Tags: BP, Jason Simpkins

BP Exec Questioned in Corporate Tax Probe as Russia Reclaims its Energy Sector

By , Money Morning •

By Jason Simpkins
Associate Editor

Russian authorities have issued a summons to Robert Dudley, Chief Executive of BP PLC's (ADR: BP) regional joint venture TNK-BP Holding, as part of a tax probe into OAO TNK's activities between 2001 and 2003.

While BP was quick to write the summons off as a "routine procedural matter," analysts see it as yet another attempt to drive BP from the country's treasured energy sector.

A source close to the situation told Reuters that the investigation will take place next week.

"The questioning was planned for this week, but for some reason they have already postponed it to early next week," the source said.

Story continues below...

The timing of the summons is precarious in that it comes just a week after BP's Russian partners demanded Dudley's removal - an overture BP has rebuffed citing Dudley's strong performance.

However, Mikhail Fridman, Vikto Vekselberg and Len Blavatnik lead a group of billionaire shareholders who have accused Dudley of favoring the British company's interest. Dudley worked at BP before assuming his current position as the head of TNK-BP in 2003.

The summons also follows a series of other setbacks that have bedeviled the venture.  Earlier this year, 78 Federal Security Service (FSB) officers raided the Moscow offices of BP and TNK-BP. The raid resulted in the arrest of one TNK-BP employee and his brother, who will both face charges of industrial espionage.

Soon after the raid, the Natural Resources ministry said it would check TNK-BP's largest oil field for environmental violations and the Interior Ministry accused the company of breaking visa rules, a charge that left some BP staff stranded outside the country.

Russia's history of wrangling control of oil projects from foreign oil majors has many analysts anticipating BP will have its role reduced to that of a minority shareholder.

"We are all worried there is going to be some political maneuvering in order to relieve BP of the stake," Colin Morton, a fund manager at Rensburg Fund Management who owns BP shares, recently told Reuters. 

Two years ago, OAO Yukos Oil Co., formerly one of the world's largest private oil companies, went out of business after Russia's Federal Tax Service demanded the payment of $30 billion in back taxes.

Soon after, Royal Dutch Shell PLC (RDS.A, RDS.B) was forced to relinquish control of its Sakhalin-2 oil and gas project to OAO Gazprom for $7.45 billion when the Russian government threatened to block investment plans by canceling building permits on environmental grounds.

And just last year, TNK-BP was talked into selling its 62.8% stake in one of the world's largest gas fields, the Kovytkta field, to Gazprom, after Russian authorities threatened to revoke the company's license to develop it. 

So it's perfectly reasonable to believe that TNK-BP, Russia's third-largest oil producer, could be Gazprom's next takeover target. It's also reasonable to expect that Gazprom may want more than to simply replace the Russian oligarchs as junior partners in the venture.

RBK Daily recently reported that Gazprom is seeking a 1% stake in the joint venture from BP, while at the same time buying out TNK-BP's three Russian shareholders, thereby giving the state monopoly a controlling stake in TNK-BP.

Meanwhile, a source close to BP told the Wall Street Journal, that the company believes the Russian shareholders are putting pressure on Dudley in attempt to strengthen their hand in negotiations with a state-owned company like Gazprom. The Russian shareholders want to rein in long-term investments, such as enhanced oil recovery, health and safety, and privileged dividends, because they are aiming to sell their share to a state-run firm, the source told the paper.

BP Chief Executive Tony Hayward recently arrived in Moscow in part to attend the annual shareholders' meeting of Russia's OAO Rosneft, the country's largest oil firm of which BP is a minority shareholder, Reuters reported.

"BP is committed to Russia," Hayward said addressing the meeting. "Russia, alongside the Middle East, is one of the world's great hydrocarbon provinces. Russia is a great nation in the process of economic transformation."

While BP may remain committed to Russia, however, it doesn't seem as though Russia is equally committed to BP. And so far, the process of undermining foreign oil companies and surreptitiously consolidating Russia's energy sector under state control has not ended with Vladimir Putin's presidency.

"This is exactly the kind of issue that is making Medvedev's life so difficult as he tries to rebrand Russia as an attractive investment location," Chris Weafer, chief strategist Moscow-based investment bank OAO UralSib, told Reuters. "The fate of TNK-BP is a major test for how the government views the investment climate."

News and Related Story Links: