Last updated: June 7, 2012 10:39 pm

Tensions led to Mexican stand-off at TNK-BP

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When Gerhard Schröder, former German chancellor, and Jim Leng, previously chairman-designate of Rio Tinto, stepped down as independent directors from the board of TNK-BP late last year, their act of frustration spelt the beginning of the end for BP’s Russian oil venture.

Their resignations set the clock ticking for the Mexican stand-off that erupted last week when BP announced it wanted to sell out of the 50:50 venture, while Mikhail Fridman, the leading member of TNK-BP’s Russian billionaire shareholders, suddenly stepped down as chief executive.

Bereft of these independent directors and any quorum for the board to agree strategic decisions, TNK-BP was left mired in shareholder squabbling that has left the UK oil major and its Russian partners, Alfa-Access-Renova, in their biggest battle yet.

People familiar with the situation insist TNK-BP was able to function operationally without the board to sign off on strategic moves, but shareholder sniping increased throughout the year.

One key point of contention was TNK-BP’s bid for a shale gas development tender in Ukraine. People close to AAR claim that BP threatened to withdraw its support for the bid because of its concerns on what it considered to be a material transaction which should be approved by the board. People close to BP say it eventually supported the bid, which was non-binding, while its initial concerns were due to earlier bid structures. People close to AAR say they fear BP went behind the scenes to the Ukrainian government to relay its concerns but people familiar with BP deny this.

To make matters worse, the process of finding replacement independent directors became the object of a protracted conflict too. Mr Schroeder and Mr Leng resigned last December just as the board was due to review legal recommendations that TNK-BP should sue BP over its failed bid for a strategic alliance with Russian state oil group Rosneft for failing to include TNK-BP as the partner. Mr Schroeder and Mr Leng had warned in a letter that any such action could “seriously disrupt” the activity of the company and called for any review to be postponed.

People close to AAR now claim BP deliberately prolonged the process of picking replacement directors so as to delay any review by the board of the legal claim. This legal claim is at the heart of the tensions between the shareholder groups that erupted last year when BP tried to strike a strategic alliance with Rosneft for an Arctic exploration and share swap deal that AAR blocked, winning a legal injunction over its claims it breached the shareholder agreement governing TNK-BP. BP denies the claims.

Sniping that it took six months for BP to come up with its candidate for the board while adding that the selection of a headhunter firm also took months, the process began to “resemble a jury selection process rather than a board,” says a person close to AAR. The person claims this is because “BP understood the new directors would have a crucial role in deciding whether to sue BP or not”.

A person close to BP says: “Every step, every action was weighed very carefully by both sides.”

Many observers still question what exactly caused Mr Fridman to resign. Stan Polovets, chief executive of AAR, says there was no single issue. “There was no final straw. Mr Fridman just felt it wasn’t prudent to continue in the role in the absence of a functioning board. The 50:50 partnership stopped working.”

However, some industry observers suggest Mr Fridman’s move may have been a reaction to possible informal approaches between BP and Rosneft. These could have come just as Igor Sechin, the powerful energy tsar who had engineered last year’s strategic alliance bid between BP and Rosneft, was appointed Rosneft chief executive and given a broad mandate to consolidate a large part of the Russian energy industry. AAR denies this.

Others claim Mr Fridman was trying to disrupt the company’s governance and strong-arm BP into agreeing to buy out AAR’s stake in TNK-BP, giving the four billionaire shareholders behind the consortium shares in BP in return.

Mr Polovets now says BP’s decision to sell out of TNK-BP could spell the end for the UK oil major. “Once they are out of Russia, they are an obvious target for takeover as most of its growth potential was tied to Russia.”

However, Moscow industry observers say the risks are also huge for AAR should BP succeed in moving ahead with a sale to Rosneft, potentially selling its stake in TNK-BP for a mixture of cash and shares in Rosneft, linking its future to the powerful Mr Sechin.

“This is a very dangerous game” for the Russian shareholders, says Sergei Aleksashenko, the former deputy central banker.

In Moscow, no one can predict the outcome. The answer, it seems, could lie behind the doors of Vladimir Putin’s limousine, where last week Mr Sechin was seen closely conversing with the Russian president as he travelled to a meeting with Angela Merkel.

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