Oil
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By 2006, there were new strains in relations between BP and the oligarchs. The latest obstacle was BP’s interpretation of the shareholders’ agreement, treating TNK-BP as a subsidiary, even in the corporation’s accounts, rather than an independent, jointly owned company. While Browne assumed that the partners’ receipts of $18 billion in dividends would placate Fridman, he misunderstood the oligarch’s agenda. In Fridman’s mind, oil was Russia’s only resource that could be the foundation of a global empire, and he was in a prime position to become his country’s Rockefeller. BP, he hoped, could help him realize that dream, but instead his ambitions were being obstructed by Browne. The only solution was to weaken BP’s control. Fridman began composing a narrative to portray the Russian partners as BP’s victims, and equating the oligarchs’ interests with those of the Russian state.
Robert Dudley, the oligarchs complained, was resisting their plan for TNK-BP to invest outside Russia. Browne banned TNK-BP from opening gas stations in Germany to compete with Aral, the biggest distributor in the country, because it was owned by BP. He did reluctantly agree to TNK-BP opening offices in Venezuela, Turkmenistan and Kazakhstan, but blocked Fridman’s proposals to drill for oil in Cuba and Kurdistan. “That’s against American government regulations,” said Dudley. “But we’re not an American company,” countered Fridman. “We are Russian. You’re treating TNK-BP like a subsidiary.” Dudley closed his ears, as did Browne. BP wanted to reenter the Iraqi oilfields, and any involvement in Kurdistan would alienate the government in Baghdad. One year later, Fridman would fume that Hunt Oil, an American company, had snatched the Kurdistan contract, but in June 2009 BP would secure the first Western contract to develop Iraq’s oilfields. “We’re stagnating,” Fridman complained after Dudley explained his reinvestment plan to earn profits over the next 25 years. “We’re not interested in investing for 45 years’ time. We want a good return — now.” He was a player, and felt that Dudley did not understand business and risk. Fridman wanted a buying spree like the one Browne had executed in the 1990s, with TNK-BP buying the equivalent of Amoco, Arco and even Sidanco to become a global corporation. Dudley’s only concession was to spend $900 million on gas stations across Moscow.
The partners discussed their irritation with government officials. Igor Sechin was aggrieved that TNK-BP’s chief executive was an American who spoke only pidgin Russian. Dudley was never invited to official functions, and could not address the 60,000 Russian employees. “He doesn’t respect the reality of Russia,” Sechin felt. “He can’t work with the government or in the regions.” The issue was governance — if TNK-BP’s chief executive was Russian, the company would be part of Russia. Fridman agreed. Securing the Kremlin’s support against BP was easier in the aftermath of the journalist Alexander Litvinenko’s murder by polonium poisoning in London in November 2006, and sympathy for Britain eroded after a former KGB officer was publicly accused by the British government of the murder.
Mikhail Fridman’s relationship with the Kremlin was misunderstood by Browne and Hayward. Although he met the oligarchs at board meetings, Hayward relied on two Americans for precise information — Dudley and James Dupree. Dupree, a Texan oil engineer, had arrived in Moscow from BP’s operations in Angola, giving the impression that BP regarded the two civilizations as not dissimilar. The Russian oil engineers found him arrogant and patronizing, and complained they were ignored. They interpreted his attitude as “I’m from Texas and we know best.” “He’s a low-level guy and not intelligent,” was their self-interestedly distorted opinion. For his part, Hayward was unsympathetic to the oligarchs. He trusted Dupree despite his inability to speak Russian and his disdain for Russian culture. Dupree, with Dudley’s support, convinced Hayward that by December 2007, at the end of the four-year lock-in period between BP and Alfa-Access-Renova, the oligarchs would be inclined to sell their 50 percent stake. “They want cash,” Hayward was told. “I was always trying to figure out their strategy from so many inconsistent actions,” Dudley told his boss. “But they just want money.” The oligarchs were complaining because, unless someone paid a slam-dunk amount for their stake, they wanted more profits from their investment. “Something like 50 percent of $60 billion,” was the sum Hayward mentioned following a conversation with Vekselberg in Davos. BP valued TNK-BP at between $38 billion and $45 billion, so Hayward thought there was room for negotiation. But Vekselberg, renowned for spending $75 million on the Forbes family collection of Fabergé eggs, had unintentionally confused Hayward. In the oligarchs’ minds, any emotional attachment to a business was self-destructive. If someone made a stupendous offer, there was no alternative but to sell; but so far they had no intention of quitting the oil business.
The misjudgment of their Russian partners by Dudley, Hayward and Browne had fateful consequences. In their own scenario, BP’s future in Russia would be better served with Gazprom. Not only were BP executives accustomed to dealing with governments rather than businessmen, but a relationship with Gazprom would offer other opportunities. They were encouraged by Alexei Miller and Alexander Medvedev. TNK-BP’s assets and Gazprom’s business, agreed the state oligarchs, were “well matched.” But the triangular relationship among Fridman, Gazprom and the Kremlin did not, as Browne imagined, lead to an obvious conclusion.
