Is BP Fighting Kremlin, Russian Billionaires—or Both?

The fate of the second biggest foreign investment in Russia hangs in the balance amid signs of a shifting mood in the Kremlin which may have wrong-footed investors and one of the world's biggest oil companies.

TNK-BP A TNK-BP gas station. British oil giant BP is struggling with barriers to its Russian joint venture's operations—but it's not clear who's throwing up the roadblocks.

Raided by security services, its board paralyzed, key technical experts barred from working and deluged with court cases and labor inspections, TNK-BP is a struggling $38 billion oil company producing as much crude as Britain.

As investors scrutinize the saga to read the runes for future projects in Russia, signs are multiplying that the root of the dispute may not be in the Kremlin but rather the boardrooms of Russian billionaires. Even that is uncertain.

TNK-BP, a highly lucrative 50-50 joint venture between BP and four Russian-connected billionaires, began in 2003 amid much fanfare in a deal blessed by then-president Vladimir Putin. It produces a quarter of BP's global oil output and posted a net profit of $5.7 billion last year.

TNK-BP's first five years were a success story. Former BP managers working at the venture talk with pride of how they improved management of oilfields using the latest technology, cut back leaks, and boosted operating efficiency.

But its ownership structure, which gives management control to a foreign oil major, became an anachronism following a Kremlin-led drive from 2003 which took back under the state's wing control of all big Russian energy assets.

So when a campaign against TNK-BP suddenly started this year involving tax police, alleged labor code violations, security service sweeps and court cases, many assumed the Kremlin was pressuring the firm to accept a state partner.

A similar barrage of official harassment was unleashed in 2006 against Royal Dutch Shell to force it to sell a controlling stake in its giant Sakhalin gas venture to Russia's state-dominated energy champion Gazprom.

This looked like a replay, but there have been repeated statements from officials, including President Dmitry Medvedev, that the state does not want a stake.

"Something has changed in the past few months... The government has changed. Players have moved around. Power is more dispersed," said a source close to BP, speaking on condition of anonymity like most in this case because of its sensitivity.

Asked what the Kremlin wants out of the affair, one TNK-BP manager shrugged his shoulders: "Nobody knows."

"Grab TNK-BP to sell it later"

Sources close to TNK-BP say there is strong evidence that German Khan, one of the billionaire co-owners and an executive director at TNK-BP, contributed to the official harassment as part of a campaign to weaken BP's control of the firm.

They point to three signals:

* an unauthorized letter from Khan in April to migration authorities asking for the number of permits for foreigners at the company to be cut dramatically. The note contradicted instructions from TNK-BP CEO Bob Dudley.

* when 140 BP specialist staff seconded from BP to TNK-BP tried to return to work after resolving visa problems, office security barred them from the building. Khan is responsible for TNK-BP security.

* a court case launched against TNK-BP over its use of BP secondees in a Siberian court. The suit was launched by Tetlis, a little-known brokerage, two of whose managers used to work in the 1990s at companies in Alfa Group, where Khan and fellow TNK co-owner Mikhail Fridman are partners.

"A lot of my colleagues believe this is about control," one senior BP source said. "They think the Russians want to grab TNK-BP to sell it later at a higher price with control."

Khan has declined to be interviewed, but Fridman says the wave of official action against TNK-BP is normal law enforcement unconnected to the Russian shareholders, and that Khan has also been questioned by officials as part of their checks.

The aim of the Russian shareholders, he added, is simply to improve operating performance at TNK-BP and to remove what he calls a "parallel management structure" inside TNK-BP reporting to BP, which furthers BP interests at the expense of Russians.

"The performance of TNK-BP is just awful compared with its peers," Fridman said, citing the company's shrinking market capitalization and its declining production.

Independent analysts disagree. "We believe TNK-BP Holding's results are strong, confirming its ranking as one of the most efficient oil companies in Russia," said local brokerage Renaissance Capital in a comment this week on 2007 results.

CONTINUED : "Will Russia Go the Same Way as Venezuela?"

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