by Philip P. Pan

07-09-08 The British energy giant BP and its billionaire partners in Russia's third-largest oil company said that they had resolved an ugly, high-profile battle for corporate control that had become a test of Moscow's openness to foreign investment.
BP gave in to demands by its partners in Russia to replace the joint venture's American chief executive, Robert Dudley, after refusing to do so for months. The company also agreed to sell new shares of a key subsidiary of the partnership. But BP retained its 50 % stake in the joint venture, TNK-BP, an outcome that had seemed uncertain given the Kremlin's interest in consolidating control of the nation's energy sector. BP also said it would be allowed to nominate Dudley's successor.

The accord follows eight months of increasingly bitter accusations between BP executives and the Russian tycoons with whom they went into business in 2003 to develop some of the most promising oil and gas fields in Russia. The joint venture has been fabulously successful, paying out $ 18 bn in dividends to the shareholders in just five years. It accounts for as much as a quarter of BP's reserves and annual production.
But simmering disputes over control of the firm flared into open hostility this year. The Russian stakeholders accused BP of ignoring their interests and proposals for overseas expansion. BP officials, meanwhile, voiced suspicions that their partners were trying to take cash out of the venture and siphon off prized assets.

The conflict worsened in July as Russian authorities escalated a tax investigation into the firm, raided its offices and arrested one of its employees on espionage charges. The government also caused an exodus of foreign employees by refusing to renew 148 visas.
BP executives said the "harassment" raised concerns that Russian businessmen could resolve commercial disputes by enlisting the help of government officials and bullying foreign investors. The company's partners said the government's actions were a coincidence, and the Kremlin said it was neutral in the dispute.

Visa trubles forced Dudley to leave Moscow, and he has been running the company from abroad. He had become a focus of the conflict, with the tycoons in Russia -- Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik -- complaining that he ran the firm as a BP subsidiary and demanding that he be fired.
In a statement, BP chief executive Tony Hayward described the deal to remove Dudley as "a sensible means of resolving a situation that could not continue without causing serious damage to what has been an immensely successful joint venture for all concerned." He added that BP would nominate a Russian-speaking candidate with extensive Russian business experience to replace Dudley, whom he called "an absolutely outstanding CEO of great courage and strength of character."

Under the deal, the appointment will require the unanimous approval of a new board, consisting of four members from each side and three independent members.
"You can safely say the conflict is over," said Stan Polovets, chief executive of the company that represents the Russian partners in the joint venture.
In a sign that the deal had the Kremlin's blessing, two senior officials -- presidential aide Arkady Dvorkovich and Deputy Prime Minister Igor Sechin -- were quoted voicing their approval in a statement released by the Russian partners.

Artem Konchin, an oil and gas analyst at UniCredit Aton, said the decision to float shares to the public for as much as 20 % of TNK-BP's main subsidiary was an important concession sought by the Russian partners. The increase in the number of shares in circulation will probably help raise the value of the parent company, giving the Russian partners greater leverage over setting a price if they sell their stake to Gazprom, the state-controlled energy company, he said.
Both BP and its Russian partners said that they had no plans to sell their stakes. But speculation about Gazprom's interest in the venture has weighed on TNK-BP since the summer of 2007, when it sold a controlling stake in a large natural gas project to Gazprom at what was considered a below-market price after getting into a dispute with regulators.

At about the same time, the owner of one of Russia's largest private oil firms, Russneft, sold his company to an investor loyal to the Kremlin, complaining that the government was using regulatory tools to regain control of oil and gas properties privatized in the 1990s.
Several months earlier, Royal Dutch Shell was pressured into selling Gazprom a controlling stake in the world's largest oil and gas project, on Sakhalin-Island in Russia's Far East.