Strategic Alliances

Emerging Markets: BP, AAR, and TNK-BP (also see Emerging Markets 7.1)

ETHICAL DILEMMA

TNK-BP is a joint venture (JV) company that is 50% owned by BP and 50% owned by

the AAR consortium, which represents three major Russian business groups: Alfa,

Access, and Renova. Founded in 2003, TNK-BP is a major oil company in its own right.

It is Russia’s third largest oil producer and among the ten largest private oil companies in

the world. Producing about 1.9 million barrels of oil per day, TNK-BP provides about

25% of BP’s oil production and 40% of its reserves. It pays about $2 billion dividends

each year to BP. Such a cash cow with huge reserves would seem to be—in the words of

Bloomberg Business- week—a “godsend.” Unfortunately, TNK-BP has turned out to be

an unending saga of headaches, conflicts, and intrigue between BP and its three Russian

oligarch part- ners: Mikhail Fridman (founder of Alfa Group and chair- man of the board

of TNK-BP), Len Blavatnik (founder of Access Industries), and Viktor Vekselberg

(founder of Renova Group). Two episodes stand out.

Episode I

In 2008, the Russian partners publicly aired two grie- vances. First, TNK-BP relied on

too many BP’s expatriate (expat) consultants, whose fees were a “rip off”—extra

dividends to BP but excessive costs to TNK-BP. Second, and more importantly, the

Russians wanted TNK-BP to pursue opportunities outside of Russia and Ukraine, but BP

insisted on fencing TNK-BP within Russia and Ukraine to prevent TNK-BP from

becoming a global competitor. A memo from the American CEO of TNK-BP at that time,

Bob Dudley, barred managers from entertaining deals in countries blacklisted by the US

State Department, such as Cuba, Iran, and Syria. “TNK-BP is an independent Russian

company,” noted Fridman, “and should be subject to Russian laws,” which would bless

deals in these countries. In fact, given its Russian background, TNK-BP might be

particularly well-suited to exploit opportunities in these “rogue” countries labeled by the

US government. The board room dispute quickly spilled out to grab media headlines. The

Russian partners claimed that TNK-BP should be free to grow into an independent,

global oil company (at least the JV agreement did not ban this).

Rapid-fire developments took place in 2008. In January, the visas of BP’s 148 expats

working at TNK-BP were declared invalid. In March, the Moscow offices of both BP and

TNK-BP were raided by police. Shortly after, a TNK-BP manager was arrested for

alleged espionage. In April, a little-known minority shareholder filed a court case

blocking BP’s expats from working at TNK-BP. In June, the high drama on who was in

charge in this 50/50 JV reached a bizarre climax. In a Moscow hearing with Russian

immi- gration officials regarding the proper number of visas for TNK-BP’s foreign

workers, two delegations showed up, both claiming to represent TNK-BP (!). Tim

Summers, TNK-BP’s chief operating officer and a BP representative, claimed that visas

for 150 foreign workers would be needed. But Vekselberg, a director and 12.5%

shareholder of TNK-BP, said that only 71 visas would be necessary. Officials supported

Vekselberg’s case and thus forced some expat employees to leave Russia almost

immediately for good.

BP framed the dispute as oligarchs’ time-honored prac- tice to grab control of companies

by political pressures and argued that the outcome would be a test of the rule of law in

Russia. BP also implied that the Russian government might be behind the oligarchs’

aggressive moves. In an article published in Financial Times on July 7, 2008, Fridman

dismissed political motivations and characterized the dis- pute as “a traditional,

commercial dispute about different ambitions of the strategic development of the

business” (see Emerging Markets 7.1). Accusing BP of being opportu- nistic, Fridman

wrote that BP treated TNK-BP as if it had been a wholly owned subsidiary instead of a

JV. BP allegedly treated Russians as “subjects,” as opposed to shareholders of equal

rights. The article noted that BP cared more about its oil reserves than costs or profits.

The punch line? Dud- ley’s ouster as TNK-BP’s CEO. Under such tremendous pres-

sures, Dudley had to quickly flee the country. A Russian court even barred him from

performing his job for two years for allegedly violating local labor laws. In September

2008, Fridman, in addition to his position as chairman of the board, became interim CEO

of TNK-BP.

In the end, while the Russians needed BP’s expertise, BP also needed to access TNK-

BP’s crude in Siberia, which was far easier and safer to get at than the complicated and

unsafe deep water drilling in places such as the Gulf of Mexico. In April 2010, the

devastating oil spill took place. In July 2010, Dudley—although disgraced in Russia—

was pro- moted to become the new BP CEO. As the new CEO, Dudley quickly flew to

Moscow and became more accom- modating to the Russian partners. With a changed

attitude, BP now agreed that TNK-BP could expand abroad. In Octo- ber 2010, BP sold

assets worth $1.8 billion in Venezuela and Vietnam to TNK-BP—a milestone for TNK-

BP that finally broke out of Russia and Ukraine. As a Russian company, TNK-BP might

indeed be better positioned to do well in “tricky” countries such as Venezuela and

Vietnam. To BP, these sales raised immediate cash to help defray the cleanup and

compensation costs in the Gulf of Mexico, and it did not have to sell to competitors.

