BP PLC signed a deal to end a bitter conflict with its Russian partners in TNK-BP Ltd., loosening its grip on Russia's third-largest oil producer but retaining its 50% stake.
The framework agreement appears to end a highly public battle that had fueled fears among foreign investors about doing business in Russia and hurt BP's stock price. BP shares jumped almost 4% on the news, though they later closed at 505.50 pence ($8.99), down 0.5 pence.
Many investors had expected BP to be forced to give up some or all of its stake in TNK-BP, given that the Kremlin has in recent years been reasserting state control over major energy ventures, relegating foreigners to minority stakes. But although the joint venture remains a 50-50 partnership, Thursday's deal clearly gives the Russian shareholders more clout.
For the Kremlin, the deal appears to remove a cloud from an investment outlook that had become decidedly overcast after a highly public government crackdown on major steelmaker OAO Mechel and the surge in East-West tensions following last month's conflict in Georgia.
"This is a positive signal for the Russian market," Deputy Prime Minister Igor Sechin said in a press release issued by the Russian partners.
"BP's current share price factored in the Armageddon scenario for TNK-BP -- that BP would be kicked out of Russia without compensation," said Stephen Thornber, Global Equity Fund Manager of Threadneedle Investments, which owns 0.9% of BP. "This is probably the best deal they could have got under the circumstances," he said, but "the balance of power has clearly shifted towards the Russian partners."
BP had cast the conflict as an attempt at "corporate raiding," accusing its partners of using the hardball tactics typical of 1990s Russia. The Russian shareholders charged BP with running TNK-BP as a BP subsidiary, depressing its value. People close to the company said Thursday's agreement appears to put off for at least several years the possibility of a state-controlled company like OAO Gazprom taking control of TNK-BP.
In the deal, BP agreed to many of the terms set by its partners, a group of Soviet-born billionaires led by Mikhail Fridman of Alfa Group, Len Blavatnik of Access Industries and Viktor Vekselberg of Renova, collectively known as AAR.
Their main demands: the removal of BP-nominated Chief Executive Robert Dudley, who is to leave by Dec. 1 under the deal, and consideration of an initial public offering of TNK-BP shares, now expected around 2010. BP won few, if any, concessions in return, according to people close to the company. BP gave up its demand for the removal from top management jobs of Mr. Vekselberg and another Russian shareholder, German Khan, both of whom BP and Mr. Dudley accused of insubordination and acting against the interests of TNK-BP. AAR has denied those accusations.
BP CEO Tony Hayward acknowledged that the agreement left BP with less operational control. "We'll have less of a footprint in the company, that's for sure," he said. "But 90% of the shareholder agreement is still unchanged." He denied BP had made major concessions, saying Mr. Dudley had originally planned to leave at the beginning of the year.
An AAR official said the new structure "would restore parity." Both sides said they hope TNK-BP's bureaucratic problems have now ended.
As tensions between the shareholders mounted, the company was hit by an unprecedented wave of audits, searches and probes by police, tax officials, immigration authorities and labor inspectors. Visa hang-ups and legal problems meant many foreign specialists and employees were forced to leave; several top expatriate employees quit.
In late July, after weeks of fighting without success to get his visa renewed, Mr. Dudley left Russia and began running the company from an undisclosed location. Shortly afterward, a Russian court banned him from serving as CEO, citing a series of minor paperwork violations in the company's personnel records. BP officials suspected the pressure had been orchestrated by the Russian shareholders. AAR denies that.
For months, BP had appealed to top Russian government officials to stop the pressure on the company, even recruiting European leaders to plead BP's case directly with Russian President Dmitry Medvedev. But the Russian authorities denied any involvement, insisting the dispute was between the shareholders.
AAR contends Mr. Dudley was favoring BP's interests and not doing enough to raise the value of TNK-BP. AAR was particularly critical of foreigners at TNK-BP, who they charged were too numerous and overpaid. AAR also accused BP of blocking TNK-BP's expansion outside Russia. BP rejected all these allegations as a smokescreen for what it called an effort to take control of the company by stealth.
Under the deal reached Thursday, plans for which were reported by the Financial Times, those issues will be up to the new CEO. The pact, which is to be finalized in legally binding form over the next few months, calls for BP to nominate an independent candidate, subject to TNK-BP board approval. The CEO must be a fluent Russian speaker and have experience in Russia. He also will have to decide whether to reappoint Messrs. Khan and Vekselberg to their management jobs. A person close to the Russian shareholders said they are likely to remain in place at least initially; people close to BP said it is unlikely both will stay on.