International Comparative case report

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908M99 BP IN RUSSIA: SETTLING THE JOINT VENTURE DISPUTE1 Gevork Papiryan wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2008, Ivey Management Services Version: (A) 2008-12-10

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of British Petroleum, TNK-BP, Alfa Group, Access Industries, Renova or any of their employees.

In September 2003, British Petroleum (BP) formed a 50/50 international joint venture company, TNK-BP, with a group of Russian investors: Alfa Group, Access Industries and Renova (AAR). This joint venture (JV) was established as a result of the merger of Russian oil companies TNK and Sidanko, owned by AAR, with the majority of BP’s Russian oil assets. The founders of TNK-BP aimed to make it a world- class energy company. The country’s leadership supported this promising project, which could give Russia the chance to modernize its energy industry. In June 2004, the Vedomosti, Russia’s leading business daily, announced that 300 out of 1400 workers had quit their jobs at TNK-BP’s headquarters in Moscow in the past year. In response, the leadership of TNK- BP was in the process of creating a corporate organization and culture, as well as leadership philosophy, to respond to such challenges. On May 26, 2008, TNK-BP’s chief executive officer (CEO), Robert Dudley, told Vedomosti about a conflict between British and Russian shareholders. During this dispute, AAR declared that BP treated TNK-BP as its subsidiary and not as a JV. Also, the Russian shareholders criticized the JV’s leadership of the company’s expansion strategy and climate. The conflict escalated during the subsequent months. Given this situation, BP’s leadership needed to decide whether to walk away or continue its participation in the JV. MAJOR WORLD ENERGY COMPANIES The year 1998 was a dramatic one for the world oil industry as oil prices continued to decrease. During that period, BP merged with the American company Amoco Corporation (August 1998) and later bought another American company, ARCO (April 1999), turning the company into one of the world’s largest oil companies. At the same time, the consolidation process in the world oil industry began.

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By 2008, BP remained one of the 10 largest companies in the world, with $232 billion of enterprise value. The company operated on a material scale in six continents and in more than 100 countries and employed 97,600 people (2,300 people worked in Russia just as BP employees). BP had proved reserves of 17.8 billion barrels of oil equivalent and its daily production was 2.4 million barrels of oil and natural gas liquids (NGLs) and 8.1 billion cubic feet of natural gas (1.4 million barrels of oil equivalent). The company’s annual revenues as of 2007 were $284 billion. BP operated 25,000 retail sites globally and 2,100 of them were in the Russian Federation and Ukraine. These sites were serving 13 million customers per day.2 During the consolidation period — due in part to mergers and acquisitions — other major global energy companies were formed, including Exxon Mobil Corporation, Chevron, TOTAL and ConocoPhillips. These significant non-state-owned players of the global energy market were among the world’s top 10 largest oil companies in 2006 (see Exhibit 1).3 Exxon Mobil was the largest U.S. integrated oil company and one of the world’s leading integrated oil companies. This U.S.-based company was formed by the merger of Exxon and Mobil in 1999. The company had proved reserves of 13.2 billion barrels of oil equivalent and produced 6.3 million barrels of oil per day in its 38 refineries. Exxon Mobil operated 34,000 service stations around the world under the Exxon, Mobil and Esso brands. The company had approximately $390 billion in annual revenue and earned $40.6 billion in 2007.4 Royal Dutch Shell was a U.K./Netherlands oil and gas group and another of the major energy companies. The company was created in 1907 when Royal Dutch (Netherlands) and Shell Transport (Britain) merged. There were two separate holding companies, with Royal Dutch taking 60 per cent of earnings and Shell Transport taking 40 per cent. In 2005, the group underwent a major structural reorganization as the near- century-old partnership dissolved and one company was created, Royal Dutch Shell (Shell). The group had proved reserves of 11.9 billion barrels of oil equivalent and operated more than 46,000 stations worldwide. The company had approximately $356 billion in revenue and $31.3 billion in net income in 2007.5 The Chevron Corporation (formerly Chevron Texaco) was the second largest U.S. integrated oil company. This company was formed by Chevron’s acquisition of Texaco, completed in 2001. The company operated more than 25,100 gas stations under the brand names Chevron, Texaco and Caltex. The daily production of Chevron was 2.6 million barrels of oil equivalent and its proved reserves were 10.8 billion barrels of oil equivalent. In 2007, the company’s sales and net income were estimated at $221 billion and $19 billion, respectively.6 TOTAL was one of the world’s largest energy groups and based in Paris. The company was founded in 1924 and operated under the name Compagnie Francaise des Petroles (CFP). This French company renamed itself TOTAL in 1991 and bought the Belgium-based PetroFina in 1999. The newly formed company, TOTAL FINA, after the acquisition of another French company, Elf Aquitaine, became

2 Corporate site of BP, www.bp.com/extendedsectiongenericarticle.do?categoryId=9021229&contentId=7039276, accessed September 20, 2008. 3 “PIW Ranks The World’s Top Oil Companies,” Energy Intelligence Group, Inc., 2006, www.energyintel.com/documentdetail.asp?document_id=137158, accessed August 27, 2008. 4 Corporate sites of Exxon Mobil, www.exxonmobil.com/corporate/files/news_pub_fo_2007.pdf, and Hoovers, www.hoovers.com, accessed September 25, 2008. 5 Corporate sites of Royal Dutch Shell, www.shell.com/home/content/aboutshell/who_we_are/our_history/dir_our_history_14112006.html, and Hoovers, www.hoovers.com, sites accessed September 25, 2005. 6 Corporate site of Hoovers, www.hoovers.com, accessed September 22, 2008.

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TotalFinaElf in 2000. The company changed its name to TOTAL S.A. in 2003. In 2007, the company’s sales were approximately $234 billion, with a $20 billion net income. TOTAL had interests in 25 refineries (and directly operated 12) and more than 16,000 Total, Elf and Fina branded gas stations, mostly in Europe and Africa. The company’s proved reserves were 10.5 billion barrels of oil equivalent.7 ConocoPhillips, formed by the merger of Conoco and Phillips Petroleum in 2002, was the third-largest integrated energy company in the United States, based on market capitalization, oil and gas reserves. The company explored for oil and gas in more than 30 countries and had estimated proved reserves of 11.2 billion barrels of oil equivalent, excluding its Syncrude (Canadian oil sands) assets. It had a refining capacity of more than 2.7 barrels per day and sold petroleum at 8,750 retail outlets in the United States under the 76, Conoco and Phillips 66 brands. In 2007, the company’s sales and net income were estimated at $195 billion and $12 billion, respectively.8 From 1999, oil prices began to rise. The growth of the world economy at large (about four per cent) and increase of demand in the world’s faster-growing economies, such as China and India, became the main economic reasons for the significant increase of oil prices during the first years of the new century. Because of this situation, the major oil companies were trying to increase their production via the exploration and development of new oil fields in significant regions of the world, such as West Africa, the Middle East and Russia. BP was making significant investments in these regions. RUSSIAN OIL INDUSTRY Privatization In 1992, after the Soviet Union collapsed, reforms started in the Russian oil industry. From the beginning, Russian reformers needed to solve the main problem: demonopolize the hardly-centralized oil industry, which Russia inherited from the Soviet Union, by turning the Russian Ministry of Oil into separate companies. As a result, companies like Lukoil, Surgutneftegas, YUKOS, Sidanko, Slavneft, VNK, ONAKO, TNK, Sibneft, Tatneft, Bashneft and KomiTEK were formed during the period from 1992 to 1995. Simultaneously with the demonopolization policy, the Russian government began a privatization policy in its oil industry. In this stage of privatization, which was known as voucher privatization, companies became joint stock companies and the government gave companies’ shares to their managers and employees. In 1995, the second stage of privatization in the Russian oil industry started, with the active participation of Russian banks. Russian credit organizations, which made their capital in the country’s exchange and short- term credit markets during periods of high inflation, offered their help to the Russian government to decrease the state budget’s deficit. As a result, the government agreed to borrow money from its banks and mortgage its stakes of large companies. However, the government could not return borrowed credit and was forced to sell its shares in auctions in 1996. In addition, political motives played a role. In Russia, many people believed that Russian bankers helped Boris Yeltsin to be elected president of the Russian Federation in 1996 and possibly were rewarded.

