British Petroleum (BP) originated from the Anglo-Persian Oil Company (APOC) in the early 1900s. Over the years, it has had a long history of working with the Russians that includes its investment in Sidanco and management control. TNK (Tyumenskaya Neftyanaya Kompaniya Tyumen Oil Company), controlled by Alpha Access/Renova, had a series of disputes over Chernogorneft with Sidanco. While Sidanco gained control over Chernogorneft, TNK had a lot of stakes in Sidanco. As a result of the working relationship, both the Russian government and BP exercised good opportunity to work together.
However, BP had an insight into the challenges that lies ahead of it. This is what led the CEO of BP, Tony Hayward, who replied when asked for suggestions for companies going into business with Russia. He said, "My advice would be to trade with caution” (Bluhm et al., 2012). The formation of TNK-BP began in February 2003 with the $6.75 billion investment made by BP to the joint company of TNK and BP. As a result, TNK-BP was registered in the British Virgin Island and was the largest foreign investment in Russia.
The joint venture between TNK and BP had a shareholder agreement which stipulates equal control of the venture between AAR (the body controlling TNK) and BP. Each of the companies provided five representatives, making up the TNK-BP board. The joint venture flourished over the years since its creation. According to Robertson (2009), since 2003, the shareholders of TNK-BP including BP and AAR had shared dividends in excess of $20 billion. The company also paid over $80 billion in duties and taxes to the Russian government (Goes, 2013).
In the context of the public spat between BP and AAR, the joint venture blossomed greatly over the years and in the fiscal year of 2006 and 2007; the venture enjoyed a 9% increase. However, in 2008, the joint venture began experiencing some strain and the board meetings turned into battlegrounds. The stakeholders had intense disagreements between them in terms of the difference in vision for corporate policy and strategy. In addition, there was also disagreement on payment to the stakeholders. The crisis reached its height when the venture's profit decreased by 20% as a result of its investment in a new project. The Russian stakeholders blamed Robert Dudley, the chief executive for the loss. They declared that he focused on the interest of BP rather than the profit of the joint venture (Bluhm et al., 2012).
The discord was further fueled as BP employees came under attacks and in March 2008, the Russian security services attacked TNK-BP and BP offices in Moscow. In addition, investigation on tax evasion was launched into one of the TNK-BP former units by Russian interior ministry. Finally, the board from AAR claimed that the election of a new board at TNK-BP main listed subsidiary was not legal and thereby demanded the removal of the CEO, Robert Dudley. The immigration authorities denied new work-visa the CEO. Hence, he was forced to leave the country but he promised to direct the affairs of the company from outside the country.
According to Robertson, (2009), BP made four promises to the Russia when the joint venture was established. This was included: that the venture would grow reserves and production that the best technology and people in BP would be transferred into the joint venture, that corporate governance would be improved. Lastly that the BP would be a good corporate citizen of Russia. BP asserted that they have fulfilled all these promises and has gone a long way to ensuring health and safety, as well as transparency, environment and governance.
However, the public spat between BP and AAR has gone a long way to cripple and limit growth in the company. Goes (2013) mentioned that during the conflict between BP and the Russian authorities, the Russian regulatory agencies employed formal mechanism to press hard on the oil companies. Furthermore, the conflict between BP and the government is very similar to the conflict between shell and the government and of course the both companies are privately owned IOCs. In order to influence the decision-making negotiations on the side of the Russian government, the two companies involved the public into the dispute. The report further outlined the Russia's law on subsoil and foreign investment. This states that it is only state companies which can hold more than 50 percent share and can be permitted to work on onshore projects of great importance. It has greatly reduced the opportunities for private companies; TNK-BP inclusive, to involve in development projects. The law even closed the door for progressive projects in the continental shelf.
