BP, Russian Shareholders' Talks Break Down: Sources

Talks between British oil company BP and its Russian partners over the future of their lucrative joint venture TNK-BP have broke down after BP rejected a Russian ultimatum, sources close to BP said on Wednesday.

The fate of TNK-BP, the largest foreign venture in Russia by a single firm, is seen as a bellwether of the Kremlin's attitude towards global investors.

TNK-BP made $5.3 billion net profit in 2007 and pumps a quarter of BP's global oil output.

"BP rejected the ultimatum," one source said, referring to three demands presented to BP in recent days by the Russian shareholders.

"The talks broke down at 11 pm last night in London," the source added.

The four oligarch shareholders demanded a 60 percent cut in TNK-BP's foreign employees, equal representation on all TNK-BP subsidiary boards and increased powers of attorney for one of them who is also part of TNK-BP's senior management, German Khan.

The Russian billionaires delivered their ultimatum to BP Chief Executive Tony Hayward -- who attended an investment forum in St Petersburg on Saturday -- and demanded BP agree to it by 10 am London time on Wednesday or face the consequences, the sources said.

BP rejected the demand, they added.

Speaking in London on Wednesday, Hayward insisted that he remained in discussions with the Russian partners, though he said it would take some time to reach an agreement.

Strategy and Ownership

The boardroom battle at TNK-BP, as well as a campaign of harassment by Russian authorities this year, are linked to what company sources say is a fight over the highly lucrative firm's strategy and future ownership.

The Kremlin is widely believed to want a major stake for one of its state-controlled energy champions in TNK-BP.

This would mean that either BP or the Russian oligarch shareholders -- or both -- would have to cut their stakes.

Sources familiar with the matter say that BP had been talking to Gazprom about a possible deal, angering the Russian oligarchs who felt they had been cut out of the negotiations.

The two sides have also clashed over TNK-BP's use of staff seconded from BP -- something the Russians feel is too expensive and unnecessary -- and over Russian desires for TNK-BP to expand abroad.

The four major Russian shareholders -- Khan and Mikhail Fridman of Alfa Group, Viktor Vekselberg and Len Blavatnik -- have accused TNK-BP's top management, led by expatriate Robert Dudley, of acting only in BP's interests and have demanded his removal.

Dudley insists he has always acted on behalf of all shareholders, and BP has backed him.

The two sides had an angry exchange of letters last week.

Alfa Petroleum Holdings sent Dudley a letter dated June 5 alleging he had "seriously violated Russian laws ... and the shareholders agreement" by holding what it termed an illegal meeting of the TNK-BP Holding board.

BP replied two days later rejecting the accusation as "disingenuous" and saying the letter did "not even articulate, let alone attempt to substantiate" its claims.

"We're now expecting that the Russian side may well try to injunct the shareholders' meeting," the source said, referring to TNK-BP's plans to hold a meeting on June 26.

"We're expecting more legal action at any time." TNK-BP managers are dismayed by the prospect of action to stop the shareholders' meeting, which they say would prevent the company from being able to pay its dividend and would deprive the company's 18,000 minority shareholders of a vote on statutory matters.

BP and the four oligarchs own half the shares in British Virgin Islands-registered TNK-BP Limited, which in turn owns through other units 95 percent of TNK-BP Holding, the listed Russian entity.

Minority shareholders own the other five percent.

Fresh legal action would come on top of a wave of other attacks on TNK-BP.

According to sources familiar with the matter, these include three labor inspections, raids by the main domestic spy agency, a lawsuit in a Siberian court stopping the use of BP secondees at TNK-BP, an Interior Ministry tax summons and a Moscow bailiff's injunction.

"What the Russian side is doing is taking a scattergun approach," said the source. "They are hoping that one or more of these actions will pay out and get Dudley suspended from his post."

Attempts to reach the Russian shareholders for comment were unsuccessful.

A spokesman for Alfa-Access-Renova, the consortium representing the billionaire oligarchs, had no immediate comment and spokesmen for Fridman and Khan's Alfa Group, as well as Vekselberg's Renova, were not immediately available.