7 Corporate sites of TOTAL, www.total.com/en/group/presentation/history, and Hoovers, www.hoovers.com, sites accessed September 26, 2008. 8 Corporate sites of ConocoPhillips, www.conocophillips.com/about/who_we_are/index.htm, and Hoovers, www.hoovers.com, sites accessed September 27, 2008.

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As a result, banks received stakes in oil companies, which before were owned by the state. For example, bank Menatep bought 45 per cent of YUKOS and bank ONEXIM bought 51 per cent of Sidanko. Meanwhile, the banks did not pay much money for their stakes. For example, the government sold its stake in YUKOS for just $160.1 million. Later, the Russian government started to sell its stakes for a higher price. For example, TNK was sold to group Alfa for $1.2 billion in two auctions in 1998 and 1999. In the meantime, TNK’s reserves in that period were significantly less than other companies’ reserves, which were sold earlier. After the massive privatization during the 1990s, total state ownership of oil companies decreased significantly. Only one company, Rosneft, remained a state company. Some others, such as Slavneft, Bashneft and Tatneft, partially remained state companies. For example, the government of the local Tatar Republic owned a third of Tatneft. Newly formed private companies were either controlled by their own management, as were Lukoil and Surgutneftegas, or became part of large financial/industrial groups, as did YUKOS, Sidanko, TNK and Sibneft. Soon the oil companies, which had been sold to financial/industrial groups, started the restructurization process: removing non-profitable assets from their structures, decreasing personnel and increasing their effectiveness. The financial/industrial groups offering this restructurization were trying to increase their financial resources to invest in other fast-growing Russian industries, such as telecommunications, real estate and banking. Despite the process of demonopolization and privatization, oil production in Russia during the economic reform period was significantly lower than during the Soviet period. For example, in 1998, 303 million tons were produced, against 569 million tons in 1988.9 Oil production decreases were caused by several problems, such as aging oil wells, leaking pipelines, a lack of new drilling, etc. There were also major structural changes inside the industry when the state oil ministry was replaced by large vertically integrated oil companies (VIOCs). The decrease of oil production during the period from 1994 to 1999 in Russia at large was connected with the production decrease within these companies (see Exhibit 2). In 2001, the Russian oil industry had eleven large vertically integrated companies, which extracted 82.2 per cent of the total extracted oil in Russia. These companies owned 78.8 per cent of the oil refining capacity. After 2001, the effectiveness of Russian vertically integrated oil companies began to rise, compared to in the 1990s. If the total growth level for Russia was nine per cent, then these separate companies increased their effectiveness in the range of 20 to 30 per cent (see Exhibit 3). The private companies were more effective among newly founded oil companies. The private companies also more actively implemented market strategies than their state colleagues. They paid more attention to restructuring and social responsibility issues. Thanks to reforms, Russia’s oil industry was to regain much of its former production and made important advances in technology, management and operating efficiency. During the period from 2000 to 2004, Russian oil production grew at double-digit rates. As a result, the country became a new key player in the global market and provided 40 per cent of global oil production growth in 2001 to 2005.10 9 Grigoriy Vigon and Lev Ratnovskiy, “Problems of Oil Industry and Their Solutions,” Special Survey of Institute Financial Researches, May 3, 2000, in Russian. 10 TNK-BP Brochure, 2007.

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Foreign Direct Investments During the period from 1994 to 1999, the oil production of JVs between relatively small Russian companies and foreign companies displayed an opposite dynamic as compared with VIOCs. The proportion of JV oil production increased from 3.95 per cent in 1994 to 6.89 per cent in 1999 (see Exhibit 2). However, the consolidation of the Russian oil industry and changes in the country’s tax policy stopped the further increase of international joint ventures. (The first international joint ventures in the region’s oil industry were launched in 1989.) Moreover, many of them were closed or became a part of VIOCs, as their affiliated companies. During the second half of the 1990s, in order for Russia to bring in foreign investments and modernize its oil industry, it started to use internationally recognized production sharing agreements (PSAs) in addition to JVs. By some estimates, Russia needed to spend $40 billion to $50 billion per year just to maintain oil production at its current level. PSAs also began to replace the Russian tax regime, which was changing very often. This agreement was a contract between foreign investors and the host country and had the status of law. The Russian parliament was passing such laws, which left the ownership of natural resources with the state but allowed developers a defined share of future revenues. The Russian Ministry for Economic Development was responsible for the realization of PSAs in Russian territory.11 In the 1990s, the Russian government tried to enact such legislation but parliament, where communists dominated, resisted any attempt to pass such laws. Later the Russian companies, who had grown in strength and did not have any interest in competition from foreign companies, also started to impede PSAs. Nevertheless, three PSAs were implemented in promising Russian territories by 2008: Sakhalin-1, Sakhalin-2 and Khariaga. The PSA agreement for the Khariaga field was signed in 1995. In this project the main operator was the French energy company TOTAL (50 per cent), then its partners Norwegian Norsk Hydro (40 per cent) and Russian Nenets Oil Company (10 per cent). The consortium was producing approximately 900 thousand tons (6.6 million barrels) of oil annually. Reserves of the Khariaga field were estimated to be 160.4 million tons (1.2 billion barrels) of oil.12 The Sakhalin-1 Project, for which PSA took effect in 1996, was an oil and gas development on the northeast shelf of Sakhalin Island. Total recoverable reserves were estimated to be 307 million tons (2.3 billion barrels) of oil and 485 billion cubic meters (17.1 trillion cubic feet) of natural gas. The Sakhalin-1 Project’s operator was Exxon Neftegas Limited (ENL), an affiliate of Exxon Mobil (30 per cent interest). The other participants in the Sakhalin-1 consortium were the Russian company Rosneft (20 per cent), the Japanese company SODECO (30 per cent) and India’s ONGC (20 per cent). The consortium produced 11.2 million tons of oil in 2007 and reached a peak production of 34,000 tons (250,000 barrels) of oil per day in the first quarter of the same year.13 The Sakhalin-2 PSA was the oldest PSA in Russia and was signed in June 1994. This project was the largest single foreign direct investment project in Russia, with approximately $10 billion. Reserves were

