(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