Page 1 of 2 BP opens old Russia wounds
By John Helmer
MOSCOW - If you stroll past BP's London headquarters at night, and glance up,
to the right of the top story you will see an office window illuminated in
bright blue. This may be the playroom of the former BP chief executive Lord
Browne. Bob Dudley, the incumbent since taking over from Tony Hayward last
June, may keep the blue light on in the evenings while he practices his
footwork for dance tunes.
Begin the Beguine - the song Cole Porter invented at the piano of the
Paris Ritz in 1935 - is a number Dudley may have picked up during his student
days in Mississippi and Texas. But then
again, in BP's Blue Room these evenings, the lyrics of the old song have a
meaning only one Russian is likely to understand. He's Mikhail Khodorkovsky,
and nobody at BP, Rosneft, or the office of Deputy Prime Minister Igor Sechin,
is listening to what he says: When they beginin
The beguine
It brings back the sound
Of music so tender,
It brings back a night
Of tropical splendor,
It brings back a memory of green.
Khodorkovsky, once Russia's leading oilman, has been serving an eight-year
prison term in Siberia since his arrest in 2003. That was due to expire next
month, but last December, he was convicted on new charges and sentenced to
another six years. Yukos, the company he headed until 2004, has been
dismantled, and its oilfield assets absorbed by state-controlled Rosneft,
Russia's leading oil producer and exporter.
The announcement on January 14 that BP had agreed with Rosneft to compose a
joint venture to explore, develop and operate offshore oilfields in the Arctic
seas, and exchange shareholdings - 5% of BP for 10.8% of Rosneft for US$7.8
billion in value - is not exactly a novel one. That's because a similar Arctic
oilfield project was devised by Dudley when he worked for Amoco in the
mid-1990s - before Amoco was taken over by BP, and Dudley became a BP employee.
The Amoco joint venture was with Yukos, before Khodorkovsky took over; in
geography, it focused on the Priobskoye oilfield area onshore near
Khanty-Mansiisk, in western Siberia.
The terms of the latest deal, according to BP's press release, focus on an
offshore area of the Kara Sea, almost 1,000 kilometers to the north.
Rosneft
and BP have agreed to explore and develop three license blocks - EPNZ 1,2,3 -
on the Russian Arctic continental shelf. These licenses were awarded to Rosneft
in 2010 and cover approximately 125,000 square kilometers in a highly
prospective area of the South Kara Sea. This is an area roughly equivalent in
size and prospectivity to the UK North Sea." In addition, "Rosneft and BP have
agreed to continue their joint technical studies in the Russian Arctic to
assess hydrocarbon prospectivity in areas beyond the Kara Sea.
By September 1997, United States press reports indicated that the Amoco-Yukos
joint venture had collapsed. In Amoco's public version of what had happened,
Dudley and his associates had spent four years and between $100 million and
$300 million to set up the joint venture; they had also identified more than 4
billion barrels of oil in the Priobskoye reserve. That represented roughly
two-thirds of the 5.8 billion barrels of reserves which Amoco claimed to hold
at the time. Had the venture gone ahead, Amoco stood to lift its capital value
by roughly that proportion.
Amoco's terms had been signed with Yukos in 1993, before the state-owned oil
company was privatized by Khodorkovsky in 1995. He then took a close look at
Amoco's terms. Rothschild's was asked to analyze the agreement terms. His
advisor explained what happened next. Khodorkovsky discovered that the original
Yukos signatories had agreed to Amoco's proviso that if Yukos lacked the money
to match Amoco's contributions to the project, its equity stake in the joint
venture would be diluted proportionately.
Khodorkovsky concluded that Dudley, who at the time was in charge of Russia for
Amoco, had calculated that because Yukos held the project licenses but lacked
the funds for the project, Amoco could swiftly outspend the Russians, and by
progressive dilution, wind up owning all of the project, and in practical terms
expropriate the licenses.
Khodorkovsky and his advisor thought that for the original Yukos signatories to
have acquiesced in such a scheme, they had to be either stupid or corrupt.
Dudley was told the dilution was unacceptable.