11 Besides the Ministry for Economic Development, some state bodies also regulated the country’s oil industry. Among them were the Ministry of Natural Resources, which gave licenses for oil and gas fields’ development and monitors; the Federal Tariff Service, which regulated prices and tariffs of natural monopolies; and the State Antimonopoly Service, which regulated operations of monopolies. 12 “Russia Approves 2007 Kharyaga Cost Rise for Total to $164mln,” RIA Novosty, July 12, 2007, http://en.rian.ru/russia/20070712/68863373.html, accessed September 28, 2008. 13 Web site of the Sakhalin-1 Project, www.sakhalin1.com/en, and corporate site of Exxon Mobil,www.exonmobil.co.uk/Corporate/news_publications_sakhalin.aspx, sites accessed September 27, 2008.

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estimated to be 163 million tons (1.2 billion barrels) of oil and 500 billion cubic meters (18 trillion cubic feet) of natural gas. Sakhalin Energy Investment Company Ltd. (SEIC) was the operating company for this PSA. From the beginning, three companies, Shell, Mitsui (Japan) and Mitsubishi (Japan), were the company’s shareholders with 55 per cent, 25 per cent and 20 per cent shares in the project, respectively. On April 18, 2007, SEIC shareholders signed a Sale and Purchase Agreement with Gazprom14 to trigger the transfer of shares in SEIC. Under the new shareholding structure of SEIC, Gazprom held 50 per cent plus one share, Shell held 27.5 per cent, Mitsui held 12.5 per cent and Mitsubishi held 10 per cent.15 Problems 1. Russian oil reserves were increasing. The country was eighth among the leading countries with proven

reserves of oil (see Exhibit 4). However, the main reason behind the increase in reserves was the exploration of existing oil fields. The opening of new oil fields in 2008 was modest both in existing oil regions and new, promising oil regions of Russia.

2. In the Russian oil reserve’s structure, the proportion of hard, extractive reserves was increasing. Also,

existing production assets were declining. To solve these problems, Russia needed new technologies. In the mid-1990s, Russia received credit from the World Bank for the purchase of new equipment for the rehabilitation of its production assets. This credit helped but did not solve the problem completely.

3. The Russian government’s tax policy in the oil industry was not very economically effective and had

some inadequacies. For example, the main taxpayers of the industry were oil producers and refineries, which needed more investments for new technologies and innovation. In the meantime, the retailers and especially wholesalers (many of them registered in offshore zones) were paying small taxes. Also, the existence of one tax regime for the main group of companies and the other tax regime for a smaller group of companies, who signed the PSA with the government, disturbed the competition within the industry.

4. In the structure of the current Russian oil industry, there was an oligopoly of a dozen VIOCs. Several

companies had a strong influence on different Russian oil regions. The Russian government during the 1990s changed the structure of the country’s oil industry and created large VIOCs in place of the state oil ministry. The main idea was to make Russian companies competitive in world markets but these companies were impeding competition within the Russian oil industry.

5. In the context of weak institutions, many current problems inside the Russian oil industry were being

solved by personal contacts between companies’ leadership and officials at both the local and federal levels. The Russian leadership was currently trying to fix the situation by both strengthening institutions and weakening the influence of oligarchs on the decision-making process.

6. In the Russian oil business and in Russian business at large, the top managers of companies were also

their big stakeholders. In this situation it was difficult to determine the real ownership and cash flow of

14 Gazprom was the world’s largest gas company. The Russian state owned a 50.002 per cent controlling stake in the company. 15 Corporate site of Sakhalin Energy, www.sakhalinenergy.ru/en/ataglance.asp?p--aag_main&s=14, accessed September 29, 2008.

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the firms. Also, the lack of transparency made firms unattractive for investors and created grounds for tax evasion.

7. A significant problem for oil companies operating in Russia was the country’s export taxation. The oil

export duty was revised every two months and was rising continuously. It was calculated using a special formula based on the average price of Russian oil on the world market in the preceding two months. The Russian government planned to change its current tax policy and wanted to make it more favorable for companies.

8. A significant problem for Russian companies was the attempt to transfer both technology and

management skills from the West during the country’s economic transformation. At the same time, Russia restricted the flow of managers and executives from other countries. With this restriction, the Russian government was trying to stimulate foreign as well as local companies to hire Russian specialists and managers. Russian authorities thought that the current Russian labor market welcomed local specialists and managers, who received training and education in foreign countries as well as in local prestigious institutions or had sufficient knowledge to learn foreign standards after a short training period.

BP IN RUSSIA History In November 1997, the Russian government opened its oil and gas industries to foreign investment. The decree signed by Russian President Boris Yeltsin allowed foreign investors to buy 100 per cent of Russian oil companies. Foreign companies responded to this event immediately. Among them was BP, which announced that it would purchase 10 per cent of the Russian company Sidanko from the large Russian bank OneximBank. This acquisition gave BP a stake in a huge oil field near the Chinese border. From its merger with Arco in 1999, BP inherited the LukArco JV, which was a partnership with Russian energy giant Lukoil. The biggest holding of LukArco within the territory of the Russian Federation was a 12.5 per cent stake in the Caspian Pipeline Consortium (CPC),16 which was the only privately held pipeline on Russian territory. In 1998, BP formed an alliance in partnership with Rosneft, which was the only state oil company in Russia (BP owned 49 per cent and Rosneft, 51 per cent), to explore the north part of Sakhalin Island. In 2004, the operational companies were created to develop oil and gas fields on the Sakhalin-4 and Sakhalin- 5 territories. Together, all fields contained recoverable reserves of more than 700 million tons of oil and 670 billion cubic meters of natural gas. 16 Also, BP led a consortium of energy companies (with a 30.10 per cent share) that owned a Baku-Tbilisi-Ceyhan (BTC) pipeline in the Caspian Sea region. The consortium’s other shareholders were State Oil Company of Azerbaijan, SOCAR (25.00 per cent share); Chevron (8.90 per cent share); StatoilHydro (8.71 per cent share); Turkiye Petrolleri Anonim Ortakligi, TPAO (6.53 per cent share); Eni/Agip (5.00 per cent share); TOTAL (5.00 per cent share); Itochu (3.40 per cent share); INPEX (2.50 per cent share); ConocoPhillips (2.50 per cent share); and Amerada Hess (2.36 per cent share). Operation of the BTC pipeline started on May 10, 2005. Also, BP (25.50 per cent share) with StatoilHydro (25.50 per cent share) led a consortium that commissioned the South Caucasian Pipeline (Baku-Tbilisi-Erzurum BTE gas pipeline). The pipeline ran in the same corridor as the BTC pipeline. Other participants of the consortium were State Oil Company of Azerbaijan, SOCAR (10.00 per cent share); LukAgip, a joint company of Lukoil and Eni (10.00 per cent share); TOTAL (10.00 per cent share); Oil Industries Engineering and Construction, OIEC (10.00 per cent share); and Turkiye Petrolleri Anonim Ortakligi, TPAO (9.00 per cent share). Operation of the BTC pipeline started on May 21, 2006.

