The lights went down in the Barbican’s wood-panelled concert hall and an expectant hush fell over the audience. The orchestra of Moscow’s Mariinsky Theatre was making a rare visit to London, and a treat was in store — Verdi’s Requiem.
As the thrilling first notes of the Kyrie sounded, in the audience David Peattie sat bolt upright. The lean, salt-and- pepper-haired executive at BP, head of the FTSE 100 group’s Russia business, had brought the Mariinsky to London for the performance in April.
After the show, he sipped champagne in the VIP area for BP’s guests. He chatted with the Russian ambassador and complimented Valery Gergiev, the conductor, on the performance. Peattie looked relaxed. Thousands of miles away in Moscow, however, trouble was brewing. The relationship Peattie was in charge of — a delicate dance with AAR, a group of four billionaires who own half of BP’s vital Russian operation, TNK-BP — was in meltdown.
Last week the problems burst into the open. Mikhail Fridman, TNK’s chief executive and the most pugnacious of the Russian owners, quit. Five days later, BP announced that nine years after signing the landmark deal that made it the strongest western player in Russian oil, it wanted out. Its Russian adventure, the oil giant decided, had run its course. Fridman agreed: “The existing structure is no longer in the interests of each party. Either AAR or BP must ultimately control the company.”
BP’s decision, approved at a board meeting on Thursday, was not taken lightly. More than two years on from the Gulf of Mexico oil spill, BP is still on its knees. Its share price is languishing far below its pre-spill level — and trades at a one-third discount to rival oil giants. It faces the spectre of a multi-billion-dollar settlement with America’s Department of Justice.
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In its weakened state, BP remains vulnerable to an opportunistic takeover bid. TNK-BP was a rare bright spot. A collection of thousands of wells across Siberia, it has paid out more than $38 billion (£25 billion) in dividends to BP and the Russians since 2003. It accounts for a quarter of the oil giant’s global production and, in 2011, 90% of its $4.1 billion dividend.
It is possibly one of the most successful partnerships in corporate history. Yet it has also been punctuated by bitter public fights and costly legal action. Bob Dudley, BP’s chief executive and former Russia boss, was forced to flee Moscow and go into hiding four years ago after a “campaign of harassment” by Russian authorities that BP maintained was the work of its disgruntled partners.
Last week’s breaking point can be traced back to January 2011 when Dudley tried to pull off another big Russian deal. In the wake of the Gulf of Mexico disaster, he was given the job of rehabilitating a traumatised company. It has not gone smoothly. The few attempts he made to take BP in a new direction — a giant sale of assets in Argentina, a $7 billion tie-up in India — failed to deliver. The Argentina deal fell apart and the Indian fields are smaller and much more problematic than first thought.
But his biggest gamble was in Russia. At BP’s headquarters on St James’s Square in central London on a freezing night last January, he unveiled a $16 billion share swap and Arctic exploration agreement with Rosneft, the Kremlin-owned colossus. Dudley billed it as the key to BP’s revival. AAR was incensed. The Russians said it violated their shareholder agreement with BP. They won an injunction to stop the deal and drew up plans for a multi-billion-dollar lawsuit.
Faced with voting on potential legal action against TNK-BP’s 50% shareholder, two independent directors — Jim Leng, the British industrialist, and Gerhard Schröder, the former German chancellor — resigned from the TNK board in December. Since their exit, the company has been running without enough directors to approve strategic decisions.
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Insiders said Fridman’s gambit was just a way to force BP’s hand. Last year, BP got close to paying $32 billion in cash and shares to buy out him and his partners. Fridman wants to reopen the discussions, only this time he and his partners are the buyers — potentially. They tabled a cash bid a month ago. Sources close to the situation said the offer valued BP’s stake at more than $25 billion — less than the $32 billion BP would have paid last year for the TNK half, but the oil price has dropped by a quarter since then.
Stan Polovets, AAR’s chief executive, said raising the money to get rid of BP was “the least of our concerns”. He added: “Last year TNK-BP paid out almost $8 billion in dividends. The company is one of the most successful and efficient businesses in the global energy industry.” State energy company Rosneftegaz is also thought to be lurking. But there is a bigger question. If BP does sell TNK, what does it do next? And why is it suddenly so willing to part with its Russian cash machine?
At 11.02am on March 13, a disturbing email landed in Jonathan Muir’s inbox. The finance director of TNK-BP was working with the company’s other top executives on a bid for gas licences that had been put up for auction the month before in Ukraine. The “shale gas” blocks, similar to the fields that have revolutionised the energy industry in America, were a big prize.
Striking out into a new province was something the board would have to approve — but since Leng and Schröder had stepped down four months before, they did not have a quorum to vote on such decisions. Muir was left in no doubt about the risks of going ahead.
“If management elects to proceed without obtaining shareholders’ consensus . . . it will be doing so at its own risk,” Vladislavas Paulius, a BP executive, wrote in his email to Muir. “BP reserves the right to actively oppose such transactions (internally and externally) and to go after manager [sic] authorised such course of action.”
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TNK-BP risked it. The company bid but lost out to Chevron and Shell. BP didn’t sue Muir. But the threat spoke volumes about the disintegration of relations at the heart of the company.
