BP PURSUING NEGOTIATIONS, INTERNATIONAL PRESSURE, AND LEGAL ACTION IN TNK-BP BATTLE

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001964



SIPDIS



DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT

EUR/CARC, SCA (GALLAGHER, SUMAR)

DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF

DOC FOR 4231/IEP/EUR/JBROUGHER



E.O. 12958: DECL: 07/08/2018

TAGS: EPET, ENRG, ECON, PREL, RS

SUBJECT: BP PURSUING NEGOTIATIONS, INTERNATIONAL PRESSURE,

AND LEGAL ACTION IN TNK-BP BATTLE



REF: A. MOSCOW 1775

B. MOSCOW 1294

C. 07 MOSCOW 3054



Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)



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Summary

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1. (C) BP Russia President Richard Spies told us July 7 that

the company is pursuing a three-pronged approach of

negotiations, legal action, and international pressure in its

ongoing battle with Russian shareholders (AAR) over

management control of TNK-BP (refs A and B) -- a battle that,

despite progress on visas, he predicted would continue.

TNK-BP VP for International Affairs Shawn McCormick

separately told us July 7 that a negotiated resolution of the

dispute would require BP engaging more directly with AAR,

rather than relying on TNK-BP,s western managers to act in

its interest. He added that BP had succumbed to AAR pressure

tactics in the past and might do so again. End Summary.



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Three-Pronged Approach

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2. (C) Spies said BP is pursuing a three-pronged approach to

defend its interests in TNK-BP: negotiate with AAR; examine

and pursue legal options as necessary; and bring

international pressure to bear on the GOR and AAR. Spies

confirmed that BP had named Amcit Lamar McKay, the former

head of BP Russia and a former TNK-BP board member, to head

negotiations with AAR. Spies said McKay knew the AAR

partners and was well-versed in TNK-BP,s history and

structure. McKay would not be moving back to Moscow but

would meet the AAR partners here and abroad in an effort to

reach a resolution of the dispute. Spies added that BP was

prepared to defend its interests in court if negotiations

failed. However, he described the $360 million lawsuit

recently brought by BP against AAR in the UK over 2003 tax

deed of covenant as preemptory in nature, driven by concern

that their claim would lapse if the suit had not been filed.

The legal option was not BP,s preferred way to resolve the

dispute.



3. (C) With respect to the third prong, Spies said BP is

briefing all G7 governments and requesting that they approach

the GOR seeking its intervention. He said that besides the

U.S. and the UK, Canada, Germany, France and Italy had all

expressed concern at the dispute, which they thought could

undermine the position of their investors, and had expressed

their intention to raise it with the GOR. Spies presented us

with five different briefing papers (emailed to desk),which

he said had also been shared with the other G7 governments.

The papers refute the public attacks against BP by their AAR

partners. Spies walked us through one paper in particular,

which he said disproved the AAR allegation that TNK-BP had

underperformed relative to its Russian competitors. The

paper noted that the fall in production and dividends in 2007

that AAR had pointed to was a direct result of the 2006 sale

of TNK-BP subsidiary Udmurtneft, to which AAR had agreed.

The subsidiary had accounted for 10% of TNK-BP,s production

and the sale proceeds had been paid out as a dividend,

artificially raising 2006 dividends.



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AAR Tactics and Goals

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4. (C) Spies said that despite progress on visas (see

paragraph 9) he expected the attacks by AAR to continue. He

pointed to the July 7 extraordinary board meeting of TNK-BP

Management that had been called to try to dismiss TNK-BP CEO

Robert Dudley. Spies said TNK-BP Management was a cut-out

that had been created to employ the company's senior

management in a manner that complied with Russian tax law.

The meeting, called at the instigation of AAR partner Viktor

Vekselberg, had been a publicity ploy. Spies explained that

BP controls 3 of five board seats, and that AAR knew it would

lose the motion. According to Spies, AAR will use the vote



MOSCOW 00001964 002 OF 003





in favor of keeping Dudley to buttress their claims that BP

and TNK-BP,s western management were acting against Russia's

best interests.



