The retreat from Moscow

Oil industry

Analysts suspect the days are numbered for BP's Russian venture

• Terry Macalister and Luke Harding in Moscow
• The Guardian,
• Saturday July 26 2008
• Article history

Headquarters of TNK-BP in Moscow Photograph: Misha Japaridze/AP

When Lord Browne signed up for BP's joint venture in Russia five years ago, it was supposed to herald a new era in business relations with the former Soviet empire. There were doubting voices about doing business with Moscow, but Browne was at the height of his power as one of Britain's most feted businessmen and he was prepared to risk it for a stake in Russia's vast reserves of oil and gas. He had clashed with one of his new oligarch partners, Mikhail Fridman, yet here he was calling him "my friend Michael".

The day after the humiliating departure of the TNK-BP boss Robert Dudley from Moscow, driven out by a campaign of harassment by state authorities apparently acting at the behest of BP's oligarch partners, those naysayers will be saying we told you so.

Browne is long gone and familiar problems of volatile partners and an unpredictable legal system appear to be sinking his dream of securing for BP a share in the profits from Siberia's riches. Such is the impact of the collapse of BP's relations with Russia that analysts last night warned that Britain's biggest company could even be vulnerable to a takeover.

Fadel Gheit, an oil analyst with the Oppenheimer & Co brokerage in New York, said that the company was being dragged down by its involvement in TNK-BP. It should sell its £10bn stake, he said, even though the venture this week reported $4.7bn (£2.3bn) profit in the first half.

"The sooner BP gets itself out of there the better. It is a headache they don't need. It's a bit like Manchester United losing Ronaldo. It would take time to recover - a blow but not fatal."

Gheit said the Russian debacle could make BP more vulnerable to a takeover, something that has been speculated about after the Texas City refinery explosion that killed 15 workers, Alaska pipeline ruptures and propane trading irregularities in America.

"ExxonMobil is the only one that could really pull it off but it is more logical for BP to do a merger of equals with Shell with Tony Hayward running both companies," Gheit added.

There was also speculation about what would happen to BP's stake in TNK-BP, which it owns equally with the oligarchs. Although Hayward has vowed to defend its stake, which accounts for 25% of BP's overall production, analysts at Dresdner in London said it was possible that a Russian state-owned entity such as Gazprom or Rosneft would end up taking control of TNK-BP, with BP left as a minority shareholder. "We do not believe BP will lose the value in TNK-BP without compensation," they said.

BP insisted yesterday that it had no plans to retreat from Moscow. Dudley had left for a "temporary" period and would continue to run the Siberian oil and gas joint venture from a foreign location it would not name.

Hayward said in a statement that it would use "all means at its disposal, both inside and outside of Russia, to defend its interests and rights", including bringing arbitration proceedings against the company's joint-venture partners AAR "to recover any and all losses suffered by BP as a result of their violations of the terms of our shareholder agreement".

The news prompted a big sell-off of shares in Russia yesterday as investor confidence slumped, though observers in Moscow suggested that BP bore some responsibility for its downfall in Russia. Analysts said that BP had comprehensively underestimated its Russian co-owners. The firm had wrongly assumed that the partners - led by Fridman - would be prepared to sell their stake to Gazprom.

According to Yulia Latynina, a commentator with the radio station Ekho Moskvy, one of the last independent media outlets in Russia, BP began secret negotiations with Gazprom believing that the Russian oligarchs would eventually sell to the state-owned firm.

This didn't happen. Instead the Russians began a "vicious and brutal" fight-back, Latynina said. The billionaires proved far more adept and resourceful at using Russian state agencies for their own ends than BP.

She added, though: "I don't think Bob Dudley was very successful at managing the company. He couldn't find a neutral language with shareholders.

"BP made several major mistakes. BP was conducting separate negotiations with Gazprom. The idea of these negotiations was that the Russian oligarchs were finished.

"The shareholders reacted in the most brutal manner. They effectively said: 'You can say fuck off to us. But we're the big guys around here.' It was a shoot-out. The other side shot better."

BP could not really complain about its harsh treatment in Russia, Latynina said - given that the rule of law had never really existed in the country, and didn't exist when BP went into business with AAR in 2003.

Asked whether the affair had damaged Russia's international credibility, she said: "I don't think this will spoil Russia's image. Russia can't spoil its image any more. After the death of [Alexander] Litvinenko this is peanuts."

Other commentators suggested that the change of leadership inside the Kremlin had played a role - allowing the Russian shareholders to exploit a vacuum at the heart of the state.

Dmitry Medvedev took over as president in May. Sources said that the shareholders were already deeply unhappy at this point - and had complained to Vladimir Putin that TNK-BP was paying too much tax. Astonishingly, Putin appears to have agreed. But with Putin ensconced as prime minister, Medvedev was unable to make a strategic decision on TNK-BP's future.

"The balance of forces within the leadership is already uncertain," said Andrei Ryabov, a scholar-in-residence at the Carnegie Centre in Moscow. "Nobody knows who is really in charge.

"Among the high-ranking bureaucrats and politicians nobody wants to take responsibility for a decision. Any mistake will really lead to radical change among the balance of forces."

Explainer: State intervention

Ordeal by torment

The embattled oil company's ordeal started in March when agents from the Federal Security Service (FSB) - Russia's post-Soviet intelligence agency - raided BP's office in the central Moscow district of Novy Arbat. They also searched TNK-BP's offices. The raid led to the arrest of a British educated TNK-BP employee, accused of industrial espionage. The employee was quietly released shortly afterwards. The FSB returned to BP in May. On June 10, tax officials spent five hours interrogating chief executive Robert Dudley (right) in connection with TNK's tax affairs. They claimed Dudley's grilling had nothing to do with his on-going dispute with TNK-BP's Russian shareholders. Prosecutors also launched an inquiry into BP's labour practices. Russia's federal migration service has also tormented the company. The migration service refused visas to 148 BP secondees from TNK-BP - who found themselves locked out of their office from March.

On Tuesday BP announced it was withdrawing them from Russia.

The service had promised to renew Dudley's visa. On Wednesday, however, its head hinted that Dudley would be forced to leave Russia next week because he no longer had a labour contract. On Thursday Dudley took the hint and left the country.

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