AN OIL ROMANCE ON THE ROCKS
Five Years After BP Partnered With Russian Tycoons,
This Lucrative Marriage of Opportunity Is in Collapse

By Steven Mufson, Washington Post Staff Writer
The Washington Post, Washington, D.C.
Friday, July 25, 2008; Page D01 (Business Section)

The marriage of British oil giant BP and a group of Russian-bred tycoons in
a joint venture in 2003 was strained from the start.

"The first risk . . . is mutual distrust," the joint venture's executive
director German Khan warned his colleagues in the company newsletter
when the deal was signed.

Mistrust has curdled into open hostility, despite the fact that the 50-50
joint venture, called TNK-BP, has doubled or tripled in value -- and paid
out a staggering $18 billion in dividends to its shareholders in just five
years. Both sides are tapping into rich reservoirs of grievance and
accusation.

The Russian oligarchs accuse BP of pursuing its own interests, overloading
the venture with costly expatriates and refusing to let it pursue
exploration opportunities in other countries, such as Cuba. Meanwhile, BP
suspects that its Russia-based partners want to siphon off prized assets and
seize management control.

BP also thinks the partners have prompted Moscow authorities to escalate tax
investigations, conduct a raid on the company's offices and turn down the
visas of 148 expatriate workers who have been forced to leave the country.
Separately one expatriate staff member was arrested on suspicion of
espionage.

Yesterday the firm's besieged president, Robert Dudley, facing the
expiration of his Russian work visa this weekend and calls for his ouster
from the tycoon partners, said he would leave Moscow and run the company
from abroad. George Robertson, the former NATO secretary general who is
TNK-BP's vice chairman, in Washington yesterday blamed the venture's four
Russia-based partners for Dudley's inability to obtain a visa, calling it
"an outrage."

The strife at TNK-BP has disturbed foreign analysts and investors who see it
as an ominous sign about the difficulty of doing business in today's Russia.
British Prime Minister Gordon Brown, German Chancellor Angela Merkel and
President Bush discussed the case with Russia's President Dmitry Medvedev at
the recent Group of Eight summit.

When TNK-BP was formed, it was widely seen as a sign that President Vladimir
Putin's Russia was open for business, with even its prized oil and gas
industry ready for foreign investment and cooperation. BP's high-profile
chief executive John Browne and Russian financier Mikhail Fridman signed
agreements in the presence of Putin and British Prime Minister Tony Blair. A
gala reception was held at the Kremlin Armory for 300 guests from the worlds
of business and politics.

Five years later, the feud at the joint venture has become a test, in the
eyes of many foreign investors, of whether it is safe to invest in Russia
and whether the apparatus of the state can be marshaled against foreign
investors in commercial disputes.

"The sooner it's resolved through means that are transparent and fair, the
better, not only for the parties concerned but for everyone considering
investment in Russia," said Ed Verona, president of the U.S.-Russia Business
Council.

Earlier this month, Viktor Vekselberg, one of the Russia-based partners,
hosted a lunch at a tony midtown Manhattan French restaurant, Le Bernardin,
to make his case against Dudley and BP's management of the firm. The day
before he had been at Harvard University because he had financed the
replacement and return of large bells from Lowell House to their original
location in the Danilov Monastery in Moscow.

The venture has been rewarding for him. Vekselberg's personal company,
Renova, has received $4.5 billion in dividends plus its share of what BP
paid to buy in since the deal was forged; he said the partners had bought 40
percent of the firm for just $810 million when the post-Soviet government
privatized the operation.

Dressed in a white suit and open shirt, Vekselberg said there was no way he,
a wealthy oligarch of Ukrainian, Jewish descent, could orchestrate official
inquiries in Moscow. Instead, he said, the dispute with BP and the
investigations into Dudley's management were a coincidence. He said that he
too had been questioned about tax matters.

Vekselberg said there were two main disputes. First, although TNK-BP was
designed to exploit oil and gas fields in Russia, he and his partners want
it to explore in other countries. BP had agreed to consider that on a
case-by-case basis. But, he said, BP said that it would run afoul of U.S.
and British restrictions if it invested in places such as Cuba and Iran. He
said that BP would not consider ventures in the Kurdish areas of Iraq
because the British oil giant did not want to anger the Iraqi central
government, which controls even bigger prospects in the south.

