BP Troubled With TNK-Legacy

Earlier this year, BP decided to offer $6.75 billion in cash and shares to Alfa and Access/Renova, owner of Tyumen Oil Co. (TNK) to merger their assets with BP?s part in Sidanco in order to create Russia?s third largest oil group. This new company seemed to have awakened certain covetousness.

In February, Lord Brown, BP?s chief executive received a letter, in which legal action was threaded against the company unless BP would pay $85 million to two offshore companies to compensate them for losses they suffered as minority shareholders of Sidanco, which was partly owned by BP. It is claimed that Sidanco deprived minority shareholders in its subsidiaries, as well as the tax authorities of more than $2.5 billion in revenues through a complex transfer pricing mechanism.

On Monday, the same claimants announced, that they have obtained a court junction from the British Virgin Islands, which is freezing $380 million of assets, held by TNK. The order was granted until 19 June, when the High Court will reconsider the case. The litigators are the Indian Ocean Petroleum Services, based in the Seychelles, and Astian Group, based in the British Virgin Islands. Earlier, the Astian Group tried to sue Yukos for asset stripping at its Angarsk Refinery but has lost the legal case.

The main issues at stake are the transfer pricing schemes, used by Russian oil companies in the 90?s. Under these schemes, companies sold products below the market price to their offshore intermediaries. The intermediary sold the products to normal prices on world markets and the profits never come back to the Russian parent company but stayed offshore. Another practice was to sell oil at below cost to a Russian intermediary that is controlled by the executives of the parent company or their relatives. This company could sell the oil on world markets for extraordinary profits. In both cases, revenues and profits were significantly understated and minority shareholder and the tax authorities were deprived of their fair share of profits. However, oil companies routinely claim that this transfer pricing system is legal under Russian law.

The venture, BP entered with the cooperation of TNK can bring, if successful, double digit growth rates over the next few years but there are still risk involved which are hard to assess:

Additional to the current law case, there are still the threats from Norex Petroleum, a Cyprus registered company, which is in disputes with TNK over Yugraneft, an oil producer in Western Siberia. Norex claims to have lost most of its stake in Yugraneft due to the TNK takeover. It sued TNK and Alfa Group in the US to recover a part of its losses.

BP is also struggling with Rosneft, the Russian state owned oil company, which is its partner in two exploration projects offshore Sakhalin. BP wanted to combine its Sakhalin interest with the one from TNK. However, without the Rosneft approval, this undertaking is blocked.

Lastly, it seems as Gazprom, the Russian gas monopoly, is putting pressure on the government to consider revoking exploration rights, hold by Russia Petroleum, for the lucrative East Siberian Kovykta gas field. Both, TNK and BP hold stakes in Russia Petroleum. Gazprom, which is short of cash, is said to bee eager to take part in the development and misusing its ties to the government to reach the aim.

It will be interesting to observe how the combination of international financial strength and local lobbying power is able to deal with all this potential threats.


Author: Nana Bendukidze