TNK-BP Hails New Spirit of Cooperation for JV

MOSCOW (THE WALL STREET JOURNAL via Dow Jones), Jan. 22, 2010

Less than two years ago, BP's Russian venture was wracked by bitter conflict between the British giant and its local partners. But Friday, BP and its Russian co-shareholders held their first joint media briefing to pronounce their tensions gone and TNK-BP Ltd.'s prospects bright.

"Everything feels pretty good," BP Chief Executive Officer Tony Hayward told a small group of reporters, turning to smile at Mikhail Fridman, chairman of Alfa Group, the largest member of AAR, the consortium of Soviet-born billionaires that owns TNK-BP 50-50 with BP.

"This year was one of the most successful years for TNK-BP," Fridman continued, hailing the "spirit of cooperation and mutual understanding" at the company.

Within Russia, too, the climate seems to be warming to private and foreign investors, after years of Kremlin preference for big state companies had squeezed rivals' access to major new projects.

"I would anticipate more flexibility from the authorities in providing a privately owned company access to oil and gas reserves," Fridman said. "As a private company with strong cash flow....we could be quite interesting as a partner."

Heavily indebted, Russia's state oil and gas companies have been hit hard by falling prices and the global economic crisis. Gas output plunged last year, dropping Russia to the No. 2 spot in the global rankings behind the U.S. for the first time in years, while oil production rose modestly after years of stagnation. Government officials now court foreign companies, which had for years been pressured.

Thanks to its unusual Russo-British ownership, TNK-BP, the country's third-largest crude producer, stood out in Russia's largely locally controlled oil business since it was founded in 2003.

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In the summer of 2008, tensions within the company burst into the open, leading the BP-backed CEO to flee Russia. The Russian shareholders accused BP of thwarting TNK-BP's ambitions to expand internationally and relying too heavily on expatriate staff, including the U.S.-born CEO. BP charged its partners with using the Russian government to apply pressure. Ultimately, the two sides agreed to a truce, with a new board and CEO to run TNK-BP.

The search for a CEO dragged out, and Fridman stepped in as acting chief. The partners agreed on a permanent replacement, Maxim Barsky, late last year, but he will assume the CEO post only in 2011, after training at BP and as deputy CEO.

Friday, Hayward and Fridman say they expect two top Russian shareholders--German Khan and Viktor Vekselberg--to give up their management roles in the company at some point after Barsky becomes CEO. BP had protested the shareholders' roles in management during the conflict in 2008. Barsky has said he wanted to keep them on for their experience. But Friday, Fridman said the shareholders would likely leave "after a transition period."

Though the settlement deal between BP and AAR envisioned an initial public offering for TNK-BP, Fridman and Hayward said there is no rush and any such deal would be at least two years away. Both men agreed that the current parity between their shareholdings would remain for the foreseeable future.

They said that TNK-BP, if it needed additional investment capital, would consider reducing the minimum 40% share of profits it now pays as dividends.

For 2010, the company plans to invest $4 billion, up from $3 billion last year. Crude production "can continue to grow a couple of percent a year for as long as you can see," Hayward said.

Any international expansion will be focused where TNK-BP has a technological advantage, such as in Iraq, or a geopolitical one from its Russian heritage, such as Venezuela, he said.

Natural gas isn't a short-term priority for the company, given the changes in that market in the last year or so, Hayward said. Discussions on selling TNK-BP's stake in the Siberian Kovykta project to OAO Gazprom (GAZP.RS)--initially agreed in 2007--are stalled as TNK-BP awaits word from the Russian government on its plans for the project, Fridman said.

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