TNK-BP UPDATE: CEO DUDLEY LEAVES TOWN, BP BRACES FOR AAR'S NEXT MOVES

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002153



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: 07/25/2018

TAGS: EPET, ENRG, ECON, PREL, RS

SUBJECT: TNK-BP UPDATE: CEO DUDLEY LEAVES TOWN, BP BRACES

FOR AAR'S NEXT MOVES



REF: MOSCOW 2137



Classified By: A/DCM Eric Schultz for Reasons 1.4 (b/d)



--------------

SUMMARY

--------------



1. (C) TNK-BP Vice President for International Affairs Shawn

McCormick told us late July 24 that CEO Bob Dudley left

Moscow that evening after he learned, through his own and

McCormick's FSB sources, that his pending visa renewal would

be denied on July 25. McCormick told us the morning of July

25 that AAR is probably celebrating Dudley's departure.

McCormick said AAR would likely now begin trying to strip

TNK-BP of small assets as it tests its powers with Dudley out

of the country. In a separate meeting, the head of BP

Russia's shareholder team, Alistair Graham, told us July 25

that BP was confident that the original shareholder agreement

(from when TNK-BP was formed) would protect BPs assets while

this dispute plays out. "We can wait," he said. He and

McCormick both said AAR was starting to realize that it

needed foreigner experts to run the company and was having

trouble finding any. Graham said BP believes the GOR is

using AAR to &soften-up8 BP and that at some point the GOR

will use TNK-BP's deteriorating performance to push AAR aside

and negotiate a new agreement with BP. End Summary.



--------------

DUDLEY LEAVES TOWN

--------------



2. (C) As widely reported in the press, TNK-BP CEO Bob Dudley

left Moscow on July 24, planning to continue to manage the

company from abroad. According to McCormick, Dudley received

information from a senior FSB official with whom he has been

in regular contact over many years that his visa would be

denied by the Federal Migration Service (FMS) on July 25.

McCormick himself received the same report through another

FSB channel and passed that information to Dudley. Graham

expressed outrage at this turn of events, noting that the

FMS, claim that Dudley lacked a valid contract was absurd.

Russian labor law clearly states that a fixed term contract

remains valid after it expires unless it is specifically

terminated, which Vekselberg recently tried and failed to get

the TNK-BP Management Board to approve.



3. (C) McCormick explained that the administrative and legal

harassment by GOR entities, which he said has been

coordinated by AAR to pressure Dudley (reftel),had also

played a role in Dudley,s decision. He said that in

addition to the uncertainties surrounding Dudley's

immigration status, Dudley faces a $900 million personal

claim against him by AAR for supposedly exceeding the

company's authorized capital expenditure program, a

discrimination suit brought by a Russian TNK-BP employee, and

an expected wave of further suits directed at Dudley

personally. McCormick showed us an e-mail from Dudley

informing McCormick that he was not in the UK (as reported by

the press) and not in the U.S. McCormick said Dudley is

going to continue to move around "as a precaution."



4. (SBU) An official BP statement expressed "regret" that the

situation had lead Dudley to decide to leave, while BP

Chairman Peter Sutherland reacted much more harshly in a

separate statement saying "AAR are doing enormous damage to

Russia and to globalization." Sutherland further noted that

the Russian state has been manipulated as a part of the

campaign and that BP has never been treated as poorly as it

has been in Russia. TNK-BP Deputy Chairman Lord Robertson

separately expressed "outrage" and warned that AAR is

"threatening the viability" of TNK-BP.



5. (C) With Dudley trying to manage the very difficult task

of running TNK-BP from an undisclosed location abroad and the

company having lost the majority of its specialists, its

future is uncertain. Vladimir Konovalov, head of the

Petroleum Advisory Forum, the association of Western oil and

gas companies in Russia, told us July 25th that he expected

AAR to begin "wholesale looting" of the company, pushing BP

to arbitration in Stockholm, as is called for in the



MOSCOW 00002153 002 OF 003





shareholder agreement. "Even by Russian standards, this all

looks pretty awful," he added. McCormick also thought that

with Dudley gone AAR would soon begin stripping company

assets at the lower levels. He claimed, for example, that

the Russian employee who brought the discrimination suit

against Dudley has already been given sole ownership of a $9

million subsidiary called DINC.



--------------

BP,S APPROACH: WAIT AAR OUT

--------------



6. (C) Graham acknowledged the threat of asset stripping but

said BP was confident that it could rely on the &strong

shareholder agreement" and its arbitration mechanism to

protect its interests. He noted that the company has not yet

suffered major damage, and that BP can wait out short-term

impacts on performance. "No matter what, we still have 50%

of the company, and those barrels in the ground aren't going

anywhere," he said. BP is also prepared to launch legal

challenges, including in Russia, to defend its interests,

and, ultimately, to take matters to arbitration in Stockholm,

where it believes it would win.



