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BP ‘risking its reputation’ in Russian oil deal

The Times: BP ‘risking its reputation’ in Russian oil deal

By Dominic Kennedy

July 29, 2004

BP WAS accused yesterday of gambling with its reputation by buying into a Russian oil company part-owned by the Chelsea football club boss Roman Abramovich.

The warning came from the Liberal Democrat Treasury spokesman Vincent Cable, an oil expert, as shareholders in Russia claim in law suits that they have been cheated of $1 billion in profits.

BP, the London-based oil giant, said it was trying to improve corporate governance in its Russian investments but admitted: “It’s clearly something that’s going to take time.”

The row over BP’s Russian adventure intensified as the multinational declared record half-year profits of $3.9 billion but disclosed that its entire production increase came from Russia.

BP produced 3.97 million barrels of oil and gas per day, a rise of 18 per cent but without its Russian acquisition production would have fallen by 3 per cent.

BP also announced its first Russian dividends of $262 million. Some of those came from Slavneft, a company half-owned by Mr Abramovich’s Sibneft oil giant and half by BP’s own Russian joint venture, TNK-BP.

Slavneft is being hit by a string of lawsuits in Russia and abroad from a Swedish investment company, Vostok Nafta, whose shareholders include the BT and Royal Mail pension schemes.

Vostok Nafta, a minority shareholder in a production company controlled by Slavneft, claims that oil is being sold cheaply to Slavneft’s sister companies who can resell and keep the profit.

The Swedes have formally complained to Walter Massey, a science and technology adviser to President Bush, in his role as chairman of BP’s ethics and environment assurance committee.

Vostok Nafta claims BP is breaking its own code of ethical conduct by going into business with partners who disrespect the law by failing to get shareholder approval for transactions.

Although BP’s code forbids it holding secret assets, Vostok Nafta has been unable to trace any books for Slavneft Trading, a sister company in Chukotka, where Mr Abramovich is regional governor.

BP yesterday said that Slavneft is “independently managed”. However, when The Times rang Slavneft’s Moscow office and was put on hold, the switchboard began playing the 1972 Chelsea FC anthem Blue is the Colour.

Mr Cable, former chief economist for the oil giant Shell, said: “Oil companies in particular have to be extremely careful when they get involved in joint venture arrangements in countries where standards of corporate governance are much lower then apply in the home country, and there are many examples of this in Russia, China, parts of Africa and Latin America.

“There have been so many bad experiences in the past that one would have thought that one of the biggest and most successful and most impressive oil companies, which is BP, would have been alert to the dangers and would have taken precautionary action. The minority shareholders seem to have a serious point.

“BP and other companies who get involved simply can’t afford to be careless in the way they deal with these big issues.”

Mr Cable visited Russia for Shell in the early 1990s and found serious problems with the absence of legal structures. “These factors still broadly prevail,” he said.

“Most Western oil companies are quite legalistic. They have to be. They do duediligence studies. They have to go through the proper legal procedures. BP was either very lucky or very brave in going ahead with the kind of venture that it did. Russia is a bit flaky.”

Mr Cable said he admired the BP chief executive Lord Browne of Madingley’s ambitions.

“Obviously oil companies want to have a stake in Russia. That’s understandable: it’s the second-biggest producer after Saudi Arabia; it’s a major player; it’s not dependent on Middle East politics,” Mr Cable said.

“There are very good reasons why any big oil company would want to have an interest in Russia.

“The only way to get involved quick is to have a joint venture with one of the existing companies.

“If you are just wanting to buy into existing fields it has got to take place through these existing operations, all of whom have a colourful history and might fall foul of the government. BP are taking a risk.

“If there are really serious question marks being raised about weaknesses in corporate governance they have got to get on top of it very quickly.”

BP, which bought into Slavneft in the past year, said it intends to divide its assets with Sibneft rather than to forge any relationship with Mr Abramovich.

Lord Browne said: “BP has spoken to the TNK-BP board and said that equitable treatment is one of the most important things BP would look for.

“Part of this process is to restructure the TNK-BP Group, which may end up with options being offered to the minority shareholders as either shares in the TNK-BP group or, subject to an evaluation that we will ensure is carried out accurately and correctly by independent valuers, cash for the shares.

“This is being handled at the moment and it will take a bit of time, but I want to make it clear that BP’s view is that there must be equitable treatment for all shareholders.” He added: “Mr Abramovich has nothing to do with TNK-BP.”

Slavneft said it acts within the law. A spokesman for Mr Abramovich claimed the legal action by minority shareholders is a negotiating ploy to get the majority owners to pay a bigger price for their assets.

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