AAR AND BP NEGOTIATING A "CEASE-FIRE"

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002237



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: AAR AND BP NEGOTIATING A "CEASE-FIRE"



Classified By: CDA Eric S. Rubin for Reasons 1.4 (b/d)



1.(C) Summary: In a July 31 meeting with the Charge, TNK-BP

Chief Operating Officer (COO) Tim Summers provided insight

into BP and AAR's negotiations, noting CEO Bob Dudley was

unlikely to return and that the most important and difficult

issue to resolve was likely to be corporate governance, which

was central to BP's efforts to protect its investment.

Summers, now TNK-BP's senior foreign employee in Russia, also

provided some colorful background on the AAR partners and in

particular German Khan, who has orchestrated the attacks on

BP and TNK-BP's foreign employees. End Summary.



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BP/AAR Negotiations

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2. (C) Summers, a UK citizen (please protect),said that BP's

dispute with AAR head reached the "end of the beginning" and

that BP CEO Tony Hayward had met in Prague with Mikheil

Fridman the day before, July 30, to negotiate a "cease-fire."

(N.B. The meeting has since been reported in the press.)

Summers, however, likened it to an Israeli-Palestinian

cease-fire in which Khan would play the role of Hamas, ready

with some provocation or incident that would restart

hostilities. Moreover, of all the partners, Khan was the

least leveraged and therefore had the least to lose if the

dispute dragged on and the company's performance suffered and

payouts were delayed. He also had the least exposure outside

Russia were BP to push the button and start seizing the AAR

assets through arbitration.



3. (C) Summers said a longer-term resolution of the dispute

would depend on reaching agreement in four areas: picking a

new CEO, agreeing on governance issues, agreeing on the level

and nature of BP support to TNK-BP, and on "liquidity." He

said Dudley was unlikely to return. However, Summers felt

Fridman had overplayed his hand, and was now getting pressure

from the GOR to resolve the dispute and was therefore

unlikely to play hardball on the identity of the new CEO.



4. (C) Summers said the second issue, corporate governance,

was central to control of the company and would be the most

difficult to resolve. The structure of the Board, the

presence of independent directors, the authorities of the

CEO, and structure of the subsidiary companies were the keys

to BP protecting its investment in the company. He added

that the opaque nature of Russia's legal system made this

even more essential from BP's point of view and that any

foreign investor in Russia should have in its hands at a

minimum the Chief Financial Officer (CFO) and the head of

internal auditing.



5. (C) On BP's level of support, Summers said the questions

revolved around whether BP would provide technical skills to

TNK-BP in the form of secondees and if so how many and under

what terms. He noted that AAR and the Russian Government

knew full well that the company could not be run successfully

without foreign employees. First, there were simply not

enough skilled Russian petroleum engineers and second the

Russian engineers' skills were not to world standards. What

the foreign personnel had brought to TNK-BP and other Russian

oil companies were not only more sophisticated drilling

techniques but also an integrated approach to the work that

maximized production. As an aside, Summers said he was very

pessimistic that Russia would ever be able to get its

production over 10 million barrels a day and predicted

instead a steady decline in production as the current fields

were depleted and few if any new fields were brought on line.





6. (C) Summers said liquidity was really AAR's issue as their

ultimate goal was to take value out of the company.

Decisions would how much to pay out, including in the form of

dividends, and how much to invest back into the company.

Summers added that while the AAR partners overall goal was

clear enough ) make as much money as they could ) they had

no real strategy for achieving that and instead approached

everything tactically, and that the preferred tactics of the

Alfa partners in particular were to play rough. They had

felt pressured from the government to sell at a discount,

disrespected by a BP that had been weakened by its transition



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to a new CEO, and had decided to make themselves difficult

until they were accommodated.



7. (C) If the negotiations were to fail, Summers said BP

would react decisively. He said BP had not reacted fast

enough or aggressively enough as the dispute had gathered

steam but was "angry and fully awake" now and ready to go to

arbitration if necessary.



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German Khan and the Godfather

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8. (C) Summers said he had a complicated and sometimes

difficult relationship with Khan, though it was not as

difficult as Dudley's relationship had been. It was

complicated because although they were technically on the

same level in the company, Khan as a part owner out-ranked

him. However, at the same time, Khan knew very little about

the oil business, knew it, and therefore deferred to Summers

on running the company. With Dudley, he added, part of

Khan's anger was because Dudley was the boss and had thwarted

several of Khan's pet projects, such as investing in "rogue"

states.



9. (C) Summers added that Khan was a very difficult person to

work with. He was very smart but also very insecure. To

illustrate this, he told a story about a hunting trip Khan

had invited him on a few years ago. Khan had shown up for

the trip with not just his girl friend (Khan is married) but

also with six prostitutes. They had flown out to Khan's

hunting lodge, which Summers said was like a Four Seasons

hotel in the middle of nowhere. At dinner that evening, Khan

had told a stunned Summers that The Godfather was his

favorite movie, that he watched it every few months, and that

he considered it a "manual for life." Khan had also come to

dinner armed with a chrome-plated pistol.



10. (C) Summers said that after the trip he had gotten a copy

of The Godfather and now watched it on a regular basis

himself so as to better understand Khan and anticipate his

tactics. He added that Khan's aggressive but relatively

simple business style was typically Russian where

multi-million dollar deals are made in smoke-filled rooms in

a matter of a few hours and only later are turned over to the

accountants to see if they make sense. It was not a style

that meshed well with BP and that culture clash was in part

responsible for the acrimony of the dispute, as Khan had

never felt BP treated him with sufficient respect.



11. (C) Summers added that Khan had gone along with Deputy

Prime Minister Sechin on his trip to Cuba this week. Khan

had been very nervous about the trip, since he would not be

the headliner but instead would be surrounded by other

powerful Russian oligarchs, including Sechin and Gazprom's

Alexander Medvedev. Summers said nothing was likely to come

out of the trip. Cuba's potential deposits were small and

the geology was complicated. Even Khan was not really

interested and Summers doubted any other Russian oil company

would be interested either.



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Visa Update

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12. (C) TNK-BP's VP for International Relations, Amcit Shawn

McCormick, updated us the morning of August 1 on the visa

situation within the company. According to McCormick, work

visas have been trickling in all week for the foreign

employees, including a batch of 18 that morning. Although

the company is still waiting for 23 additional visas,

McCormick said that all of foreign employees in

"key/critical" positions, with the exception of Dudley, have

now received visas and work permits (this includes

McCormick).

RUBIN