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Financial Times (UK)
June 26, 2003
Aiming to clean up in Russia with record deal
The success of BP's huge project will not only be judged in oil and money
By Carola Hoyos and Arkady Ostrovsky

Today, a historic Dollars 6.75bn (Pounds 4bn) deal, representing the largest single foreign investment in Russia's history, is to be signed in the presence of Tony Blair, prime minister, and Vladimir Putin, Russia's president.

But once the ink dries on the agreement between BP and TNK to create one of Russia's biggest oil companies and the dignitaries have left, BP will face one of the biggest challenges in its history. It is a project that could catapult Lord Browne, its chief executive, to legendary status, or reveal him as a reckless risk-taker.

If things work out, BP will be credited with improving standards of corporate governance and environmental control in Russia. If they do not, the country's lawlessness and the Soviet legacy of environmental abuse will tarnish the image of civic responsibility that BP has worked so hard to create.

Much of the partnership's future will be dictated by the whims of Russia's government and whether it continues to improve corporate standards and liberalise the energy sector.

But BP's success will lie in how quickly it is able to close the gaping hole between its standards and those of TNK.

Robert Dudley, BP's top manager in Russia and the chief executive of the new company, says: "There is a lot of work to be done on environment. While we can't have BP standards on environment from day one, we can try close the gap."

Victor Vekselberg, chairman of TNK's management board, said: "BP had had some experience in Russia. In its strategic planning, its role had been that of an investor. Today it acts as oil producer and manager."

He added: "With all my respect for BP, it had a fairly vague idea about what is going on in Russia. It knew about Russian risks but it had never had to deal directly with tax authorities, customs officers, monopolies and relationships with regions."

One problem has been the issue of remuneration for expatriate managers. Mr Vekselberg says: "Bonuses and entitlement for expatriates has been one of the most hotly debated issues. Foreigners who come to Russia want to bring a piece of their own life here." This inevitably causes irritation among Russian personnel.

Another challenge has been ironing out the final details ahead of the signing - the most difficult of which concerns whether BP would take on part, or all, of TNK's stake in Slavneft, its smaller Russian rival.

One observer called the negotiations following the announcement of the joint venture in February "Chinese water torture" as TNK agreed a price for Slavneft and then changed its mind.

BP is expected today to announce that the cash portion of the deal will be Dollars 2.4bn instead of Dollars 3bn because of the increased debt taken on by TNK through its acquisition of Slavneft and other assets.

The overall value of the deal is not expected to have changed substantially.

The deal gives BP 1.1m barrels a day of extra production and 10.5bn barrels of reserves, more than doubling its existing portfolio. But there is a good reason why the Russian oil groups trade on little more than Dollars 1 a barrel of reserves compared with Dollars 9 a barrel for international oil majors.

With TNK, BP also inherits legal suits and complaints from minority shareholders about the way TNK conducted business in the past, and complex environmental and safety issues.

Getting TNK to adopt BP's safety and environmental practices will take years, analysts say, with the possibility of many embarrassments ahead as the new culture seeps down the ranks.

Pavel Kushnir, oil and gas analyst at United Financial Group, a Moscow-based brokerage, says: "Given the soft environmental requirements from Russian oil companies in general, there has been no environmental policy to speak of at TNK. However, the question is: Will BP apply its own tough standards to its Russian production sites? If it does, it may simply have to sell some of its assets. If it doesn't, it may be accused of double standards."

BP regards TNK as 10 years behind in its environmental and social standing but analysts warn it could take far longer - and millions of dollars - to clean up the aggregated mess left by a Soviet regime that was bent on extracting as much oil as fast as possible, no matter what the cost.

BP is also expected to set new standards of transparency and corporate governance in Russia. Mr Kushnir says: "Everybody will scrutinise this deal for any corporate governance issues."

Another analyst says that one of the first tests will be whether BP makes public the detail behind the deal.

Mr Dudley says: "We will insist on the same level of transparency and governance as in BP.

Both sides realise expectations are high. Mr Dudley says: "This is more than just an oil deal. And if we fail, it will be more than just a setback for one foreign investor. It will be a setback for the whole country - and the Russian government understands that very well."

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