7. (C) Graham and McCormick both said that AAR was motivated

by the desire to maximize short term profits, while BP wanted

to grow the company. In that regard, AAR's actions could

have the unintended consequence of causing TNK-BP to be in

breach of strict corporate governance clauses which are part

of some $8 billion of loans the company has. If that

happened, Graham suggested the creditor banks would likely

prevent the company from paying out dividends, one of the

major streams of income for the AAR partners. Given that the

AAR partner,s main interest is short term profits, he said

this situation plays to BP,s advantage. In fact, Graham

said, he was optimistic about the future of the company

despite Dudley,s departure because with Dudley gone the

focus was now squarely on the AAR partners to deliver.



--------------

EXPAT DEPARTURES THREAT TO OPERATIONS

--------------



8. (C) Both McCormick and Graham felt that the AAR partners

had overplayed their hand with respect to the foreign

employees in TNK-BP. McCormick confirmed that the 148 BP

secondees have left or are leaving Russia, likely never to

return. In addition, of the approximately 80 expat employees

in TNK-BP, 18 have either left or will be leaving shortly as

their visas are not expected to be renewed. McCormick said

60 expat specialists is no where near enough to help run the

66,000 employee company and AAR knows it. He related a

recent exchange with AAR partner Viktor Vekselberg in which

Vekselberg complained to him and Dudley that he needed

&his8 expats, including ten BP secondees to run the gas

operation he heads. Dudley had responded incredulously that

Vekselberg should take this up with Khan.



9. (C) McCormick said Khan hired two search firms six weeks

ago to recruit expats to replace the secondees and direct

hire staff that AAR has, in effect, kicked out of Russia.

The replacements would work directly for AAR. Graham,

expressing both outrage at the hypocrisy and a hint of glee

about AAR's predicament, noted that Khan isn't having much

luck. He explained that specialists in the oil and gas

business are in very high demand and know they can command

salaries equal to what TNK-BP is offering, without the

complications now encountered by expats at TNK-BP.



--------------

AAR IN SECHIN,S SIGHTS?

--------------



10. (C) Graham underscored for us once more what a tremendous

success TNK-BP has been. It leads Russian oil companies by

almost any metric of operational efficiency and results.

Perhaps the most telling statistics according to Graham is

the $70 billion the company has paid the GOR in taxes since

2003 and the nearly $18 billion in dividends and other pay

outs to the AAR partners. Graham said TNK-BP was responsible

for much of the AAR billionaires, current wealth. He shared



MOSCOW 00002153 003 OF 003





with us an internal BP analysis that shows that TNK-BP assets

comprise $35.7 billion of the $43.8 billion increase in the

combined wealth of the AAR partners from 2003 to 2008.



11. (C) TNK-BP,s continued success was the subject of

remarks by Deputy Prime Minister Sechin on July 24, reported

in the Russian press, in which he praised BP,s contributions

to the Russian oil and gas industry and underscored the

importance to the GOR of TNK-BP,s continued good

performance. Both McCormick and Graham said they interpreted

Sechin,s comments as a warning to the AAR partners not to

let TNK-BP,s performance slip. However, as Dudley,

McCormick, and others have told us, results are likely to

take a hit from the absence of BP,s technical expertise and

the disorder created by the shareholder dispute. COO Tim

Summers made that claim public on July 24, saying that the

shareholder dispute may impact 2009 performance.



12. (C) In addition, Graham told us AAR needs BP -- "they

chose us, not the other way around." He said AAR,s overseas

expansion plans have already been set back, with Khan having

been rebuffed by the Libyans and others who are shunning

deals with TNK-BP if the company isn't bringing BP's

expertise to the table. This also will not be well-received

by the GOR, which has prioritized the overseas expansion of

Russian businesses.



13. (C) According to Graham, BP believes that AAR is being

used by the government to "soften" BP in advance of

negotiations leading to some form of state control of the

company. BP plans to simply ride out the storm for now,

until the GOR shows its hand and uses the company's declining

performance as an excuse to push AAR out. At that point, he

said, negotiations would begin in earnest. Graham added that

BP was comfortable with such a scenario. "We want to be here

for the long term and we can do so only if the government

wants us here; just like everywhere else in the world," he

said. He added that BP is well aware that the 50-50

ownership model, with a foreign CEO, is no longer viable in

Russia.



--------------

COMMENT

--------------



14. (C) Dudley's departure is likely to allow AAR to act with

a much freer hand, whether it has the legal authority to do

so or not. However, TNK-BP is unlikely to be able to

continue to perform optimally without BP,s expertise and as

this becomes more evident, BP is betting on the pressure from

the government mounting on AAR. What the GOR ultimately

wants, however, remains unclear and as a result, so is the

future of Russia's third-largest oil producer.

RUBIN