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BP Venture In Russia Hit as CFO Steps Down

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BP Venture In Russia Hit as CFO Steps Down

August 5, 2008; Page A1

MOSCOW — BP PLC sustained one of the most serious blows yet in its fight to hold on to its lucrative Russian oil venture Monday, as the operation’s chief financial officer quit amid the increasingly rancorous dispute between its British and local owners.

James Owen, who had served as TNK-BP Ltd.’s independent CFO since December 2005, is the most senior executive to resign at the venture since the conflict between BP and its Russian billionaire partners erupted in the spring.

“Mr. Owen’s letter states that as the current shareholder issues remain unresolved, he feels it is difficult for him to continue working independently, as his role demands,” TNK-BP said in a statement. The company wouldn’t make Mr. Owen available for an interview.

Mr. Owen’s departure could leave an important management committee in the hands of AAR, BP’s local partners, marking a major tactical victory in the Russians’ struggle to control TNK-BP. It comes 11 days after the oil company’s chief executive, Robert Dudley, left Russia to manage TNK-BP from an undisclosed location in Central Europe after Russian authorities declined to issue him a new visa. At the time, he complained of a campaign of “sustained harassment of the company and myself.” Mr. Dudley had been dispatched to the venture from BP, and Mr. Owen had worked for years in various managerial roles at Chevron Corp.

The conflict is a fateful one for BP, which made a bigger bet on Russia than any of its competitors in Big Oil, and whose share price has been depressed for months by the crisis at TNK-BP. The joint venture accounts for a quarter of the British oil major’s global production, and nearly a fifth of its reserves — a focal point for investors.

The health of TNK-BP, Russia’s third-largest oil producer, also has repercussions for international oil markets; Russia is the second-largest exporter of crude after Saudi Arabia and sits on the biggest reserves of oil outside the Middle East and Venezuela.

TNK-BP was launched with fanfare in 2003, under the watchful gaze of then-President Vladimir Putin and British Prime Minister Tony Blair. Since then, the Russian state has gradually expanded its control of the strategic oil and gas sector at the expense of private investors and foreign oil groups. TNK-BP, a 50-50 joint venture, has increasingly been viewed as an anomaly.

Many observers have long expected a big state-run entity such as OAO Gazprom, the natural-gas giant, or OAO Rosneft to be brought into TNK-BP as the majority shareholder. Previously, Gazprom has said it would be interested in a stake in TNK-BP, but that the owners are not selling, and Rosneft has declined to comment on the venture.

A Test of Medvedev

The dispute between the Russian and British partners burst into the open early this year. The Russian principals in AAR — Mikhail Fridman of Alfa Group, Len Blavatnik of Access Industries and Viktor Vekselberg of Renova — demanded Mr. Dudley’s dismissal, complaining of mismanagement and poor performance at the oil company. BP stood by the CEO, and accused AAR of seeking to seize control of TNK-BP.

Mr. Owen’s departure could now allow the Russian partners to tighten their grip on the company. Mr. Owen was part of a five-member core executive committee at the joint venture, along with two representatives of BP and two from AAR. With Mr. Dudley outside Russia and the resignation of Mr. Owen, that committee will now be dominated by the two Russian shareholders.

“For as long as BP is dragging its feet with nominating a new CEO, AAR is going to step up to the plate and assume greater responsibilities for managing the organization,” says Stan Polovets, chief executive of AAR. “We are a 50% shareholder and it’s in our interest to have the company be managed effectively and make sure nothing falls through the cracks.”

BP declined to comment for this story.

Some say the departures won’t affect control of the company. One person close to TNK-BP said the core executive committee had no formal decision-making authority.

However, a person close to BP said it looked bad for the London-based oil major. “This is another step in the corporate takeover,” he said. “They’ve got the CEO to leave the country, they’ve got the 148 BP specialists out, and now they’ve got the CFO to resign.” BP was forced to withdraw from Russia 148 technical specialists it lent to TNK-BP after they experienced visa problems.

Throughout the conflict, all eyes have been on Russia’s new president, Dmitry Medvedev. How the fight plays out is seen as a test of his attitude toward foreign investment and his commitment to the rule of law.

Outwardly, the Kremlin has stayed neutral, saying it was up to the partners to patch up their differences. Some people close to TNK-BP say the kind of regulatory and bureaucratic interference the company has faced would be unthinkable without some backing from senior Russian officials.

Power Vacuum

A key issue is who will control TNK-BP’s internal financial flows. As CFO, Mr. Owen acted as a watchdog ensuring that money was allocated to projects agreed upon by both shareholders. But now that he is gone that role is likely to become more opaque. The person close to TNK-BP said the shareholder dispute had already placed a serious strain on governance.

“The company has a sensible management structure with fail-safe mechanisms built into it — but not for the extended absence of its CFO,” said the person close to TNK-BP.

Shortly after the TNK-BP battle erupted this year, the company and its employees were subject to a wave of investigations by Russian tax authorities, labor regulators and prosecutors. Those probes focused particularly on foreign nationals working at the company. BP has accused AAR of orchestrating the pressure on TNK-BP’s foreign staff, a charge the Russian partners deny.

Hopes of a cease-fire were raised last week when Tony Hayward, BP’s CEO, met with AAR’s Mr. Fridman in Prague for the first time in almost two months. The two drew up a list of four points of contention in need of resolution, according to people familiar with the talks. But little substantive progress was made and the two sides remain deeply distrustful of one another.

It was this impasse that clinched Mr. Owen’s decision to leave, according to a person close to TNK-BP. “He felt that these guys were so far apart that there was no realistic chance of a resolution in the near future,” the person said.

This person added that the CFO also felt he was less and less able to rely on data streams and other information being provided by TNK-BP’s financial department. Signing off on accounts whose integrity he couldn’t vouch for opened him up to the risk of shareholder litigation, the person added.

Other oversight positions are also up in the air. A few weeks ago, the company’s corruption-risk manager, Matthew Murray, was forced to leave Russia after his visa wasn’t renewed, according to people familiar with the situation. Mr. Dudley appointed Mr. Murray last year to work in TNK-BP’s Financial Control department, with a mission to prevent potential corruption and uphold corporate-governance standards. Some officials in the company say there’s a risk such scrutiny will weaken in his absence.

TNK-BP will now have to search for a replacement for Mr. Owen, and any candidate will require unanimous board approval — a tricky task with the board evenly split between representatives of BP and AAR. But there are grave doubts that the company will be able to find any suitable candidates for a job that will be widely viewed in the oil industry as a poisoned chalice.

“There won’t be many takers,” said the person close to TNK-BP.

Write to Andrew Osborn at [email protected] and Guy Chazan at [email protected]

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