A number of factors caused and fueled the dispute between the Russian government and TNK-BP. Alfa Access/Renova (AAR), represents the Russian oligarchs. The stakeholders representing AAR includes Mikhail Fridman, Viktor Vekselberg and Leonard Blavatnik. BP and AAR accused each other of trying to have control over the joint venture.Consequently, the government subjected BP to lots of investigations for accusations on industrial espionage and tax evasion. In addition, BP faced lots of accusations for favoritism and for treating the joint venture of lesser importance. BP was also accused of mismanagement and lots of other allegations.
On the other hand, BP accused the oligarchs for hindering the smooth operation of the joint venture. They declared that it is playing activism among the shareholders and also cashing out dividend and thereby frustrating the capital expansion program. This dispute had a negative effect on both the Russian government and BP. Regarding the part of the Russian government, a lot of investors from other countries assumed Russia as an unfriendly and biased place to make an investment. On the part of BP, the corporation suffered immense loss (Ram and Syed, 2010).
In addition, Mouawad (2010) mentioned in his article that BP has had a long history of environmental incidents. The report stated that in 2005, BP’s Texas City, refinery blew up and killed about 15 workers. Even though the company promised to address the shortfall but it was still involved in environmental incidents the next year. Records show that BP has the worse health, environmental and safety record than any other major oil companies. The Mineral Management Service also asserted that the platforms operated by BP spilled a total of about 7000 barrels of oil between 1996 and 2009 in the Gulf of Mexico. This corresponds to the 14% of the amount of oil spilled in the Gulf by any other company.
TNK-BP was criticized greatly for the Siberian oil spills. TNK-BP is deemed one of the greatest polluters of the Yenisei and Ob river basins in Siberia and Yuri Trutnev. The Natural Resources Minister of Russia, proclaimed the regulatory charges in 2012 for the pollution. Report showed that almost 300,000 to 500,000 tons of crude oil was leaking into the Yenisei and Ob river basins annually, and TNK-BP is one of the greatest offenders of it. However, TNK-BP claimed to have paid a sum of $2.1 billion since 2003 in order to clean up the pollution and mess it has caused. As a measure to settle the environmental problems, TNK-BP has also established a $500 million fund (“TNK-BP”).
According to Wilson (2008), BP was lure to experience business with Russia because of the huge reserves of oil & gas in the country. Russia pumps up to 8 million barrels of oil per day and BP assumed this huge petroleum reserve too big to ignore. At the time of its merger, both BP and AAR enjoyed a lot of benefits but in later years, the joint venture suffered greatly as a result of the dispute. The Russia government tactfully supported AAR in making life difficult for BP and not only that, a lot of other oil companies which did business with the Federation in the past faced similar conditions. For instance, it can be mentioned Yukos that became bankrupt as a result of the huge back-tax claims from the Federation. Moreover, Shell, also lost his intentions in Russian Sakhalin-2 oil and gas project in 2006 and engaged to Russian energy giant Gazprom.
The statements of Tony Hayward, the chief executive of BP, made it clear that the company foresaw the dispute. It had with TNK even before the joint venture was created. Hayward suggested companies to be cautious in case they are intended to do business in Russia. Soon after that BP invested the huge amount having worth of $6.75 billion in the joint venture and thus TNK-BP was formed (Bluhm et al., 2012). Of course, BP could have avoided the dispute in the first place by not doing business with Russia.
It is important to consider that the deal or contract with TNK is not the first business that the BP did with TNK. Prior to the deal, in 1997, BP invested in Sidanco, a Siberian company and by the year 2000 the 10% investment in Sidanco increased to 25% and also the company had management control. The current dispute under discussion is not the first dispute that BP has had in Russia. At the time of its early investment in Russia, BP and Sidanco sued and countersued one another over Chernogorneft (Bluhm et al., 2012). The particular bottom line of this analysis encompasses BP that could have averted this discord if it were not lured by the huge petroleum reserves in Russia.
Furthermore, AAR alleged that the BP counterpart of the joint venture was more focused on the interests of BP rather than the overall development of the joint venture. Judging from how the Russia Federation has dealt with other oil companies like Yukos and Shell, it is obvious that the Federation has a long history of attacking IOCs.
