BP’s $6.75bn Russian oil gamble spills into dangerous territory

The sumptuous lunch at BP‘s plush London headquarters to celebrate a ground-breaking deal in Russia was a convivial affair with John Browne in high spirits. It was 2003 and the oilman was being feted by the financial press as the Sun King, having turned a struggling UK oil company into a global oil major.

But the clink of crystal and gentle chatter at St James’s Square ended abruptly when a guest questioned why BP was doing a multibillion-pound deal with a group of Russian oligarchs he had already crossed swords with. There was a chilly silence before the BP chief executive recovered his poise, and testily denied his company was pursuing in court the billionaire businessmen behind its new business partner TNK for misappropriating assets of another Russian firm, Sidanko, in which BP was an investor.

What Lord Browne held back is revealed in a series of dramatic documents seen by the Observer that are being used to underpin a US court case brought by Canada’s Norex Petroleum. The papers allege the British oil group had in fact been warned that the powerful businessmen had links to the criminal underworld in Siberia, Russia’s oil frontier. Norex is seeking $1bn damages as it argues that BP and TNK have both benefited from Russian oil assets that were seized from it.

The dispute could not come at a worse time. BP has been desperately trying to clean up its image and operations ahead of a massive but entirely separate legal case resulting from the Gulf of Mexico oil spill. The department of justice in the US is still reviewing whether to bring criminal charges over the Deepwater Explorer accident in which 11 oil workers were killed and miles of coastline polluted.

The celebration at St James’s Square unveiled a $6.75bn (£4.2bn) deal under which the UK-based oil major would take a 50% holding in Tyumen Oil – TNK – and other assets owned by Russia’s Alfa Access Renova (AAR) consortium controlled by four of the country’s richest and most powerful businessmen, German Khan, Mikhail Fridman, Leonard Blavatnik and Viktor Vekselberg.

Fast forward to July 2008 when current BP boss Bob Dudley, who was running TNK-BP, was forced to flee Russia after relations with the powerful quartet turned sour. The dispute escalated and became increasingly politicised. BP’s technical staff were barred from working in Russia by a Siberian court. The security service, the FSB, twice raided TNK-BP’s offices in Moscow.

Only now, as the history of BP’s dealings in Russia are raked over in New York, is it becoming clear to shareholders and regulators the risks that the British energy company was prepared to take in its attempts to exploit oil fields in Siberia.

Norex has been pursuing legal cases against AAR for more than a decade and is now targeting BP as well. At the heart of the dispute is the alleged misappropriation of the Yugraneft oil field in Siberia, which it argues was achieved by forcing the bankruptcy of Norex’s business partner Chernogorneft, which was a subsidiary of Sidanko.

The Canadian firm is bringing a damages action against the oligarchs and BP, even though as a Sidanko investor, BP also lost money, prompting the question about the US legal action that so unnerved Browne.

Alex Rotzang, chairman of Norex, said BP must pay for having lost its own battle in the late 1990s, which he says led BP to make a “deal with the devil” in 2003. “BP paid the Russian oligarchs $6.75bn to join forces with TNK to form TNK-BP as a 50-50 joint venture to protect its interests in Russia,” he said.

The Yugraneft oil field was and continued to be an important component of TNK-BP’s oil well assets, generating at least $1bn in oil revenues over the last decade, he said. In response, BP said that Norex had failed to produce a single fact connecting it to the allegedly unlawful takeover.

One newly released paper, obtained by Norex and published through the New York court procedure, is a BP internal briefing from the late 1990s when the British company was trying to get the measure of the men behind TNK and AAR.

“Sources close to TNK believe [that in the] Tyumen region as a whole, the local oil industry [has] been infested with criminal elements long before Alfa [AAR] took over TNK,” say the court papers.

Another confidential memo, dated 9 September, 1999, and also revealed in the court papers, says “[Former TNK chief executive, Simon] Kukes noted that the battle between TNK and BP Amoco over Chernogorneft is ‘getting personal’. He cited BP Amoco’s efforts to block TNK’s loan application with Export-Import Bank wherein TNK was purportedly characterised by BP Amoco as ‘crooks and thugs’.” A London-based representative of AAR declined to comment.

Another document quotes Georgi Tal, head of the Russian bankruptcy service, who was shot in the streets of Moscow in 2004, as saying: “Tal claimed…the courts did not apply bankruptcy law and acted subjectively. Tal also asserted that Chernogorneft’s bankruptcy is a fiction.”

Norex alleges in its action that BP not only knew about the problems inside TNK but accepted that Norex might have a case against the Russians. The British company asked for an indemnity clause – effectively a guarantee – to be included in the TNK-BP tie-up agreement covering the Yugraneft oilfield, which would mean it would not have to pay any compensation if a successful legal action was mounted over its seizure.

Norex, however, claims this clause is the vital issue and in its main New York court submission, writes: “This indemnification agreement is the ‘smoking gun’ that demonstrates BP’s full understanding of TNK’s chequered history vis-à-vis the ‘events that befell Norex’ in connection with TNK’s seizure of Yugraneft and marks BP’s entrance into the conspiracy.”

However, the UK oil giant rejects this accusation over the guarantee. “BP believes there is no merit in Norex’s suit against it and has moved to have it dismissed,” said a spokesman. “The allegations made by Norex all involve conduct that predates the formation of TNK-BP and had nothing to do with BP.”

The company also gives a different reason for seeking the indemnity clause: “The indemnification provision shows the Norex claims against AAR had nothing to do with BP and BP was trying to protect itself against exactly the kind of meritless claims Norex is bringing.”

The actual wording of the TNK-BP agreement, according to documents obtained by Norex, says: “Each of Access/Renova Holdings and Alfa Holdings shall indemnify and keep indemnified BP Holdings against all losses, claims and demands of whatsoever nature which are incurred by any of them as a result of the Norex dispute.”

Yet Sam Bennett, a longtime BP executive who was working at Sidanko and is now described as “chief negotiator” for BP, sent an email in 27 February, 2002 to Ian Stewart and other members of the press office which read: “TNK, through the even more notorious German Khan, is the real target of Norex’s suit. While our [BP’s] history is intertwined with the events that befell Norex, we long parted company on the road to where we find ourselves today. Our official response should be that this is nothing to do with us.”

Russia was always a big prize for BP and today represents a quarter of its global oil production. In January the British company tried but failed to further its interests there with a new share swap and Arctic exploration deal.

The Norex revelations come at a difficult time for BP, which in February will face one of the largest court cases in history when a New Orleans court hears evidence against it over the Deepwater Horizon accident, in which the livelihoods of many fishermen and others working around the coast of the US southern states were hit by pollution from oil slicks.

BP has spent the 18 months since the Macondo blowout working hard to rebuild a reputation which had already been tarnished by the Texas City refinery fire, propylene trading irregularities and pipeline spills in Alaska. Dudley, who replaced the vilified Tony Hayward, is seen to be making progress but the Norex documents could once again raise questions that were directed at Browne about why bad former protagonists made good future partners.

This time it is not be just a lunch guest who would like a more in-depth answer, it is the US department of justice.

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