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

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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)

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SUMMARY
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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.

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DUDLEY LEAVES TOWN
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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

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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.

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BP,S APPROACH: WAIT AAR OUT
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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.

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EXPAT DEPARTURES THREAT TO OPERATIONS
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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.

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AAR IN SECHIN,S SIGHTS?
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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

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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.

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COMMENT
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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