The Unraveling of TNK-BP

It’s a big day in energy news for Russia, though understandably most reports are concentrating on Vladimir Putin’s efforts to use his new “Presidium” cabinet to push through with massive oil tax cuts in the order of $4 billion to boost production – a move that Alfa Bank believes could create a 20-30% upside for company stocks of Rosneft and LUKoil. However behind the salivating market headlines, there is a quieter story: the situation appears to be getting worse and worse for BP’s subsidiary TNK-BP in their protracted battle against state harassment and difficulties with shareholders. The continued expropriatory pressures on BP are making this dispute into an embarrassing eyesore of an advertisement for foreign investment in Russia, right at a moment when the new government needs to consolidate authority and legitimacy. How much longer before the executive steps in to straighten it out?

Acknowledging the problem is a good first stepThere’s a reason why those Alcoholics Anonymous meetings begin with the simple premise of each member standing up to introduce themselves and acknowledging their problem – admitting that there is an issue is the first step in that road to recovery. It’s not all the different for foreign energy companies working within the Putinist system – time and time again we see a refusal by the executives to even admit that they might be having a problem, despite all the reports of unfair tax, environmental, and other bureaucratic agency harassment, which only seems to be magically solved the moment in which an asset is sold to a state-owned company at a bargain.Up until today, this had been the BP policy line – deny, deny, and deny. Send in CEO Tony Hayward for frequent visits to the Kremlin to pay homage to the czar just like his predecessor. Who could blame them though? Undoubtedly this is what they had been told was necessary to please the authorities, to whom they found themselves at complete mercy with no protection from the legal system. That’s the sticky power of corruption in resource nationalist states – it recreates non-transparent behavior in Western corporations. Case in point, Hayward has even become an informal lobbyist for opening markets for Russian investment while the corporation’s most valuable production assets are held hostage.However, all that may be changing, because today, for the first time, we were greeted with the headline “Russian owners, BP confirm differences over TNK-BP.” Finally the long awaited honesty and transparency! – TNK-BP CEO Robert Dudley gives a groundbreaking interview with Vedomosti, which the FT has cited: “There is of course some disagreement among TNK-BP shareholders . . . on the question of investment, on the question of the sale of some assets in Russia. (…) The managers acted in the interests of one shareholder with the aim of significantly lowering the presence of international specialists in the company. This is a vivid example of when the company is being run not in its own interests, but in the interests of a single shareholder. (…) [the absence of specialists could cause a] decrease in the company’s production by the fourth quarter of this year or the first quarter of next year.“However, before too long, another headline appeared: “Dudley ‘to walk away from TNK-BP’” I suppose there had to be a price for speaking so clearly.TNK-BP president Robert Dudley (Photo: Alexander Miridonov)The Unraveling of TNK-BP – Does Sechin Hold a Thread?What Dudley admitted to was not that there is direct government pressure (although they’ve already played that game with Kovykta), but rather that the center of the problems is a dispute with their Russian partners, the ultra-wealthy Len Blavatnik, Viktor Vekselberg and Mikhail Fridman – a point that the Wall Street Journal had predicted earlier this month. It seems that the Russian partners want TNK-BP to pay out high dividends now, which of course limits the company’s ability to reinvest in production and plan for future strategic growth. Their main threat to the British supermajor: do what we want or else we will sell our stake to the state, which will of course sink you. As I have written before in this space, Gazprom still remains the winner, as BP moves to build a closer relationship with the gas giant in an effort to discourage Vekselberg and company from selling – much in the way that Eni was cornered into becoming a virtual subsidiary of the Russian state.But never forget that today’s Kremlin is an extremely fractured structure – the scene of brutal power struggles between multi-billion dollar business interests under the control of feuding clans. There are winners and losers in Russia if TNK-BP becomes unraveled and put under the thumb of Gazprom – most notably Igor Sechin and Rosneft, who would like to prevent any more oil interests going into the hands of their competitor. A while back Carl Mortished argued that it was Sechin’s group which was behind all the continued legal and tax harassment of TNK-BP, perhaps working in cooperation with one of the three major shareholders to advance his interests vis-a-vis the new president, Dmitry Medvedev. But today, it is Sechin who is calling upon the government to resist intervention in the affair (for now): “If you notice an internal corporate conflict, the shareholders first and foremost should direct their attention to that … and deal with sorting it out,” Sechin told reporters. “It seems to me that influence from outside, including statements of some kind of official position, would not be appropriate.“So the plot thickens in this drama, and a highly respected corporate officer is being forced out, simply due to the cruel vagaries of individual proximity to power. Maybe someday Dudley will talk more about the what’s going on inside BP’s most important foreign venture.