(C) TNK-BP END GAME?

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003297

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: 11/13/2018
TAGS: EPET, ENRG, ECON, PREL, RS
SUBJECT: (C) TNK-BP END GAME?

REF: MOSCOW 2941

Classified By: Econ MC Eric T. 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 November 7 that Russian shareholder German
Khan has effectively taken control of the company. He
confirmed that former Norilsk Nickel head Denis Morozov will
be the company's new CEO, but stressed that Khan would be
calling the shots. He said Khan is forcing out foreign
employees. McCormick plans to leave the company in
mid-December and expected less than 30 expats, none in senior
management positions, will remain beyond January 2009.
McCormick said GOR sources have told him that Khan's control
over the company may be short-lived. According to these
sources, the GOR plans to split TNK-BP into separate oil and
gas companies that would then be sold, respectively, to
Rosneft and Gazprom, with BP reduced to a minority
shareholder in both companies. End Summary.

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KHAN AND AAR TAKING OVER
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2. (C) TNK-BP Vice President for International Affairs Shawn
McCormick told us November 7 that AAR's months-long campaign
to wrest operational control of the company from BP were
close to fruition. The Russian shareholders, in the person
of Executive Director and Alfa partner German Khan, have
moved quickly and aggressively to exert maximum control over
the company's operations following their October agreement
with BP that "ended" the shareholder dispute.

3. (C) McCormick confirmed press rumors that former Norilsk
Nickel head Denis Morozov has been chosen to replace CEO
Robert Dudley, but stressed that the selection is
"irrelevant." McCormick maintained that the job description
of the new CEO could be summarized as "do what Khan says," as
Khan has, in effect, rendered the CEO just a "titular
position."

4. (C) According to McCormick, Russian shareholders Mikhail
Fridman (Khan's Alfa partner) and Len Blavatnik (Amcit),are
not interested in managing the company and are willing to
leave it to Khan. According to McCormick, Viktor Vekselberg,
the final AAR partner, is interested to some degree in the
gas side of the business, but is also backing Khan's effort
to gain operational control of the company.

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BP and the Barn Door
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5. (C) McCormick noted that BP has assigned an experienced
Russia-hand, David Peattie, as the new Group Vice President
overseeing BP's interests in TNK-BP. Peattie intends to be
in Moscow more often and to be more active in looking after
BP's interest in the company than his predecessor. He also
plans to make changes to the personnel in BP Russia and to
involve it in TNK-BP's management, a departure from its past
hands-off approach.

6. (C) However, McCormick said while these changes might have
made a difference six months ago, they are too little too
late to have an effect now. "BP had already given up" in
September when it agreed to removing Dudley and renegotiating
the original shareholder agreement (reftel). The outlook for
the company was now poor and McCormick told us that most of
the remaining foreign staff, including himself, COO Tim
Summers, and other senior management is leaving the company.
McCormick said his last day would be in mid-December. By
January 1, there would be only 25 or so foreign employees
left in the company (down from 130 plus another 150 BP
secondees before the dispute),of whom only 4 would have any
ties to BP and none would be a position of authority.

7. (C) McCormick said the drive to reduce the foreign
presence in TNK-BP was driven partly by the desire for
control and partly to cut costs. With oil prices collapsing
while production costs and taxes remained high, TNK-BP was
now losing $5 on every barrel of oil that it exported. The

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company had cut exports by 100,000 barrels but Khan had
sought to eliminate whole sections of the company to reduce
losses further. McCormick said Khan had now realized he had
gone too far and that he could not run the company
effectively without foreign expertise, but was having little
or no luck in convincing employees to stay or in recruiting
foreign replacements.

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GOVERNMENT TAKEOVER?
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8. (C) McCormick said Khan's control of the company might
prove short-lived. Well-placed contacts of his inside the
Russian government had told him earlier in the week that the
GOR's plan is to split TNK-BP into separate oil and gas
companies in 2009. According to these contacts, the oil
company would then be taken over by state-owned Rosneft and
the gas company would be taken over by state-owned Gazprom.
The contacts initially told him that BP would also be out,
but in a subsequent meeting on November 10, told him that it
might be allowed to stay on as a minority shareholder in one
or both of the companies. McCormick added that TNK-BP was
already on its way to becoming a "parastatal" as several of
its new executives were joining the company from the ranks of
the government.

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COMMENT
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9. (C) By most accounts, Khan is not only an inept manager,
with little knowledge of the oil business, but is even
perhaps mentally unstable. His ascension is likely to damage
seriously the company's prospects and BP's multi-billion
dollar investment. It is also likely to further damage
investor confidence in Russia. However, if McCormick's
sources are right, Khan and his partners will in turn be
hoisted on their own petard as Rosneft and Gazprom divide up
the company, dictate settlement terms to AAR, and in the
process perhaps inadvertently save BP's investment, albeit
with no control over the companies or their assets. End
comment.
BEYRLE