BP Gambles in Removing Foreign Specialist Staff from Russia's TNK-BP in Ongoing Dispute

Surrender…?

In the latest twist to the seemingly intractable TNK-BP shareholder dispute, BP announced yesterday it was withdrawing its remaining 60 technical specialist staff from Russia, saying it was taking this action "reluctantly" after heavy pressure from its erstwhile partners, Alfa-Access-Renova (AAR). Lamar McKay, BP's executive vice-president, said in a statement that: "These technical experts have played a huge part in making TNK-BP one of Russia's most successful oil companies in the past few years." However, BP said it was withdrawing these remaining 60 staff—following the early withdrawal from Russia of another 88 BP secondees earlier this month—to redeploy them in BP's other ventures around the world "where their skills are needed and valued".

The withdrawal of the 148 foreign BP specialists—mainly engineers and other technical staff—from Russia marks an apparent decision by the U.K. firm to give in to AAR demands in one area of their wide-ranging shareholder dispute. Many of those specialists have been barred from working for TNK-BP since March owing to problems with their visas, a situation for which BP claims AAR is to blame after a little-known brokerage pursued an injunction against the BP secondees' ability to work. The visa status of the technical specialists, as well as top foreign executives at TNK-BP including CEO Robert Dudley, has been a source of back-and-forth bureaucratic battles over the past few months, with BP seeking to renew visas with Russia's Federal Migration Service (FMS) in the face of opposition and resistance from AAR.

Dudley, a U.S. citizen and former BP employee whose ouster has been a chief goal of AAR's in the shareholder dispute, last week received a temporary reprieve himself in the proxy battle over his visa. Dudley received a 10-day transit visa, although his right to work in Russia remains a source of dispute, as AAR says that his contract has not been renewed. BP says that the TNK-BP board of directors has approved a new contract for Dudley, and the FMS says that TNK-BP has until Sunday (27 July) to present this new contract to renew his visa. For its part, AAR claims that the board meeting that approved Dudley's new contract was illegal, since the election of the current board of directors of TNK-BP was held illegally.

…Or Calculated Gamble?

The decision by BP to withdraw its secondees marks a victory for AAR in the shareholder dispute over TNK-BP's labour practices, but it could well be a Pyrrhic victory if the absence of these technical specialists results in a decline in the joint venture's operational performance. TNK-BP is Russia's third-largest oil producer, with output of approximately 1.4 million b/d, and Dudley has already warned that the shareholder conflict could have an operational impact on the company this year. A BP spokesperson said that the withdrawal of the BP specialists, experts in the fields of drilling, reservoir management and project planning, will be felt in the long term, noting that, "These are the people who over the past five years have brought BP's international expertise to bear on TNK-BP's assets and have played a huge part in enabling TNK-BP to deliver the superior results that it has done. This expertise, which TNK-BP has greatly benefited from, will now be unavailable to TNK-BP." McKay added that since the formation of TNK-BP in August 2003, the company's oil output has grown by an annual average of 5.8% per year.

AAR chief executive Stan Polovets downplayed the impact of the withdrawal of the BP secondees, however. "We respect BP's decision and are confident it will not have an adverse impact on TNK-BP's operations. The BP secondees have not been working for TNK-BP for many months now, and the company's operations have not been hampered in any way. In fact, production has been up for the past three quarters," Polovets said, adding, "Most of the production growth referred to by BP came in 2003-2005, which was a result of the actions, decisions, and investments made prior to the merger or shortly thereafter." Polovets also noted that AAR had proposed several times to BP that the specialist staff be converted to TNK-BP employees rather than being used as BP secondees, only for these proposals to be rejected by BP. AAR said that retaining the BP specialists as secondees in Russia cost US$1 million per year per person.

Outlook and Implications

On the face of it, the BP decision to withdraw its technical specialists from Russia appears unlikely to have much impact on TNK-BP's operations in the short tem. Indeed, the entire shareholder dispute over the foreign specialists' work visa status and whether they should remain BP secondees or be converted to TNK-BP employees appears quite petty, hardly worthy of such drama and bitterness between AAR and BP. However, the fight over visas is clearly a proxy battle for the future of TNK-BP, with AAR looking to expand the company's focus beyond Russia and also force the U.K. supermajor to stop treating TNK-BP as merely a subsidiary. In a potential sign of a change in the status quo, TNK-BP yesterday signed a deal with Venezuelan state oil giant PDVSA to explore in Venezuela's heavy oil belt. Notably, however, the deal was signed by TNK-BP's German Khan, one of the Russian oligarchs behind AAR.

It remains to be seen if there is truly a long-term impact of the absence of the BP secondees on TNK-BP's operational performance. BP may be betting that their absence will be acutely felt in a downturn in the company's operations, prompting AAR to reconsider its position, acknowledge the importance of these specialists, and welcome their return to Russia. However, BP itself will also suffer the consequences of a decline in TNK-BP's output, given the importance of TNK-BP to BP's overall portfolio. A drastic turn for the worse at TNK-BP would also almost certainly prod the Russian government to involve itself more actively in the shareholder dispute. In one another possible interpretation of BP’s move, the company might have done it exactly to remove any grounds for dispute with the Russian authorities, and channel the conflict squarely towards a corporate battle with AAR. While Igor Sechin, Russia's Deputy Prime Minister for oil and gas issues, has said that the government supports BP involvement in Russia, and treats the dispute as an internal company matter, there is no guarantee that Russian officials will side with BP in the end, and BP might be working to remove any possible cause of annoyance from the presidential administration at the Kremlin..

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