In order to develop better understanding for the dynamics of TNK-BP, it is important to take a look at Russia's perception of the West. Russia and Russians viewed the growing European influence on the Federation as an attempt to impose western culture, attitude and philosophy on people who are not willing. In addition, the long tradition of collectivism within Russian society which dates back to the time of the tsars ignored the importance of individuals was quite opposed to the individualistic approach associated with Western traditions. When one or the both parties (as in the case of TNK-BP) are not inclined to full collaboration, such seemingly harmless difference could have a remarkable effect.
These aforementioned factors were largely responsible discord between the discord between the Russian Federation and the TNK-BP as well as other IOCs. Furthermore, one can assert that the dispute is doomed to take place and that the only way it could have been prevented and BP had avoided the partnership. Thus, the marriage was doomed to failure from the start and should never have taken place.
As a matter of fact, BP made a lot of promises to the Russian Federation when the joint venture was established, and it fulfilled these promises. This is reflected in the implementation of top-notch technology in the joint venture and also in the obvious growth in revenue and profit (“BP and Rosneft Committed.”; Robertson, 2009). However, this is not to claim that BP was innocent in the discord but to a reasonable extent it could have prevented the dispute
The disagreement between AAR and BP soared and reached the climax as the CEO of the TNK-BP joint venture, Robert Dudley, was ousted from the office, and the COO directed the company. However, a new report on September 4, 2008 presented highlights on the resolution of the dispute. The CEO of TNK-BP, Robert Dudley, stated that he was pleased that the shareholders have come to an agreement in principle on resolving the dispute. He went further to assert that if the agreement is implemented, TNK-BP will be able to develop greater independence and identity and also it will be prepared for public offering in the process. The venture would become a more publicly held company. Therefore, the standards of corporate governance will be driven higher and also the market valuation will be made fairer (Bluhm et al., 2012).
Tony Hayward, who was the chief executive of BP, mentioned that the agreement is a good way of resolving the dispute between BP and AAR. Robertson, (2009) pointed out that the two sides involved in the dispute need to develop an understanding for an agreement. That involved a memorandum of understanding to change the formation of board structure and to appoint a new chief executive. The agreement also included considering an initial public offering of TNK-BP shares. It is important to note the terms involved in the agreement and how it benefited the two parties involved namely, AAR and BP.
Rosneft, a major oil company in Russia, acquired TNK-BP and therefore has become the largest oil company in the federation. Prior to the addition of TNK-BP, Rosneft produced almost 2.4 million barrels of oil in a day. It is declared sixth largest oil company in the world as per production and the fourth largest as per the proven reserves. However, with the addition of the joint venture, Rosneft has risen to the frontline in the oil companies in the world as it has become the largest publicly traded oil company. It produces up to 4.1 million barrels of oil in a day. In addition, its reserves have risen from 19 barrels of oil equivalent to 29 barrels of oil equivalent (“BP and Rosneft Committed.”).
The production and exploration sector of Rosneft has also risen considerably with the addition of TNK-BP as it inherits lots of upstream and downstream businesses from the joint venture. Of course, both BP and AAR were compensated in the new agreement with BP receiving about $12.3 in cash and an 18.5% stake in Rosneft. Thus, BP will become the second largest shareholder in Rosneft, after the Russian state. Not only this but also the former CEO of TNK-BP, Robert Dudley, has been appointed to the Board of Directors of Rosneft.
Davidson (2013) mentioned that the BP, Rosneft and Rosneftegz (the state-owned parent company of Rosneft) signed the agreements after approval by the Russian Government. This makes the purchase of BP from Rosneftegaz for 5.66% stake in Rosneft against $4.8 billion. The agreement involved a definitive and binding sale - purchase agreements for the sale of the 50% interest of BP in TNK-BP to Rosneft. BP is set out to assist Rosneft in a lot of ways as stated in their agreements.
