By Torrey Clark and Eduard Gismatullin
Sept. 4 (Bloomberg) -- BP Plc and its billionaire partners in TNK-BP, Russia's third-largest oil company, agreed to oust the chief executive officer and expand the board to resolve an eight-month dispute that threatened the British company's future in the country.
TNK-BP CEO Robert Dudley will step down by the end of the year, the partners said today in e-mailed statements. The shareholders will also examine selling shares in a unit of TNK- BP Ltd., to boost the company's market value, and will bring three independent directors onto the board. BP rose as much as 4.9 percent in London trading, the biggest gain since April 29.
The accord leaves BP with its stake in the 50-50 venture intact while acceding to demands by the Russian billionaires for a more independent board. TNK-BP accounts for almost a quarter of BP's global output and reserves and Russia is the world's second-largest oil exporter. The dispute hit TNK-BP's output and discouraged investors in the Russian stock market, contributing to a 30 percent decline in the Micex index this year.
It's ``certainly positive to see a plan for cessation of hostilities, with BP preserving its 50 percent stake and an opportunity to release part of the value via an initial public offering,'' Ivor Pether, who helps oversee about $17 billion at Royal London Asset Management, said today. ``But it's hard to envisage who would qualify as an independent director,'' given how polarized the dispute was, he said.
Billionaires' Demands
Russian investors Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik made removing Dudley, who has headed the venture since it was formed in 2003, central to negotiations, saying he favored BP's interests over theirs. The American executive and London-based BP both denied that.
The shareholders agreed to expand the board of TNK-BP Ltd. to 11 directors, four from each side and three independents. The current board has 10 members, split evenly between BP and AAR, which represents the Russian billionaires, the companies said.
The Kremlin has emerged as the winner in previous squabbles in the Russian energy industry, as then-President Vladimir Putin sought to strengthen the state's control over assets. Last year, Royal Dutch Shell Plc sold a controlling interest in its $22 billion Sakhalin Island oil and natural gas project to OAO Gazprom, the state-controlled energy company. Shell's move came after a government environmental watchdog threatened to revoke permits and stop work at the project.
Medvedev's Challenge
OAO Yukos Oil Co. was bankrupted after the government claimed more than $30 billion in back taxes. The company's founder, Mikhail Khodorkovsky, is serving eight years in a Siberian labor camp. Rosneft, under Sechin's watch, acquired many of Yukos's assets in government auctions to pay the tax claims.
For President Dmitry Medvedev, who took office in May, TNK- BP was the first big test of his energy policies. Medvedev was chairman of Gazprom for six years as the gas producer and pipeline owner grew to be the third-largest company in the world by market capitalization. The TNK-BP dispute is part of a wider global trend in which state-controlled energy companies are battling international rivals for access to oil and gas.
Clashes with foreign investors may hobble Russia's ability to tap its energy. The country's oil output has begun to fall this year -- to 9.8 million barrels a day in August from a peak of 9.9 million in late 2007. For much of the past decade, Russia was among the biggest contributors of new global supply.
Government Support
``We're glad that the situation was resolved and the participants in the talks reached'' the agreement ``without bringing in third parties including the government,'' Deputy Prime Minister Igor Sechin said in the AAR statement. ``We support the development of TNK-BP and believe that this company shows excellent long-term potential.''
BP traded 16.5 pence, or 3.3 percent, higher at 522.5 at 12:56 p.m. London time. OAO TNK-BP Holding, a unit whose shares trade in Moscow, rose 18 cents, or 11 percent, to $1.78. About 5 percent of the stock is publicly traded, while the British-Russian venture holds the rest.
Dudley left Russia July 24, citing ``sustained harassment'' amid court battles and labor and tax inspections that led to him being disqualified from his post in Russia for two years. TNK-BP has appealed the disqualification decision.
The agreement will free the venture of ``this significant distraction and the uncertainties around the company's business plan and capital expenditure,'' Dudley said today in a statement e-mailed by TNK-BP.
New CEO
A new TNK-BP CEO will be nominated by BP and will require the board's unanimous approval. The executive will have the right to decide on the number of foreigners and employees contracted from BP at the venture.
``Bob is going to work through the transition; he is then going to go off on a decent break,'' BP Chief Executive Officer Tony Hayward said today in telephone interview. ``My expectation is that he will return in a senior role for BP.'' Hayward said BP has ``half a dozen'' candidates short-listed to replace him.
TNK-BP lost almost half its foreign staff after clashes between BP and the billionaires over visas and work permits earlier this year. BP had to withdraw about 150 secondees at TNK-BP who hadn't been allowed to work at the venture since March.
Bonds of TNK-BP rose to the highest in a month. That reduced the yield on TNK-BP's $1.1 billion of 10-year 7.875 percent bonds to 9.05 percent from close to a record-high of 9.51 percent, according to prices on Bloomberg at 1:20 p.m. in Moscow.
Investment Proposals
AAR has pushed for TNK-BP to expand internationally and has proposed investments in Poland, Germany, northern Iraq and elsewhere. BP's directors have shot down most of these proposals, according to AAR.
In July, TNK-BP signed an agreement with Venezuela to study a possible joint project in the Latin American country's Orinoco region, where heavy oil is produced. TNK-BP also plans now to expand in Turkmenistan and possibly compete with BP for the central Asian nation's fields.
``We are interested in developing large projects with the active participation of foreign investors,'' Arkady Dvorkovich, an aide to Medvedev, said today in the AAR statement. ``TNK-BP is one of the most ambitious and promising projects of this type.''
To contact the reporters on this story: Torrey Clark in Moscow at tclark8@bloomberg.net. Eduard Gismatullin in London at egismatullin@bloomberg.net
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