5. (C)Qccording to Spies, BP was willing to accommodate GOR

interests but it was unclear what those interests were at

this point. BP,s talks with Gazprom had been dormant since

April and with Rosneft since last year. Spies speculated

that AAR might be acting on behalf of a future government

buyer for its share of TNK-BP in order to avoid any unseemly

control battles between that buyer and BP. However, he had

also heard speculation that part of AAR's motivation was to

neutralize Putin, who was angry over their having stalled the

long-pending sale of the Kovykta gas field to Gazprom (ref

C). By "wrapping themselves up in the Russian flag" the AAR

partners had prevented Putin from moving against them, which

would have been seen to be siding with foreigners against

Russians. Spies said that in the end, BP doesn't care who

its partner in TNK-BP is, so long as agreements are respected

and the company is managed professionally for long-term

profit growth.



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TNK-BP Management Perspective

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6. (C) In a separate July 7 meeting, McCormick also pointed

to the TNK-BP Management board meeting as evidence that AAR

would continue to use every means at its disposal to take

management control of TNK-BP. (Note: On July 8 tax

authorities reportedly demanded detailed records on

international secondees to TNK-BP. End note.) He said

Dudley would remain the focal point because of the CEO's

powers under the shareholder agreement, which could only be

changed by agreement or through the arbitration clause of the

original shareholder agreement forming TNK-BP, which directs

disagreements to be settled by an international arbitration

court in Sweden. In the end, McCormick said, the AAR

partners would be fine with Dudley staying on so long as his

control of the company was diluted.



7. (C) McCormick said a resolution of the dispute would

require BP engaging directly with the AAR partners. In that

regard, he welcomed the appointment of a new BP

representative in charge of TNK-BP negotiations. However,

McCormick said Lamar McKay might not have been the right

choice. McKay had personal issues to deal with that hampered

his ability to travel. McKay had come to Moscow three weeks

ago but had not been back since. McCormick felt that BP

would be better served by having someone senior on the ground

in Moscow not only to resolve this dispute but to look after

its interests in general. In fact, the absence of such an

individual contributed to the appearance that Dudley and

other Western managers were acting on its behalf.



8. (C) McCormick added that he was not sanguine that BP would

be able to successfully defend its interests. AAR had

successfully used pressure tactics against BP before. He

noted that the original sales agreement had called for BP to

pay half of its investment up front to the AAR partners with

the other half paid in yearly installments. However, before

the ink was dry the partners had asked for all the money up

front. BP had said no and the partners had responded by

effectively shutting down the company, as they were doing

now. BP had ultimately caved and might do so again unless it

was willing to accept as much short-term pain as were its

partners.



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VISAS

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9. (C) As reported in the press, 49 expat staff of TNK-BP

(actual TNK-BP employees, not secondees) have either received

or should soon receive their new visas. There are at least

another 37 employees whose visa prospects are still unclear,

although 14 of these may be resolved soon. Spies and

McCormick explained that the 150 expat employee figure often

cited in the press is misleading because it represents the

number of positions (not people) for which TNK-BP management

seeks visas. Many of these positions are duplicates or even



MOSCOW 00001964 003 OF 003





triplicates in some cases because the visas are granted on

the basis of nationality and position. In order to have

hiring flexibility, TNK-BP management sought permits for

several nationalities for a given position. However, due to

a court order resulting from a lawsuit brought by a minority

shareholder linked to Alfa, there are currently no BP

secondees working for TNK-BP, and many of these employees are

now being relocated by BP.



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COMMENT

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10. (C) This case sends the wrong signals about Russia's

long-term investment climate and its commitment to economic

reforms. Convincing the Russian government of that is,

however, another task altogether as foreign investment

continues to flow into the rapidly growing economy, buoyed by

rising energy prices. End Comment.

BEYRLE