AAR Tells Dudley He Is Personally Liable

Combined Reports

Published: July 25, 2008 (Issue # 1393)

MOSCOW — BP’s billionaire partners in TNK-BP, Russia’s third-largest oil producer, have told Chief Executive Officer Robert Dudley to cut spending by about $900 million or “personally” face demands for compensation.

AAR, which represents the interests of TNK-BP’s Russian billionaire shareholders, wants Dudley to limit capital expenditures to $3.5 billion this year rather than about $4.4 billion estimated in the venture’s business plan, according to a letter dated July 15 and obtained Thursday by Bloomberg News.

BP is struggling for control of the 50-50 joint venture with Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik, who have called for Dudley’s removal, as well as criticized TNK-BP’s share price and returns. BP has praised the oil venture’s performance, saying development costs per barrel are the lowest in Russia. TNK-BP invested about $3.5 billion last year.

“AAR reserves the right to seek all available remedies against you personally,” AAR CEO Stan Polovets wrote in the letter. “You have failed to act in the best interests of all shareholders, and as a 50% owner of the company, AAR is entitled to seek compensation for losses caused by your actions.”

Marina Dracheva, a spokeswoman for TNK-BP, declined to comment, saying only that this is a matter for shareholders.

Dudley, who has led TNK-BP since its inception in 2003, said in July 2007 that capital spending may rise to as much as $4.5 billion this year as the company aims to maintain output at aging fields and revive production overall with new projects. The billionaires have said TNK-BP’s priority is adding oil and gas reserves to the benefit of BP, rather than pumping more oil from the ground and increasing refining capacity.

TNK-BP’s reserves-to-production ratio of more than 16 years is high for the industry and a sign management should accelerate output, Polovets said Thursday by telephone from Aspen, Colorado, confirming the authenticity of the letter.

BP, which estimates Russia’s reserves-to-production ratio at 21.8 years, has defended most of TNK-BP’s spending plan.

“We’ve seen that AAR are now suggesting that the company should reduce its investment, which surprises us,” Alastair Graham, head of BP Russian Investments, told Bloomberg Television last week. “We think this company has a great portfolio of investment projects.”

TNK-BP’s shareholders agreed to delay a $1.8 billion dividend this year after the cost of borrowing rose because of turmoil in the credit markets, Polovets said on Sunday.

Russia, the world’s second-biggest crude exporter, faces its first annual drop in oil production in a decade.

On Thursday Dudley left the country as he ran into bureaucratic problems amid the shareholder dispute.

“Dudley has temporarily left Russia to run the company from outside the country,’’ TNK-BP said in an e-mailed statement Thursday.

Dudley, a U.S. citizen, has faced problems renewing his visa as TNK-BP’s billionaire shareholders demand his dismissal.

On Wednesday, a Siberian court ruled that BP employees could not work for TNK-BP, a day after the British firm announced that it would reassign its remaining foreign specialists from the country.

The Tyumen Regional Arbitration Court decided in favor of Tetlis, a minority shareholder in the company’s publicly traded unit, annulling an agreement that had allowed BP to assign foreign support staff to TNK-BP.

The 60 employees had been prevented from working at TNK-BP since March, initially by an injunction from the Tyumen court. After that was lifted, BP says, they were blocked by TNK-BP security personnel from entering the building.

Another 88 BP employees — mostly engineers and technicians — left Russia in mid-July after no end to the dispute appeared in sight.

A BP spokesman in Moscow said the company would contest Wednesday’s ruling in an arbitration appeals court in Omsk.

“This decision is not binding, because it’s not final,” the BP spokesman said. “Like anywhere else in the world where the legal system functions, we have the right to appeal.

(Bloomberg, SPT)