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In addition to these significant investments, BP also had a strong and growing consumer lubricants business, which had a turnover of about 90 million dollars in 2004. The company had a relatively small marine lubricants business in St. Petersburg with a turnover of about 30 million dollars in 2004. Air BP, which supplied fuels at the local airports, was the largest non-pipeline lifter of Russian crude oil and exporter to world markets. In September 2003, BP formed a joint-venture company TNK-BP. This company was established as a result of the merger of Russian oil companies TNK and Sidanko with the majority of BP’s Russian oil assets. This merger gave Russia a chance to create a modern world-class company and modernize its oil industry. For BP, this $7.7 billion investment “rather was in some respects a concluding point in a process that had been going on since 1997.”17 Major Foreign Competitors in the Russian Market Shell Shell was one of the oldest operators in Russian territory, along with other large foreign energy companies. Besides its participation in the above-mentioned Sakhalin-2 PSA, Shell participated in other alliances with Russian companies. In 1996, Shell’s affiliate company, Shell Salym Development BV, founded a 50/50 JV company, Salym Petroleum Development NV (SPD), with the Russian company OAO NK Evikhon to develop the Salym group of fields in west Siberia (the field would be operated in accordance with Shell’s operational and business practices and standards). SPD held production licenses for all the fields in the territory. In 2007, SPD’s total oil production in the Salym fields increased more than twice compared with 2006 and was 4.26 million tons. Total daily production exceeded 120,000 barrels per day (16,500 tons per day).18 Chevron The Caspian Pipeline Consortium (CPC) was established in 1992 by the governments of the Russian Federation and the Republic of Kazakhstan, as well as the Sultanate of Oman. Chevron was the largest private shareholder in this project, with a 15 per cent stake. The $2.6 billion CPC project consisted of a 1,505-kilometer (935-mile) pipeline that ran from the Tengiz oil field in western Kazakhstan to the Black Sea marine terminal Novorossiysk-2 in Russia. Among others, BP, Exxon Mobil and Shell were participating in this consortium. They had 12.5 per cent, 7.5 per cent and 7.5 per cent shares, respectively. Approximately 85 per cent ($2.2 billion) of the total project expenditure took place in Russian territory. Chevron funded 30 per cent (about $800 million) of the initial construction costs of the CPC pipeline. Chevron began selling its products in the Russian market in the late 1990s. As a result of its significant market share growth, in November 2004 the company created a wholly-owned subsidiary to market and manage the distribution of its Texaco and Chevron brands’ products in Russia.

17 Speech of Peter Charow, president of British Petroleum Russia, at the 6th Annual AmCham Investment Conference: The Economy and Investment Climate in Russia, March 29, 2005, www.amcham.ru/userupload/amcham/Seminars/2005/Transcript_032905.doc, accessed October 7, 2008. 18 Corporate site of Salym Petroleum Development, www.spdnv.ruindex.php?s=116, accessed August 25, 2008.

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TOTAL TOTAL was participating in several projects in the Russian oil market. Its main project was the PSA project in Khariaga field. In this project the company was the main operator with 50 per cent share. During the 2000s, TOTAL increased its participation in the Russian oil business significantly. In October 2003, TOTAL and Rosneft formed a JV under equal ownership to explore and develop the Tuapse Trench in the Black Sea. The Russian partner of this project received the exploration license for the 12,000-square- kilometer offshore area in August 2003. The French energy giant’s acquisition of an interest in this project was in line with the company’s strategy of expanding deep offshore holdings worldwide. In February 2008, TOTAL, Gazprom and StatoilHydro formed a strategic partnership to develop the Shtokman field.19 Gazprom held a 51 per cent stake in the registered, Swiss, joint company Shtokman Development AG, while TOTAL held 25 per cent and StatoilHydro held 24 per cent. This project, according to its participants, could guarantee reliable and long-term gas supplies for European consumers.20 ConocoPhillips ConocoPhillips had a presence in Russia since January 1992, when the Russian company Polar Lights Company (PLC) was established to develop the Ardalin field (located in the Timan-Pechora province in northwest Russia, above the Arctic Circle). Also, ConocoPhillips finalized the creation of the JV company Naryanmarneftegaz (NMNG) with the Russian company Lukoil in 2005. This company was governed 50/50 by Lukoil and ConocoPhillips and was expected to be producing and marketing approximately 200,000 barrels of oil per day by 2008.21 In 2004, ConocoPhillips bought the Russian government’s 7.59 per cent stake in Lukoil for $1.988 billion. Also, as part of a larger strategic alliance ConocoPhillips entered into an agreement with Lokoil to create a JV to develop oil and gas resources in the Timan-Pechora province in the same year. The JV was governed 50/50 by Lukoil and ConocoPhillips. This alliance gave the American partner a chance to increase its oil reserves by 655 million barrels in 2005 (this was 42 per cent of the total increases of the company’s oil reserves in 2005). The American major controlled Lukoil’s 20 per cent shares in 2008.22 On the other hand, in 2004 Lukoil bought ConocoPhillips’s 795 gas stations with the brand name Mobil in the east coast of the United States for $265.8 million. Later, in 2007 Lukoil sold part of the American stations (162 stations) and bought 376 stations in Europe.23 Chinese and Indian oil and gas companies were active in Russian territory, besides major Western energy companies. For example, Chinese Sinopec, together with Rosneft, was involved in the Sakhalin-3 Project and Indian ONGC was involved in the Sakhalin-2 Project. In 2008, ONGC was in the process of 19 Shtokman field was one of the world’s largest natural gas fields and lay in the Russian sector of the Barents Sea. 20 “Gazprom, Total, and StatoilHydro create Shtokman Development Company for phase one on the Shtokman gas field,” www.total.com/en/finance/fi_press_releases/fpr-2008/080221-gazprom-statoilhydro-shtokman_14663.htm, accessed August 27, 2008. 21 Corporate sites of ConocoPhillips, www.ConocoPhillips.com/about/worldwide_ops/country/russia/index.htm, and Lukoil, www.lukoil.com/press.asp?div_id=1&id=2265&year=2004, sites accessed August 15, 2008. 22 Ibid. 23 Lukoil moved into the foreign markets aggressively in the 2000s. The company, for example, moved into the U.S. market by buying Getty Petroleum Marketing with 1300 gas stations in 13 states of the country’s northeastern part in 2000.