"There was no requirement about activities outside Russia," Vekselberg said,
"but we had a verbal understanding."

Second, he said that BP had brought too many of its employees on loan to the
joint venture, failed to train Russians to replace them and paid the
expatriates too much. Vekselberg, who is a member of TNK-BP's board and the
venture's chief operating officer, said the expatriates cost $150 million a
year.

He alleged that the expatriates also undermined his authority. "When I say
to expatriates 'we do this' they say 'sorry, I'm a BP employee,' "
Vekselberg said. "It is very difficult to manage these people."
He added, "BP doesn't treat us like equal partners."

BP officials responded that there are more than enough opportunities for
exploration inside Russia and the Ukraine without starting businesses in
Cuba, Sudan, Burma or Iran -- all places the Russia-based partners proposed.
In addition, BP said TNK-BP was exploring opportunities in Venezuela and
Turkmenistan.

The average cost of finding and developing a barrel of oil over the past
five years has been $2.20 a barrel, the company said in a news release. Even
though Russian taxes eat up almost all the revenue above $28 a barrel, the
country is still a lucrative place for the oil business. (Russia is weighing
an increase in that threshold.)

BP defends its use of foreign workers, some on loan to the Russian joint
venture and some of whom had quit other jobs and become full employees of
TNK-BP. The expatriates make up a tiny portion of the more than 60,000
employees. The whole idea of the venture was to import BP know-how and to
boost output at existing Russian fields and prospects. Output has grown 5.8
percent a year, BP says.

"The idea is to apply west Texas technology to west Siberia," a BP executive
said in 2006. Many of the expatriates specialized in finance and were based
in Moscow, preventing shenanigans by Russian managers, people close to BP
say. At a time of labor shortages in the oil industry, BP officials say,
TNK-BP is lucky to be able to draw on BP manpower.

The two sides also have different priorities. The Russian partners want to
take cash out of the venture, while BP says it is pursuing a long-term
program of building reserves and production. "They are interested in the
short-term and not the long-term health of one of Russia's greatest assets,"
Robertson said.

Things have unraveled over the past few months. When it came time this
spring to apply for visas for about 150 expatriates on loan from BP, Khan
and Vekselberg applied for 84. Dudley could not attend the visa meeting
because he was attending a board meeting of one of the firm's subsidiaries,
where he feared the Russian partners were trying to install their own
directors to wrest control of key assets, including Russia's largest oil
field.

Separately, a lawsuit against BP was filed in Siberia by a firm called
Tetlis, which had no offices or business. Its owners, however, had formerly
been associated with Alfa Finance Holding, belonging to Fridman. Then in
April, TNK-BP defied Dudley's orders and turned off the electronic building
passes of employees with visa troubles.

In addition, Russian tax agents raided the firm's headquarters, seizing
documents. Unions lodged complaints. Dudley was cited for failing to provide
proper safety training.

Meanwhile, the firm's board didn't meet for months as Russian partners held
out for the dismissal of Dudley while BP stood by him. At a meeting of the
joint venture's board last week, BP said it would postpone dividend payments
until September; the Russian partners said they would block the business
plan, obstructing new capital expenditures.

"They're holding hostage capital expenditures . . . which at any oil company
is the lifeblood of the company," Robertson said. He said it would hurt
operation and lower production this year.

Last week after a group of Russian employees filed a lawsuit against him,
Dudley told reporters at a Moscow news briefing "we have reached a new low
in the tactics being used. . . . .These claims will tear the company apart."

For all the hassles, the Russian venture has been extremely lucrative. BP
paid the Russian partners $7.8 billion for its half of the enterprise. It
has received $9 billion in dividends and will continue earning $2 billion or
more a year. BP's share of the Russian venture accounts for about a quarter
of BP's worldwide production and almost a fifth of its proven reserves.

BP isn't giving up. Robertson said, "we are not going to be driven out of a
country by the actions of these four individuals."
---------------------------------------------------------------------------------------http://www.washingtonpost.com/wp-dyn/content/article/2008/07/24/AR2008072403752_2.html
With several photographs.