The oil business has never been for the faint of heart. But think back, if you will, some five years to a time when the industry was nothing like it is today. In mid-2003, when a barrel of oil fetched about $30, BP made what was then the largest ever foreign investment in a Russian firm. The British company paid more than $6 billion for a 50% stake in TNK-BP, an oil outfit it set up with a consortium of four Russian billionaires. Vladimir Putin, Russia's President at the time, joined Tony Blair, then Britain's Prime Minister, in cheering the joint venture. TNK-BP's CEO, Robert Dudley, hailed it as a "momentous and exciting event" that would "set new benchmarks in the Russian oil and gas industry."
This deal, which created Russia's third-largest oil firm, still has the leaders of both countries talking. But their tone has changed. When current U.K. Prime Minister Gordon Brown brought up TNK-BP with Dmitri Medvedev, Putin's successor, on the sidelines of the G-8 summit on July 7, the uneasy discussion was of a breakdown in relations between the British and Russian partners. Meanwhile, Dudley, the company's BP-appointed boss, is battling to keep his job. In Moscow that same day, AAR, the Russian consortium that controls 50% of TNK-BP, called for his dismissal, claiming that the business was floundering.
Publicly, AAR's list of grievances is long. It claims, among other things, that TNK-BP operates too much like a BP subsidiary, resisting expansion beyond Russia to avoid stepping on the British firm's toes. Instead, the Russians want an independent CEO, and a culling of BP staff seconded to the Russian venture. AAR, led by Mikhail Fridman, TNK-BP's chairman, has even threatened legal action after its calls for more influence came to nothing.
For their part, TNK-BP's British executives defend the company's performance and mutter darkly that their Russian partners are maneuvering to take control of the venture. This dispute isn't TNK-BP's only headache, either. In recent months, Russian security services have raided the firm's premises as part of an industrial espionage probe, detaining a low-level employee (though TNK-BP itself was not involved in the investigation); officers at Russia's Interior Ministry have questioned Dudley as a witness in connection with another probe into tax evasion at a firm later absorbed into TNK-BP; and dozens of the company's foreign staff may have to leave Russia after authorities nixed requests to renew their work permits. BP suspects AAR may be behind the regulatory squeeze; the consortium insists that's nonsense.
Nonetheless, sweeping changes inside Russia's oil and gas sectors in recent years have dented Western investors' faith in the country's rule of law. Caught up in a state effort to claw back control of lucrative assets, some were left badly scarred. In 2006 BP rival Royal Dutch Shell was forced to give up control of the Sakhalin-2 oil and gas project off Russia's eastern coast after the country's environmental regulators threatened to shut it down. Gazprom, Russia's state-owned energy company, duly took over the operation.
Suspicions of a state raid on BP's Russian assets aren't surprising. Relations between the countries, already chilled by Britain's refusal to expel various critics of Russia's government, have been in a deep freeze since the murder of former Russian spy Alexander Litvinenko in London in 2006. Still, in the case of TNK-BP, it's hard to make out a government agenda. The squabble over work permits was at least partially resolved once it became public, and suspicions of tax evasion stem from the years prior to BP's involvement. Resolving the conflict, Medvedev has said, is up to the shareholders.
For companies yearning to cash in on Russia's immensely lucrative energy boom, there's an obvious business lesson: choose your partners carefully. The moment a lock-in agreement blocking either side from selling out expired in December, the competing interests of BP and AAR looked set for a collision. Oil giants like BP are used to investing for the long term, knowing that patience is key in this capital-intensive business. AAR would like a faster return. Both sides might have done better, in fact, if one had taken overall control. Indeed, Putin recently recalled warning BP in 2003 to "agree to one of you having a controlling stake" in order to avoid "frictions over who is the boss."
What could end all this bad blood? One possibility is that Gazprom might buy out the Russian billionaires, then take control of TNK-BP. Given the acrimony between BP and its partners, it's not hard to see why the Brits might welcome Gazprom. Likewise, Gazprom may be more attuned to the benefits of having a foreign partner with deep pockets and a long-term outlook. To help develop a vast gas field in the Barents Sea, Gazprom teamed up with Norwegian oil firm StatoilHydro and French giant Total last year, indicating there's still an openness to such partnerships, even as Russia gains confidence in its ability to fly solo. Moreover, Moscow is under pressure to reverse a worrisome slowdown in the nation's oil production. While the rules of the game keep changing, foreign investors know there are still fortunes to be made in Russia. But with no end to its feud in sight, BP continues to find itself over a barrel.