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purchasing the British independent upstream oil exploration and production company Imperial Energy, which had its main activities in the Russian Federation.24 Joint Venture TNK-BP Post-Merger Activity and Strategy ТNK-ВР was 50 per cent owned by BP and 50 per cent owned by a group of prominent Russian investors: Alfa Group Consortium,25 Access Industries26 and Renova Group of Companies27 (AAR). The company also owned a 50 per cent interest in a Russian company, Slavneft, which had operations in Russia and Belarus. ТNK-ВР was headquartered in Moscow and was governed by a multinational management team. Robert Dudley was appointed as CEO in 2003. Prior to his current role, Dudley served as BP’s vice- president and was responsible for the group’s upstream businesses in Angola, Egypt, Russia, the Caspian region and Algeria. In 2003, TNK-BP was third by its annual production and fourth by its daily production among Russian oil companies (see Exhibits 5 and 6). The upstream operations of this VIOC were located primarily in the Russian regions of west Siberia, Volga-Urals, east Siberia and Sakhalin Island. In 2004, the company was third among Russian oil companies in terms of annual production (see Exhibit 5). In 2005, TNK-BP became the second largest oil producer in the Russian market after Lukoil, with an average of 1.58 million barrels of oil produced per day. In 2005, the company grew its oil production by 6.4 per cent to 77 million tons. This compared with the Russian industry average of approximately 2.4 per cent.28 This occurred after the accusation against the Russian oil giant Yukos of tax evasion and the transition of Yukos’s main oil producing assets to another company. TNK-BP maintained production growth above the industry average through the consistent application of world-class technology, a continuing program of asset renewal and reserve replacement in excess of production. In this case, Dudley announced that TNK-BP was committed to replacing 100 per cent of its annual production with new proved reserves as part of the company’s effort to build a sustainable and long-term business.29 Indeed, the reserves of TNK-BP were increasing since the company’s founding and in 2005 achieved the level 1.2 billion tons because reserve investment doubled within the same period of time. At the end of 2005, TNK-BP’s total proved reserves were 8.230 billion barrels (liquids only). Of these, proved

24 “ONGC Videsh reaches an agreement with Imperial Energy Plc, UK, for purchase of shares,” August 26, 2008, www.ongcindia.com/def1.asp?fold=headline&file=headline138.txt, accessed September 3, 2008. 25 Alfa Group Consortium was one of the largest Russian financial-industrial conglomerates. The company had interests in banking, asset management, insurance, real estate, telecommunications, retail and media. Michail Fridman was the group’s founder and chairman. Alfa owned a 25 per cent stake in TNK-BP. 26 Access Industries was founded by its chairman, Len Blavatnik, and was a privately held U.S.-based industrial group with long-term holdings worldwide. The company’s interests were in natural resources, chemicals, media, telecommunications and real estate. Access Industries owned a 12.5 per cent stake in TNK-BP. 27 Renova Group of Companies was the leading Russian asset management company. The company was a stakeholder and strategic investor of leading Russian companies in the metallurgical, oil, machine, engineering, mining, chemical, construction, housing, utilities and financial sectors. Victor Vekselberg was the group’s chairman. Renova owned a 12.5 per cent stake in TNK-BP. 28 “TNK-BP replaces 137 percent of Production with New Proved Reserves,” Magazine TNK-BP Insight, Spring 2006. 29 Speech of Robert Dudley, president and CEO of TNK-BP, at the Russian Economic Forum, London, April 12, 2005, Magazine TNK-BP Insight, Spring 2005.

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developed reserves were 6.108 billion barrels. This constituted that the company replaced 137 per cent of production with new reserves.30 The other key element of TNK-BP’s corporate strategy was its move into Russia’s gas sector. The company entered into an agreement on major terms of cooperation with Gazprom in June 2005. The agreement contemplated establishing a strategic alliance between the companies for long-term investment in joint energy projects as well as asset swaps, both in Russia and other countries. According to the agreement, TNK-BP would sell Gazprom a 62.8 per cent stake in Russia Petroleum, which was the license holder for the Kovykta field, as well as a 50 per cent stake in East Siberian Gas Company, which was implementing a regional gasification project for the Irkutsk province.31 The Kovikta project was a significant project for TNK-BP and also for Russia and its neighbors. The exploitation of this east Siberian gas condensate field could open chances for this region’s gasification and its further development, as well as gas condensate export to China, Korea and North America. In this project, TNK-BP desired to be in charge of gas production and become the partner of Gazprom’s export unit, GazExport. With the help of oil production growth and activities in the gas sector, TNK-BP became Russia’s sixth largest and the world’s 38th largest oil company in 2005, according to the Petroleum Intelligence Weekly’s annual ranking of the world’s 50 largest oil companies. In 2006, TNK-BP again was sixth largest among Russian companies but fell to 40th among world companies (see Exhibit 1). TNK-BP was second in Russia and 10th in the world by daily oil and liquids production in 2006. Also, the company was 11th in the world by its proved reserves (see Exhibits 7, 8 and 9). From the beginning, the financial data of the JV was growing (see Exhibit 10). In 2005, TNK-BP declared that the regular review of its own assets portfolio was part of its long-term strategy and started to optimize its annual investment program. TNK-BP announced the selling of its four assets to the state company Rosneft in December 2005. It sold the large production unit OAO Udmurtneft to China’s Sinopec in 2006. Value enhancement through improved governance and transparency was another key element of TNK- BP’s corporate strategy and a significant part of its corporate restructuring program. The Russian-based holding company TNK-BP Holding, which consolidated the majority of the JV’s assets in Russia, was established in 2006. Also, the number of legal entities decreased. There was doubt among some Russians about the lawfulness of the privatization of the country’s oil enterprises at large and the privatization of some of TNK’s assets, particularly. The desire of TNK-BP’s leadership to show its intention to do business honestly in Russia made transparency one of the most important elements of its business.

30 “TNK-BP replaces 137 percent of Production with New Proved Reserves,” Magazine TNK-BP Insight, Spring 2006. 31 “Gazprom, BP and TNK-BP Enter into Agreement on Major Terms of Cooperation,” June 22, 2007, www.gazprom.ru/eng//news/2007/06/24143.shtml, accessed September 23, 2008.

