13 years—and in total reserves. Without TNK-BP, BP would avoid considerable management distraction and would be able to invest in other projects whatever compensation or sale proceeds it received for its roughly 50% of the venture. Smith calculates TNK-BP's value at $41 billion to $46 billion. He thinks BP will remain attractive financially, even if it loses the Russian stake-holding and gains no compensation.
Just what the outcome of the battle will be is far from clear. BP wants to remain in Russia and will try to arrange a deal. There are many possibilities, including continuing with the same shareholders or forming a joint venture with one of the Russian state giants, Gazprom (OGZPF) or Rosneft. It looks as if BP's resolve is being tested in advance of a possible change in the ownership of TNK-BP.