TNK-BP UPDATE: BP AND AAR SIGN MOU, BP INFLUENCE DILUTED, DUDLEY OUT

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002671



SIPDIS



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

EUR/CARC, SCA (GALLAGHER, SUMAR)

DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF



E.O. 12958: DECL: 09/04/2018

TAGS: EPET, ENRG, ECON, PREL, RS

SUBJECT: TNK-BP UPDATE: BP AND AAR SIGN MOU, BP INFLUENCE

DILUTED, DUDLEY OUT



REF: A. MOSCOW 2452 AND PREVIOUS

B. MOSCOW 2273

C. MOSCOW 2270



Classified By: Econ MC Eric T. Schultz for Reasons 1.4 (b/d)



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SUMMARY

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1. (C) On September 4, BP announced that it had reached an

agreement with AAR, its partners in TNK-BP, to resolve the

ongoing dispute (reftels) over the future of the company.

The agreement includes the departure of current CEO Bob

Dudley by December 1, a new board structure, and an option to

conduct an IPO in the "medium-term." TNK-BP VP for

International Affairs Shawn McCormick (protect) told us the

deal was bad for BP, which had "caved" because of the

company's deteriorating situation worldwide. BP Russia

President Richard Spies (protect) told us in a separate

meeting on September 4 that the deal was "good news." Spies

said BP retains ownership and dividend flows and the IPO will

have a disciplining effect on AAR's behavior. The agreement

is not yet legally adopted but should end the downward spiral

of the company. Overall, however, the damage to Russia's

investment climate is likely to linger. End summary.



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BP SEES IPO AS KEY

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2. (SBU) Following months of behind-the-scenes negotiations

led by BP CEO Tony Hayward and AAR partner Mikhail Fridman,

the two sides have come to an agreement spelling out a way

forward for TNK-BP, their embattled joint venture.



3. (C) Perhaps the most valuable part of the agreement for BP

is the stipulation that the partners will prepare to issue an

IPO of up to 20% of TNK-BP Holding, the main subsidiary of

TNK-BP Ltd. According to Spies, AAR's interest in raising

the value of the company in preparation for the IPO should

prevent AAR from pulling too much cash out of the company,

either in dividends or by even less transparent means.

McCormick agreed that the IPO was the most valuable part of

the deal for BP. According to Spies, the IPO would only take

place in the medium-term (1-2 years),as AAR seeks to bolster

the value of the company before a sale and overcome the

current market and investor malaise.



4. (C) The AAR partners have reportedly long sought a way to

cash-out some of their stake in the company and have wanted a

more convincing benchmark for TNK-BP's true market value than

is provided by the current 3% float. In addition, the IPO

would bring in foreign shareholders less likely to accept any

attempt by state firms to later acquire any part of TNK-BP at

a discount to market. (Note: The BVI-registered TNK-BP Ltd.

will continue to be owned 50-50 by BP and AAR. The floated

shares will not allow shareholders much, if any, say in the

operations of the company, which would still answer to TNK-BP

Ltd. End note.)



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CHANGES TO TOP MANAGEMENT WEAKEN GOVERNANCE

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5. (C) Both Spies and McCormick confirmed that BP had agreed

to the removal of Bob Dudley as CEO. Spies said both sides

are currently reviewing possible candidates to replace

Dudley, who will leave his post December 1. He told us BP

agreed to nominate a CEO who is not affiliated with BP or

AAR, who has extensive management experience in Russia, and

who has excellent Russian language skills -- "in effect, a

Russian." He added that Dudley would be looked after by both

BP and AAR. McCormick noted that a key check on AAR's

influence has always been specific legal powers entrusted to

the person of Bob Dudley. He expressed concern that these

powers would be diluted under a new CEO.