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Finally, personnel development also was declared as a key element of TNK-BP’s corporate strategy. This included a variety of training programs and learning partnership with key Russian and international oil and gas universities.32 Organization and Management From the beginning, TNK-BP’s leadership adopted BP’s famous disaggregated model to improve management processes across the entire organization. This situation was similar to the “BP-Amoco merger, where the BP organizational design prevailed and the Amoco assets were brought under the BP business unit model.”33 The founders of TNK-BP appointed Westerners to key managerial positions, such as CEO, chief operating officer (COO) and chief financial officer (CFO) (see Exhibit 11). Foreigners from heritage companies or other companies were in charge of finance, marketing, planning and environmental protection (120 foreigners were working in TNK-BP’s headquarters in 2004). Meanwhile, Russians were in charge of extraction, legal support of business, security and relations with the government. The appointment of Westerners to top positions within Russian oil companies had happened before. For example, before the creation of TNK-BP, its Russian shareholders, as mentioned above, controlled another oil company, Sidanko. They had a 56 per cent share in 2002 but agreed to have BP’s representatives in the company’s top management (BP had 25 per cent plus one share). In 2004, Mikhail Fridman, chairman of the TNK-BP board of directors and chairman of Alfa Group, mentioned some of the benefits of having Western managers within TNK-BP. He said that international managers had been able to contribute in the areas of new approaches to technology use, information management and accounting systems, performance management processes, and development of the company’s long term strategy.34 However, in September 2004, Vedomosti35 announced the departure of 300 out of 1400 Russian workers from TNK-BP’s headquarters in Moscow during the period of less than one year. As the magazine announced, “Nobody was fired — most of these people left the company voluntarily, they couldn’t work well with company’s new joint owners — Britishers.”36 German Khan, TNK-BP’s executive director and one of the Russian shareholders (former executive director of TNK), identified mutual distrust between new expatriate arrivals and those who had worked in Russia before, including both Russian nationals and expatriates, as risks for the company and mentioned a necessity to draw up an appropriate integration program by the company’s HR.37

32 Speech of Robert Dudley, president and CEO of TNK-BP, at the Russian Economic Forum, London, April 12, 2005, Magazine TNK-BP Insight, Spring 2005. 33 John Roberts, The Modern Firm: Organizational Design for Performance and Growth, Oxford University Press Inc., New York, 2004. 34 Interview of Mikhail Fridman, Magazine TNK-BP Insight, September 2004. 35 Vedomosti was a joint project between The Wall Street Journal and Financial Times. 36 Julia Bushueva, “The Russian and foreign managers of TNK-BP are trying to think equally,” Vedomosti, June 30, 2004, 118:2140, in Russian. 37 Interview of German Khan, Magazine Insight TNK-BP, December 2003.

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Khan mentioned particularly, that they did not expect one culture to be taken over by the other and planned to gradually create a new culture.38 Challenges From the beginning, despite the support of the Russian government, some challenges existed for BP and its JV, TNK-BP. 1. From February 2005, some auctions where the Russian government was going to give its approval for

projects to develop some strategic oil fields were canceled. Russian officials tried to explain this by saying they did not have the appropriate law to work with foreigners.

The Russian parliament voted on a new bill about foreign investments in the strategic industries in April 2008. According to this bill, the foreign companies needed to get governmental permission to buy more than a 50 per cent share in local companies working in strategic industries. Also, according to this bill and a new version of Subsoil Law, companies with foreign affiliations had limited participation in auctions bidding for strategic fields. (These were oil fields with reserves greater than 70 million tons and natural gas fields with reserves greater than 50 billion cubic meters).

2. By 2008, Russia was the world leader in the gas industry and gas export and wanted to maintain this

status quo. Moreover, its gas export was a significant source of foreign currency. Also, Gazprom’s shares in global and Russian gas production were nearly 20 and 85 per cent, respectively.39 Despite the readiness of the other players, such as TNK-BP, to cooperate with the Russian government at large and Gazprom in particular, some problems arose during the application of their gas strategy.

3. Russian companies were interested in developing their international business. For example, Lukoil

continued rapid development of its international exploration and production business. The group was involved in 15 geological exploration projects outside Russia during 2007. Lukoil Group constantly monitored opportunities for participation in new, promising international projects and the company acquired stakes in three new projects during 2007.40

In this situation, when main Russian players expanded their international business, it was difficult for THK-BP’s leadership to pursue the internationalization strategy. Indeed, one of the company’s shareholders, BP, was interested in its own international projects, even in Russia’s neighboring countries.

4. The leaders of foreign companies or Russian companies with foreign affiliations were interested in

bringing executives and managers from other countries. But they were facing some difficulties connected with regulations on work permits for expatriates.

In the meantime, the company’s leadership was forced to hire more Russian specialists and managers because of the Russian government’s restriction of flow of managers and executives from other countries. In this situation, the problem was in introducing Western management standards and BP’s corporate culture to the corporate environment with a mostly Russian personnel.

38 Ibid. 39 OAO Gazprom - Global Energy Company, www.gazprom.com/eng/articles/article8511.shtml, accessed October 3, 2008. 40 “International Exploration and Production,” corporate site of Lukoil, www.lukoil.com/static_6_5id_255_.html, accessed August 30, 2008.

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Dispute Dudley told Vedomosti about the conflict between TNK-BP’s shareholders on May 26, 2008. He announced that the disagreement between the JV’s shareholders existed and hindered the company from working.41 Indeed, Russian shareholders refused to approve the financial account for 2007. They sought to oust the company’s CEO. They announced that Dudley put BP’s interests ahead of the JV’s. In response, BP blamed three top Russian managers for challenging Dudley’s authority. For example, BP claimed Khan acted in breach of instructions from Dudley in applying for 63 work permits for foreign staff instead of the 150 requested. BP also claimed Andrei Maidannik, head of legal affairs, refused to confirm the names Dudley had nominated for the boards at more than a dozen key subsidiaries.42 From the beginning of the dispute, there was speculation that the Russian shareholders could sell their stakes in the JV to state-owned Gazprom or Rosneft. But AAR’s leaders argued that the stand-off had nothing to do with discussion on a share sale but stemmed solely from their disappointment with the company’s performance. They announced that the company went from being a highly entrepreneurial, rapidly growing company to a huge, slow-moving political bureaucracy.43 Another source of frustration for the Russian shareholders was that BP blocked AAR’s proposals for TNK- BP to expand into international markets.44 The leadership of AAR also was disappointed that the JV had not made any acquisitions within the last five years and had not performed as well as rival producer Lukoil.45 As AAR’s CEO, Stan Polovets, mentioned, “TNK-BP and Lukoil started out at the same level, about $15 billion or $16 billion. Now they are $98 billion and we’re $38 billion.”46 During the dispute, two key members of TNK-BP’s senior management — the CFO, James Owen, and the executive vice-president for downstream, Toni Considine — left the company, as did an independent board member, Jean-Luc Vermeulen. Also, Dudley left Russia, citing harassment (Dudley was being investigated for alleged labor law violations). Further, in July 2008, a collective lawsuit was filed by 16 vice-presidents and department directors of the TNK-BP management to seek protection for their labor rights. The managers accused Dudley of granting benefits to nonresident employees. They demanded Dudley’s resignation and the cancellation of a document with guarantees and compensation to foreign employees. This document specified the monthly appropriation of $4,000 to $18,000 to nonresident top managers to settle the rent in Moscow, payment for

41 Vera Surjenko, “There is a disagreement between shareholders,” Robert Dudley, President of TNK-BP,” Vedomosti, May 26, 2008, 94:2116, in Russian. 42 Catherine Belton, “Under Pressure: How BP is Falling Out With its Russian Partners,” June 4, 2008, http://us.ft.com/ftgateway/superpage.ft?news_id=fto060420081850533287, accessed September 3, 2008. 43 Ibid. 44 Ibid. 45 In 2008, Lukoil had operations in 60 regions in Russia and 30 other countries. The company’s main production region was western Siberia. Lukoil was carrying out international exploration and production projects in Kazakhstan, Egypt, Azerbaijan, Uzbekistan, Saudi Arabia, Colombia, Venezuela, Cote d’Ivoire, Ghana and Iraq. Also, the company had refineries in Ukraine, Bulgaria and Romania, with total capacity of 14.0 million tons per year. At the beginning of 2008, Lukoil’s marketing network encompassed 24 countries, including Russia, and European countries. 46 Dan Lonkevich and Halia Pavliva, “Russian Group Suggests Ending TNK-BP Fight by Buying BP’s Stake,” July 15, 2006, www.bloomberg.com/apps/news?pid=20601102&sid=axMFDHeiHtyg&refer=uk, accessed July 17, 2008.