AAR was compensated in the agreement and resolution as Rosneft agreed to buy AAR’s half of the venture for $28 billion in cash. According to Clark and Arkhipov (2012), BP agreed to put an end to all the legal disputes with AAR and clear the pathway for the sale of the joint venture to Rosneft. Furthermore, Rosneft is set to purchase the entire joint venture at TNK-BP for a sum of $55 billion. The two partners, BP and AAR, declared that they would support each other with respect to the sale.
Furthermore, BP agreed to pay AAR a sum of $325 million for the resolution of the dispute. However, BP spokesperson, David Nicholas, said that there was no offense on the side of the both corporation, and also AAR refused to talk about the payment. The analysis of the report above shows that the settlement of the dispute between AAR and BP benefited the both parties and went a long way to increasing the productivity of the both firm. BP expressed appreciation for the settlement as well as AAR. Even though the dispute did cause a lot of damages, the resolution went a long way for the settlement of the dispute as well as to heal the damage caused by the dispute.
In short, the essay examined the events that brought about the agreement between the Russian oligarch (Alfa Access/Renova) and BP and the events that led to it. BP (British Petroleum) was obviously lured to do invest in Russia because of the huge oil reserve in the country even though it foresaw the dispute that latterly arouse in TNK-BP.
The essay further pointed out the issues that led to the dispute and the allegations between the two concerned parties (AAR and BP).They made inclusion of favoritism, treating of the joint venture of lesser importance and so forth. In addition, analysis of the dispute and issues surrounding it was conducted as well as interpretation of the analysis. This essay also examined how the dispute between AAR and BP was settled? Rosneft played a significant role in the settlement of the dispute. The compensations were made to BP and AAR in the settlement of the dispute.
Joint ventures like TNK-BP enables organization to achieve a broader goal with their versatile combined capabilities. This type of international partnership provides benefits to all stakeholders. BP holds a strong and effective market set-up as well as equipped with advanced technology. On the other hand, TNK has huge oil reserves in different parts of Russia. Hence, BP offered his service to TNK to achieve common objectives. This strategic joint venture could attain marvelous market power. The cultural differences and economic incentive play a vital role in the success of such joint ventures. This was obvious cultural difference that made this venture instable and both the parties involved in a dispute due to lack of understanding and corporate culture with TNK. Conclusively, this essay encompassed the events that happened in recent times in order to evaluate the instability of TNK-BP venture.
References
Bluhm, C.T et al., 2012. TNK-BP: Tread With Caution, Journal of the International Academy for Case Studies, Vol.18 (5), pp.35-57.
Clark. T., & Arkhipov. I., 2012. BP Ends Disputes with TNK Partners to Clear Rosneft Way. Available online from <http://www.bloomberg.com/news/2012-11-13/bp-tnk-billionaires-said-nearing-accord-to-drop-mutual-claims.html> (Accessed November 15, 2014).
Davidson, L., 2013. Shift Work. BP Magazine. Available Online from <http://www.bp.content/dam/bp/pdf/bpmagazine/bp_magazine_2013_issue_1.pdf> (Accessed November 15, 2014).
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Robertson, L. 2009. TNK-BP: A Russian Success Story. Available Online from <http://www.heraldofeurope.co.uk/Issues/5/Economics/TNK-BP/TNK-BP.pdf> Accessed November 15, 2014).
“BP and Rosneft Committed to Russia’s Energy Future”. Available online from <http://www.bp.com/content/dam/bp/pdf/BP_and_Rosneft.pdf> Accessed November 15, 2014).
TNK-BP.2014 Wikipedia [Online] from <http://www.wikipedia.org/wiki/TNK-BP> Accessed November 15, 2014).
Wilson. B., (2008). No End in Sight to TNK-BP Dispute. Retrieved November 15, 2014 from <http://news.bbc.co.uk/2/hi/business/7523174.stm> Accessed November 15, 2014).