TNK-BP was imperfect from its beginnings on October 16, 2003, when John Browne (before he was Lord Browne of Madingley) shook hands on the tie-up with Fridman at the Intercontinental hotel in London. The men had been adversaries for years. Few were as adept as Fridman at taking advantage of the chaos in 1990s Russia. President Boris Yeltsin was desperate for money and Fridman was one of a band of businessmen who offered the government cash in exchange for shares in state-owned industrial giants.
This was how he came to own TNK, a big Russian oil producer. He later took control of part of Sidanco, the oil group controlled by another oligarch, Vladimir Potanin, in which BP had a 10% stake. The takeover of the Sidanco subsidiary was done through what BP saw as a rigged bankruptcy auction and forced BP to write down hundreds of millions on its first big Russian investment.
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Browne was livid. Prime minister Tony Blair wrote to his Russian counterpart Vladimir Putin on Browne’s behalf. The Central Intelligence Agency also got involved. It produced a dossier that led the Export- Import Bank, an arm of the US state department, to turn down TNK for a big loan.
Days later, TNK and BP, through Sidanco, unveiled a new alliance, paving the way for the blockbuster deal four years later. BP agreed to pay $7 billion in cash and shares for a 50% stake in the newly formed TNK-BP. Fridman and three other oligarchs — German Khan, Victor Vekselberg and Len Blavatnik — owned the other half.
Browne turned BP from an also-ran into one of the world’s biggest oil companies with the audacious takeover of not one, but two American rivals, Arco and Amoco. His dive into the wild west of Russian oil, however, was far riskier — and is seen by many as his crowning achievement. The tie-up has been a financial bonanza. Since its inception, the company has paid out more than $19 billion in dividends to BP — and more than $160 billion to the Russian treasury in taxes and duties.
It always had a sell-by date. Relations between the company and the oligarchs were always testy, and periodically they blew up. Dudley’s Rosneft deal was the straw that broke the camel’s back.
A Swedish tribunal will rule later this year on whether BP breached its contract with AAR. BP, meanwhile, has filed a suit against Vekselberg for a separate action that it claims also violated their agreement. Peattie said: “Joint ventures don’t last forever. This one has lasted nearly 10 years. It looks like it may have run its course.”
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The oil industry has stumbled into something of a purple patch recently after several lean years of scouring the world for new prospects and coming up with little. Off the coast of Tanzania and Mozambique, wildcat drillers have uncovered enormous gas fields — enough to supply nearby Asia and India for decades. Kurdistan in northern Iraq is on its way to producing 1m barrels a day — from nothing five years ago — after a flurry of giant discoveries. America has turned a gas deficit into a century of supply by applying new drilling techniques to open previously untappable fields of shale rock.
Most of the above have almost entirely passed BP by. If Dudley really is intent on selling out of Russia, he surely has a few ideas on how to reinvest the windfall. “You don’t take $25 billion on to your balance sheet without knowing what you want to do with it,” a senior banker said. “They have a master plan.”
Investors have been clamouring for well over a year now for Dudley to take more drastic action to get BP motoring again. Analysts at Investec, the broker, said last week its stock traded at a “management discount” because Dudley was “reactive and slow”.
Shareholders have called for a break-up ... a monster share buyback ... a big acquisition ... something to light a fire under the shares. They may be about to get their wish.
They can only hope it turns out to be as successful as Browne’s Russian adventure.
Lucrative deal that has run its troubled course
BP said last week that it might sell its 50% stake in TNK-BP, its controversial Russian business. The joint venture has been punctuated by highs and lows, but has been consistently lucrative for the British oil giant.
October 2003: BP pays $7 billion (£4.6 billion) in cash and shares to set up TNK-BP with four oligarchs. The 50-50 joint venture is a first in the oil industry and gives BP the strongest position of any foreign company in Russia.
May 1, 2007: Lord Browne, the architect of the deal, resigns amid revelations about his private life and allegations that he misused company resources. Tony Hayward takes over as chief executive.
July 2008: Bob Dudley, chief executive of TNK-BP, is told by Russia’s immigration service that he cannot work in Russia under his temporary visa. It marks the beginning of a sustained campaign of harassment amid disagreements between BP and the oligarchs over strategy.
August 2008: Dudley flees Russia to an undisclosed location, fearing for his safety.
December 2008: Dudley resigns as head of TNK-BP after a deal is struck between Hayward and Mikhail Fridman, the leader of the oligarchs.
June 2009: Fridman takes over as chief executive of TNK-BP.
January 2010: Carl-Henric Svanberg replaces Peter Sutherland as BP chairman.
April 20, 2010: The Deepwater Horizon oil rig in the Gulf of Mexico explodes, killing 11 workers and unleashing the largest oil spill in history.
July 2010: Hayward resigns as chief executive of BP, citing the company’s need for new leadership after the spill. Dudley replaces him.
January 2011: BP agrees a $16 billion share swap and Arctic exploration venture with Rosneft.
May 2011: BP cancels the Rosneft deal after AAR wins an injunction to stop it.
November 2011: BP’s $7.1 billion deal to sell its Argentina business — and bolster its balance sheet — collapses.
May 28, 2012: Fridman resigns as chief executive of TNK-BP and says the 50-50 partnership structure “has exhausted itself”.
June 1, 2012: BP announces plans to sell its half of TNK-BP after receiving “unsolicited indications of interest”.