Amoco then told US reporters that Khodorkovsky was violating his contract and
cheating Amoco. The Chicago Tribune, Amoco's hometown newspaper, reported in
September 1997: "[An] Amoco executive in Moscow said the two sides have not met
since May to iron out details of how the joint venture will work. The sticking
point is who will pay for what: Outsiders say it appears Yukos wants Amoco to
pick up the bulk of the tab."
Khodorkovsky's advisor now adds that Amoco had made another costly mistake. The
terms of Amoco's original contract with Yukos subjected Amoco's project
spending and equity dilution provisions to the condition that the Russian
parliament would enact a new law governing production sharing agreements with
foreign investors. Dudley had spent Amoco's money in the expectation this would
pass. Khodorkovsky lobbied to make sure it didn't. That left Amoco with no
recourse, and Dudley holding the bag.
With hindsight of what has become of Khodorkovsky and Dudley, it is noteworthy
to read the account of events given by Forbes' reporter at the time, Paul
Klebnikov: "Khodorkovsky didn't like the 1993 Priobskoye deal," Klebnikov
reported on April 20, 1998. "He offered to renegotiate. Amoco would have to put
in more money and take a smaller share of the deal. Amoco brought out its
signed contract. Khodorkovsky smirked. Though Amoco had spent four years and an
estimated $300 million, Khodorkovsky simply kept for his company all the oil
the field produced. Bad behavior like Khodorkovsky's rarely goes unrewarded in
today's Russia."
Klebnikov titled his story "Russian roulette". He was assassinated in Moscow in
July of 2004.
According to his BP biography, when the British concern bought out the American
one in August 1998, Dudley moved over to do in London the same job he had been
doing in Chicago - general manager for group strategy. He became the BP chief
executive's advisor for a time, before taking operational charge of BP's
businesses in Russia, the Caspian Sea, Angola, Algeria and Egypt. Capturing new
reserves for BP's bottom line was what Dudley's strategy was about.
The story of Dudley's second big Russian stratagem - the 50-50 acquisition of
TNK in February of 2003 - has been a controversial one because it preceded the
Kremlin's refusal to permit Khodorkovsky to sell a comparable stake in Yukos to
an American oil company, either ExxonMobil or Chevron. TNK was Russia's most
heavily indebted oil company at the time, and there were fears in the Kremlin
that if BP didn't join the TNK-BP joint venture, the Russian company might
default, triggering an economy-wide collapse.
BP turned out to be luckier than the Americans. But four years after TNK-BP was
formed, Dudley tried again to pull the equity rug from underneath his Russian
partners, counting, or so he thought at the time, on then-prime minister Dmitry
Medvedev, Gazprom's board chairman, to back him in ousting Mikhail Fridman,
Victor Vekselberg and Len Blavatnik from their position as the Russian
shareholders of TNK-BP. Officially, Dudley was chief executive of TNK-BP.
Helping Dudley with this, his third big Russian stratagem, was Konstantin
Chuichenko, an ex-KGB agent, university classmate of Medvedev, and a lawyer on
the Gazprom board. When Medvedev moved to the Kremlin, Chuichenko went with
him. He is (still) the head of the Presidential Administration's Control
Department.
In June 2008, Fridman set about defeating Dudley, publicly mocking his
presumption that he could violate the terms of BP's contract with TNK forming
their joint venture. "All these rumors [about the buy-out of the Russian
co-owners]", Fridman told Reuters, "appeared mostly because of permanent
discussions with the head of Gazprom, which by the way contradict our
shareholding agreement. I got the whole information about these talks the next
day after they had these discussions. This is Russia, it's impossible to make a
secret out of it. Of course for them [BP] Gazprom is much more sexy than AAR
[Alfa-Access-Renova - the consortium through which the Russian shareholders
held their stake in TNK-BP]. Gazprom has an enormous amount of reserves."
The story of how Fridman and his co-shareholders in the Alfa-Access-Renova
consortium defeated Dudley and gave his BP superiors in London the drubbing of
their lives made gripping reading in the summer of 2008. For Dudley, the
tit-for-tat tactic he recommended turned into an embarrassing disclosure in the
UK High Court after BP filed a claim for 8.5 billion roubles (then more than
US$350 million) against AAR.
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