6. (C) While BP's statement on the deal stressed the

importance of corporate governance and transparency,

McCormick said he believes the deal specifically reduces the

ability of BP to control either. He said the new make-up of

the board, to include three "independent" members to be

agreed upon by both sides, will likely favor AAR, taking away



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the critical 50-50 arrangement that was the major check on

AAR malfeasance. Moreover, McCormick said AAR co-owners

Viktor Vekselberg and German Khan will remain in their

current positions as part of the "core" leadership of the

company, further diluting BP's influence. For his part,

Spies stressed that the agreement includes a mechanism to

ensure the independence of the new directors by requiring

arbitration if the two sides can't agree on a director.



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EXPATS

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7. (C) McCormick said the contentious issue of foreign

employees remains to be worked out. He noted however, that

slightly less than 60 expat employees remain at the company,

down from about 235 in June. He added that he thinks nearly

all remaining foreigners have an eye out to leave the

company, with most having no interest in going to work for

BP. McCormick said in strictest confidence that James Owen,

the CFO who resigned recently resigned, left because he was

increasingly being pressured by the AAR owners to sign

accounting and financial documents that were patently

falsified. According to contacts at the French embassy here,

Tony Considine, in charge of refining and marketing and one

of the most widely respected expats in the Russian oil

sector, left the company in part because he couldn't do his

job in the face of pressure to redirect oil and other

products to AAR-favored traders.



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A GOOD DEAL, OR DID BP CAVE?

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8. (C) Spies called the deal "good news" in that it allows

the company to keep its 50% share and remain in Russia. In

addition to Spies' spin, BP's press release on the deal is

also positive while AAR's release is relatively glowing and

includes quotes from Deputy Premier Igor Sechin and

Presidential Aide Arkady Dvorkovich praising the deal as

sending a "positive signal for the Russian market." Indeed,

Spies said BP understands that AAR arranged for this deal to

receive a "nod from appropriate levels." Spies was

"optimistic" that TNK-BP's various administrative problems

(reftels) -- labor code violations, tax inspections, visa

troubles -- would "go into hibernation."



9. (C) Despite the public pronouncements, however, it appears

BP got less than it gave. Both Spies and McCormick noted

that AAR got basically all it wanted, including the green

light on some international expansion that was more limited

in the original shareholder agreement. Spies admitted that

although neither he nor anyone in BP would "officially" say

so, BP's power has been diluted under the new deal.

McCormick expressed general frustration with BP for not

having defended its interests forcefully enough. He said BP

had been forced to give in by its deteriorating situation

worldwide. BP's stock was down 30 percent in recent months

and there were credible reports of potential takeover

attempts by Chevron and others. In addition, he said BP had

gotten wind that Standard and Poor's was considering lowering

BP's credit rating. This had caused BP Chairman Peter

Sutherland, who had been opposed to the deal, to shift 180

degrees.



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WILL IT HOLD?

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10. (C) According to McCormick and Spies, the MOU signed by

the two sides is still not a binding document, but a

"blueprint" for a binding contract that should be completed

by the end of the year. Alfa Bank Chief Strategist Ron Smith

told us September 5 that the agreement "appears to be the

real deal," allowing the company to move forward. Chris

Weafer, chief strategist of investment bank UralSib, was more

cautious, suggesting in press statements that TNK-BP has much

work to do to regain investor confidence. In a private

e-mail exchange with us, Weafer predicted that the deal would

probably break down by early spring. Weafer also did not

discount the possibility that a GOR-approved takeover by

Gazprom (or Rosneft) might still be in the cards.



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MOSCOW 00002671 003 OF 003





COMMENT

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11. (C) BP may have gotten the best deal it could have under

the circumstances. They preserved their sizable investment

and have stabilized the company's downward spiral for now.

That said, it would appear they got the short end of the

stick and their control of the company has been weakened. In

addition, while the deal is likely to increase TNK-BP's

short-term value, it may not have much of an effect on

overall investor confidence given that AAR's tactics may be

seen as successful and therefore might be repeated.

BEYRLE