Overall, Episode I seemed to have a (relatively) happy ending.

Episode II

Only a couple of months after the ending of Episode I, Episode II began. In January

2011, BP announced a new $16 billion strategic alliance with Russia’s state-owned

Rosneft. Creating the first cross-shareholding alliance between international and Russian

oil companies, the deal would enable BP to own 9.5% of Rosneft’s shares and Rosneft to

own 5% of BP’s shares. Both sides would jointly explore a new offshore oil field on the

Russian Arctic continental shelf in the Kara Sea. Rosneft is Russia’s sec- ond largest oil

company, which produces 2.4 million bar- rels of oil a day (behind Gazprom but ahead of

TNK-BP). This new alliance had the full support of the Russian government—after all,

Rosneft’s chairman of the board Igor Sechin was the sitting Deputy Prime Minister. All

seemed well . . . but here was the catch: The Russian part- ners at TNK-BP jumped out

and sought to block the deal. Their argument was that per the TNK-BP JV agreement, BP

could only pursue further business in Russia through the JV. In other words, AAR’s

rights of first refusal were vio- lated. In simple terms, “if you want to marry a new wife,”

a furious Fridman argued, “you have to divorce the old one first.” The Russian

government was mad about BP too. “I met with BP’s head and he did not say a word

about it,” said (then) Prime Minister Vladmir Putin. Basi- cally, BP had lied to Rosneft

that it had no third-party obligations. According to the Economist,

At the least, it seems a woeful misjudgment on BP’s part. The company says it had no

idea that its deal with Rosneft would result in such a legal tussle, so it felt no need to

mention the terms of its shareholder agreement with TNK-BP to its new Russian partners.

Perhaps Mr. Dudley gambled that getting into bed with Rosneft would silence TNK-BP.

Such a gamble backfired badly. AAR initiated legal challenges by initiating arbitration

proceedings to block BP’s deal with Rosneft.* In March 2011 a Swedish arbitra- tion

tribunal supported AAR and dealt a blow to the Rosneft deal, which became known as

“Ros-nyet.” In May 2011, BP admitted failure and reaffirmed that it remained fully

committed to TNK-BP as its “primary busi- ness vehicle in Russia”—which, in human

marriage terms, sounded like acknowledging AAR as its legally married spouse after

being caught for indulging in an extramarital affair.

However, BP’s headache did not end. In September 2011, its frustrated other partner

Rosneft struck a new strategic alliance deal with Exxon Mobil. They would jointly

explore the same icy blocks of the Arctic Kara Sea that slipped from BP’s hand. Things

then got worse. The very next day, BP’s Moscow offices were raided by police again.

Having managed to alienate both the Russian government and Rosneft—just imagine

Kremlin’s fury after the collapse of the deal—on the one hand and AAR on the other

hand, “BP appears to have little protection against being pushed around in Russia,” noted

the Economist. In October 2011, a severely weakened BP agreed to let Fridman to

formally serve as CEO, thus enabling him and AAR partners to essentially run the show

at TNK-BP.

Despite the ordeals, challenges, and hard feelings, both BP and AAR remained

committed to the success of TNK-BP. One has to be totally naïve to believe that they

would live “happily ever after.” So stay tuned for Episode III...

Sources: Based on (1) BusinessWeek, 2008, BP: Roughed up in Russia, June 16: 69; (2)

Bloomberg Businessweek, 2010, How BP learned to dance with the Russian bear,

September 27: 19–20; (3) BP, 2010, BP to sell Venezuela and Vietnam businesses to

TNK-BP, October 18, www.bp.com; (4) BP, 2011, BP and AAR agree on new

management structure for TNK-BP, October 21, www.bp.com; (5) BP, 2011, BP and

AAR reaffirm commitment to growth and success of TNK-BP, May 17, www.bp.com;

(6) BP, 2011, BP remains committed to partner with Russia, March 24, www.bp.com; (7)

BP, 2011, Rosneft and BP form global and Arctic strategic alliance, January 14,

www.bp.com; (8) Economist, 2008, At war with itself, July 5: 74; (9) Economist, 2008,

Crude tactics, June 7: 74–75; (10) Economist, 2011, Dudley do-wrong, April 2: 60; (11)

Economist, 2011, Exxonerated, September 3: 64; (12) M. Fridman, 2008, BP has been

treating Russians as subjects, Financial Times, July 7: 11.

Book:

Peng, M. (2014). Global Strategy (3rd ed.). Mason, OH: Cengage Learning. ISBN-13:

9781133964612