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the education of their children, the provision of a car with a personal driver, VIP-service in airports, etc. Russia’s top managers did not enjoy benefits of such an extent, despite holding similar offices.47 Future Ideas Since THK-BP’s foundation, some significant processes had begun in Russia and its oil and gas industry. In the new era of relations between the government and business, social issues received more attention in comparison with the first years of economic reforms, which began in 1992. The oil and gas industry had also become more consolidated. Meanwhile, the state started to increase its holdings. Foreign investors had increased their participation in Russian energy companies. On the other hand, Russian companies had started to pursue an internationalization strategy. This situation and other current problems in the country’s oil industry, as well as the challenges facing foreign investors in Russia and the escalating dispute of TNK-BP’s shareholders, had the potential to change BP’s Russian strategy. But first, BP’s leadership needed to settle this crisis. There would be three possible choices: maintain the status quo; acquire AAR’s stake (full or partial); or sell its own stake. If TNK-BP’s status quo would be maintained, its leaders would be confronted by the fundamental questions: 1) Which kind of corporate strategy would be chosen? 2) Would the JV’s organizational model and corporate culture be some kind of copy of BP’s organizational model and corporate culture or would something new be discovered?

47 Olga Pleshanova, “The VIP-Management,” Kommersant, October 3, 2008, www.kommersant.com/p1035046/TNK- BP_nonresident_amicable_, accessed October 7, 2008.

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Exhibit 1

PETROLEUM INTELLIGENCE WEEKLY’S (PIW’S) TOP 40: HOW THE FIRMS STACK UP Rank 2006 Rank 2005 PIW Index Company Country State

Ownership 1 1 30 Saudi Aramco Saudi Arabia 100 2 3 33 NIOC Iran 100 3 2 37 ExxonMobil U.S. 4 5 52 BP U.K. 5 4 55 PDV Venezuela 100 6 6 60 Royal Dutch

Shell U.K./Netherlands

7 7 61 CNPC China 100 8 11 78 ConocoPhillips U.S. 9 8 84 Chevron U.S. 10 8 85 TOTAL France 11 10 87 Pemex Mexico 100 12 15 96 Gazprom Russia 50.0023 12 12 96 Sonatrach Algeria 100 14 13 103 KPC Kuwait 100 15 14 106 Petrobras Brazil 32.2 16 17 123 Adnoc UAE 100 17 16 126 Lukoil Russia 18 19 127 Petronas Malaysia 100 19 18 144 Eni Italy 30 19 20 144 NNPC Nigeria 100 21 24 157 QP Qatar 100 22 23 158 INOC Iraq 100 23 22 161 Libya NOC Libya 100 24 26 168 Rosneft Russia 75.16 25 21 169 Repsol YPF Spain 26 24 173 EGPC Egypt 100 27 26 186 Surgutneftegas Russia 28 29 193 Statoil Norway 70.9 29 28 194 Sinopec China 71.23 30 33 216 Pertamina Indonesia 100 31 30 219 ONGC India 74.14 32 35 237 PDO Oman 60 33 32 243 Yukos Russia 34 31 255 Marathon U.S. 35 34 268 SPC Syria 100 36 36 275 Socar Azerbaijan 100 37 44 285 Anadarko U.S. 37 39 285 EnCana Canada 39 40 289 Ecopetrol Colombia 100 40 38 290 TNK-BP Russia

Source: Energy Intelligence, 2007.

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Exhibit 2

DYNAMICS OF OIL PRODUCTION IN RUSSIA DURING THE PERIOD OF 1994 TO 1999 (MILLIONS OF TONS)

Company 1994 1995 1996 1997 1998 1999

Lukoil 56.900 53.454 50.982 53.420 53.667 53.354 YUKOS 37.317 36.095 35.270 35.601 34.111 34.188 Sidanko 25.551 22.866 20.815 20.255 19.903 19.555 Surgutneftgas 34.252 33.326 33.257 33.906 35.171 37.573 Sibneft 22.678 20.350 18.612 18.165 17.314 16.334 TNK 24.722 22.572 21.310 20.886 19.652 20.060 Rosneft 12.642 12.463 12.740 13.042 12.626 12.554 Tatneft 23.610 25.022 24.779 24.538 24.440 24.065 Bashneft 18.782 17.737 16.344 15.359 12.891 12.261 Slavneft 13.493 13.233 12.883 12.300 11.784 11.930 VNK 11.322 11.243 11.241 11.184 10.736 10.532 ONAKO 7.626 7.660 7.891 7.934 7.888 7.953 KomiTEC 5.067 4.526 3.256 3.590 3.512 3.629 VIOCs Total 293.960 280.546 269.380 270.180 263.694 263.987 JV with Foreign Investments

12.617 14.659 16.703 17.888 19.495 21.013

Total in Russia 319.301 306.483 301.283 305.477 303.371 305.057 Source: Special Survey of Institute Financial Researches, 2000.

Exhibit 3

OIL PRODUCTION OF LARGEST RUSSIAN COMPANIES IN 2002 (MILLIONS OF TONS)

Company 2002 2001 Change Lukoil 80.1 78.5 2.1% YUKOS 69.6 58.4 19.2% “Surgutneftgas” 49.2 42.8 14.8% TNK 36.8 34.1 8.0% “Sibneft” 26.3 20.0 31.5% Total 262.0 234.0 12.1% Russia 380.0 348.0 9.2%

Source: Special Survey of Institute Financial Researches, 2003.

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Exhibit 4

PROVED RESERVES OF OIL* IN LEADING NATIONS (BILLION BARRELS)

Country Oil Reserves % of Global Reserves Saudi Arabia 266.8 20.0 Canada 178.6** 13.4 Iran 138.4 10.4 Iraq 115.0 8.6 Kuwait 104.0 7.8 U.A.E. 97.8 7.3 Venezuela 87.0 6.5 Russia 60.0 4.5 Libya 41.5 3.1 Nigeria 36.2 2.7

Note: * Oil includes crude oil and condensate. ** Oil reserve estimate for Canada includes 5.392 billion barrels of conventional crude oil and condensate reserves and 173.2 barrels of oil sands reserves. Source: Oil & Gas Journal, Vol. 105.48, December 24, 2007.

