Dust-Up Between BP and Russian Investors Threatens TNK-BP Joint Venture

18 June 2008

by Jack Rosebro

A quartet of Russian oligarchs—Mikhail Fridman and German Khan of the Alfa Group, Viktor Vekselberg of the Renova Group, and Len Blavatnik of Access Industries—are pressuring BP to replace Robert Dudley, the BP-nominated CEO of TNK-BP, a joint British-Russian oil venture, and shake up its board of directors.

The TNK-BP joint venture is a significant contributor to BP’s total production. In the first quarter of 2008, BP’s share of output from TNK-BP was 818,000 barrels of oil per day and 512 mmcf/d of natural gas per day, for a combined 906,000 barrels of oil equivalent per day—33.4% of BP’s oil production and 23% of its total liquids, oil and natural gas production for the quarter.

BP has claimed that the demands, as well as ongoing inter-corporate espionage, are part of a strategy to seize control of TNK-BP, and some industry analysts believe that the long-term goal is to secure a stake in the joint venture for Gazprom, Russia’s state-owned oil and gas monopoly. In December 2006, Gazprom was able to secure a controlling interest from Royal Dutch Shell, Mitsui, and Mitsubishi in the massive Sakhalin II oil and gas project (earlier post), following years of interference from Russia’s environment agency.

At a Stockholm press conference, BP chairman Peter Sutherland criticized the tactics of the four, who own 50% of TNK-BP, as well as the lack of state response to the dispute.

This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s... The leaders of the country seem unwilling or unable to step in and stop them. This is bad for us, bad for the company, and, of course, very bad for Russia.

—Peter Sutherland

Sutherland also dismissed Gazprom’s recent prediction that oil prices could rise to $250 per barrel as “apocalyptic”.

Relations between TNK-BP partners have deteriorated sharply this week, with Fridman comparing Sutherland’s comments to “Goebbels propaganda” and “Nazi tactics” in a recent interview with Russian business daily Vedomosti.

TNK-BP is a privately owned, British Virgin Islands-based, vertically integrated oil and gas company with upstream and downstream operations located primarily in Russia and the Ukraine. The company claims total proved reserves of 9.982 billion barrels of oil equivalent.

Oil production from TNK-BP has been flat or trending down slightly, from 832 thousand barrels per day in 1Q 2007 to 829 mb/d in 4Q 2007 to 818 mb/d in 1Q 2008. The company expects production to rise again in 2009 when new projects come on line.

TNK-BP’s major upstream projects. Click to enlarge.

TNK-BP is developing over a dozen new major projects, many of which are located in remote areas with limited or no infrastructure and require significant investment of capital and technology. The more advanced are several large greenfield projects: the Uvat group of fields and the Bolshekhetsky project in West Siberia, and the Verkhnechonskoye field in East Siberia.

Resources

• Corporate website for TNK-BP

• TNK-BP Information Sheet June 2008

• BP First Quarter 2008 results

• “TNK-BP chief questioned by Russian ministry”, FT, 10 June 2008

• “TNK-BP fighting erupts in public”, FT, 28 May 2008

• “Oligarchs to sue TNK-BP after failing to agree control of company”, The Guardian, 12 June 2008