Exhibit 5

OIL PRODUCTION IN RUSSIAN COMPANIES (MILLIONS OF TONS)

Company 2003 2004 1. YUKOS 80.7 85.7 2. Lukoil 80.2 86.2 3. TNK-BP 61.6 70.3 4. Surgutneftgas 54.0 59.6 5. Sibneft 31.4 34.0 6. Tatneft 24.7 25.1 7. Rosneft 19.6 21.6 8. Slavneft 18.1 22.0 9. Bashneft 12.0 - 10. Gasprom 11.0 - 11. Russneft 2.0 6.6

Source: Information Resource Oil and Capital, 2005.

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Exhibit 6

TOP RUSSIAN OIL COMPANIES DAILY OIL PRODUCTION IN 2003

Rank in

Russia

Company Oil Production (thousands of barrels)

1. Lukoil 1.622 2. YUKOS 1.619 3. Surgutneftgas 1.085 4. TNK-BP 638 5. Sibneft 631 6. Rosneft 393 7. Tatneft 488 8. Slavneft 362

Source: Corporate sites of Russian oil companies.

Exhibit 7

RUSSIA’S LIQUIDS (OIL AND CONDENSATE) PRODUCTION IN 2006

Rank in

Russia

Company Liquids Production (thousands of barrels per

day) 1. Lukoil 1.85* 2. TNK-BP 1.75 (1.52 + 0.23**) 3. Rosneft 1.62* 4. Surgut NG 1.32 5. Gazprom 1.19 (0.30 + 0.89***) 6. Gazprom Neft 0.89 (0.86 + 0.23**) 7. Tatneft 0.51 8. Slavneft 0.47 9. Yukos 0.43 10. Russneft 0.30 11 Bashneft 0.23 12. Novatek 0.05 13 PSA contracts 0.10 14. Others 0,40

Note: * Lukoil’s production includes minority interests in affiliated companies but not its overseas output. Rosneft’s production includes its 51 per cent interest in Udmurtneft. ** Equity share in Slavneft (TNK-BP owns 50 per cent of Slavneft. Gazprom Neft owns the other 50 per cent). *** Gazprom Neft production, including equity share in Slavneft. Source: TNK-BP Brochure, 2007.

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Exhibit 8

DAILY AVERAGE OIL AND GAS PRODUCTION OF WORLD LEADING COMPANIES,

MINIMUM BARRELS OF OIL EQUIVALENT PER DAY (BOE/D), 2006 Rank

in World

Company Country Liquids Production

Gas Production

Total

1. Exxon Mobil U.S. 2.7 1.6 4.3 2. BP Britain 2.5 1.5 4.0 3. Royal Dutch Shell U.K./

Netherlands 2.0 1.5 3.5

4. PetroChina China 2.3 0.6 2.9 5. Chevron U.S. 1.8 0.8 2.6 6. ConocoPhillips U.S. 1.5 0.8 2.3 7. TOTAL France 1.5 0.8 2.3 8. Petrobras Brazil 1.9 0.4 2.3 9. Lukoil Russia 1.9 0.2 2.1 10. TNK-BP Russia 1.7 0.2 1.9 11. Rosneft Russia 1.6 0.2 1.8 12. ENI Italy 1.2 0.6 1.8 13. Statoil Norway 0.7 0.4 1.1 14. Repsol Spain 0.5 0.6 1.1 15. Gazprom Neft Russia 0.9 0.1 1.0 16. Sinopec China 0.8 0.1 0.9 Note: TNK-BP includes its 50 per cent share in Slavneft. Source: TNK-BP Brochure, 2007.

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Exhibit 9

SOCIETY OF PETROLEUM ENGINEERS (SPE) PROVED OIL AND GAS RESERVES OF WORLD LEADING COMPANIES, BILLION BARRELS OF OIL EQUIVALENT

Rank in World

Company Country Liquids Gas Total

1. Exxon Mobil U.S. 10.9 11.3 22.2 2. PetroChina China 11.6 8.9 20.5 3. Lukoil Russia 15.9 4.4 20.3 4. BP Russia 9.8 7.7 17.5 5. Rosneft Russia 10.7 1.1 11.8 6. Petrobras Brazil 9.7 2.0 11.7 7. Chevron U.S. 7.8 3.8 11.6 8. RD/Shell U.K./

Netherlands 4.2 7.4 11.6

9. ConocoPhillips U.S. 6.7 4.5 11.2 10. TOTAL France 6.5 4.3 10.8 11. TNK-BP Russia 8.5 0.5 9.0 12. ENI Italy 3.5 2.8 6.3 13. Gazprom Neft Russia 4.4 0.5 4.9 14. Statoil Norway 1.7 2.5 4.2 15. Sinopec China 3.3 0.5 3.8 16. Repsol Spain 1.2 2.2 3.4 Note: TNK-BP includes a 50 per cent stake in Slavneft. Figures for Rosneft, Petrobras, Gazprom Neft and Repsol are based on 2005 data, the latest available. Source: TNK-BP Brochure, 2007.

Exhibit 10

TNK-BP’S FINANCIAL HIGHLIGHTS

$ in billions 2003 2004 2005 2006 2007 Net Revenues 10.4 14.2 22.2 24.7 - EBITDA 4.0 6.4 9.1 11.2 9.4 Net Income 2.8 4.0 4.7 6.6 5.3 Notes: Numbers are based on TNK-BP International Ltd. US GAAP audited consolidated financial statements. (1) EBITDA is calculated as income before taxes, minority interest and cumulative effect of change in accounting principles, plus depreciation, depletion and amortization, exchange loss and interest expense, less interest income and net other income. (2) Oil and condensate production includes TNK-BP’s share in Slavneft’s and other JVs’ production. Source: Magazine TNK-BP Insight and TNK-BP Information Sheet.

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Exhibit 11

THE LEADERSHIP STRUCTURE OF TNK-BP

President and CEO

Robert Dudley

Executive Director

Gas Business Victor

Vekselberg

Chief Financial Officer

Kent Potter (Jim Owen)

Chief Operating Officer

Larry McVay (Tim Summers)

Executive Director German Khan

Deputy Executive Director

Gas Business Ferguson

EVP Technology

Dupree (Herbert)

EVP Downstream

Considine

EVP Upstream Dibtsev

(Brezitsky)

EVP Oil Field

Services Osipov

Supply Chain

Management Sams

EVP PPM Wright

Human Resources Cridland

CPA Henshaw

International Affairs McCormick

Chief of Staff Manakov (Kourilin)

General Auditor Romanov

Controller Easton

Finance and Control Muir

Tax Astakhov

(Troshenkov)

Treasury Ridlington

Accounting Operations

Church

EVP SNBD Sliger

EVP Legal Maydannik

EVP Security Kondrashov

EVP Business Support Bennett

Russian Government

Relations Gorshkov

BP TNK

Sidanco

External

Key to Management Titles EVP - Executive Vice-president PPM - Planning and Performance Management SNBD - Strategy and New Business Development CPA - Communications and Public Affairs () - New Appointments

Source: TNK-BP Brochure 2004 and TNK-BP Brochure 2007.

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