Fridman feared Miller’s ambitions to own the lucrative oilfields, and he suspected that Browne and Hayward were encouraging Miller’s appetite. Miller, Fridman knew, had asked Browne and Hayward whether they would oppose the purchase of the oligarchs’ stake. “Talk to the partners,” Hayward told Miller. Miller agreed to do so, hinting that the invincible Gazprom could create problems if its ambitions were stymied. Hayward placed himself, as he later told his directors, “in receiving mode.” So long as BP’s interests were protected, he decided, the Russians should resolve their own dispute. Vekselberg’s friends at Gazprom informed him of the conversation. “What happened at Gazprom?” Vekselberg asked Hayward and Dick Olver, John Browne’s deputy, at a board meeting in Moscow. “We had a broad conversation, nothing specific,” replied Hayward, convinced that he was required neither to be wholly candid nor to offer Vekselberg reassurance. The Russians disliked Hayward’s obfuscation. Shortly after, Fridman bumped into Miller at the private jet terminal at Vienna airport. Both had flown from Moscow to watch a football match. Fridman challenged Miller about his conversation with Hayward. “How could you know what happened at the meeting?” asked Miller. “I was by myself with Hayward, and there were no interpreters.” “We’ll only sell our stake for an attractive offer,” Fridman volunteered.
Tony Hayward hoped to win the Kremlin’s support against his Russian partners. One of BP’s advisers fancifully reported that although “the road map to seize Khodorkovsky’s assets was organized by the Alfa Bank” (Fridman’s major asset), the oligarchs’ relationship with the Kremlin had deteriorated after Khodorkovsky’s arrest. Other advisers, including ex-ambassadors, academics and Mark Heathcote, a former senior MI6 officer, suggested that the oligarchs’ access to the Kremlin had become restricted. They could no longer buy more assets, Browne was told, but they needed to pay officials more bribes to keep their empires. Evidence of the oligarchs’ declining influence, said BP’s advisers, was Roman Abramovich’s agreement to sell Sibneft to Gazprom for $14 billion. That money, it was speculated, would be deposited in an offshore bank to be divided between Abramovich and Alexei Miller. Only John Gerson, another former MI6 officer, argued the opposite, that BP was “in for big trouble.” All those reports, except Gerson’s, encouraged Hayward to calculate that the Kremlin would direct Fridman and the partners to be similarly paid off. If anything, BP’s executives believed, their relationship with the Kremlin was protecting the oligarchs.
Hayward, however, was misinformed by unsubstantiated fantasies. Lamar McKay, BP’s only eyewitness to Fridman’s personal relationship with Putin, had been withdrawn from Russia to resolve the corporation’s problems in America. In 2004 and 2005, McKay had accompanied Fridman to meetin
gs with Putin and Sergei Priodka, the president’s assistant on foreign affairs. He had observed how Fridman reported to the president every detail about TNK-BP’s production, reserves and corporate behavior, and reported that Putin clearly approved of the company’s direction. Fridman also did not believe that Abramovich was compelled to sell Sibneft. The sale, Fridman believed, was only made to finance his lifestyle, which included giant yachts, countless houses and the ownership of Chelsea Football Club.
Handicapped by that misunderstanding, in early 2007 BP began briefing the media that AAR wanted to sell its stake, and that the Kremlin supported Gazprom’s bid. Inevitably, Fridman became irritated by the apparent conspiracy between Miller and Hayward. He urged Peter Aven to discover the truth from the Kremlin. After his visit to the Citadel, Aven reported that so long as the partners remained politically loyal and neutral, neither Igor Sechin nor Putin intended to expropriate their ownership. Indeed, Sechin had advised Putin against compelling the oligarchs to sell. Fridman began stirring. Newspaper correspondents in Moscow reported mischievous rumors that Sechin, as chairman of Rosneft, was competing with Miller to buy TNK-BP. Hayward was cast as an unsubtle executive adrift between the competing state oligarchs, destabilized by the Kremlin and failing to finesse his partners to execute an elegant solution.
Having cast the company as duplicitous for secretly negotiating with Gazprom, Fridman sought to exploit BP’s new weakness. Since 2003, Tony Blair had been BP’s ally. The corporation could rely on the prime minister to telephone Putin and caution him about the consequences of any argument between BP and Russia. On the eve of Blair’s resignation, in March 2007, Hayward joined Blair’s successor Gordon Brown in Moscow. He hoped Brown would persuade Putin to halt the spiral into conflict. The argument was convincing. BP’s investment had been beneficial for Russia. With advanced technology and an incentive scheme for workers, production had been boosted by 13 percent every year, taking over 30 percent of the oil from the ground compared to 25 percent in the Soviet era. Booked reserves had increased to 10.5 billion barrels. TNK-BP had paid over $50 billion in taxes, levied at 90 percent on oil companies’ revenue, not profits. Putin had recovered the losses from the assets privatized during the 1990s by tax rather than renationalization, and Hayward assumed he would not want to harm Russia’s financial interests or international reputation. Reassured by Putin’s agreement to meet and listen to his comments, and then by the president’s smiles and pleasantries, Hayward would have been shocked by the officials’ scoffs after his departure: “Why should Putin care about Brown?”
Hayward had also assumed that he would secure Sechin’s support by agreeing to bid in the auction for Yukos’s assets in March 2007. As the chairman of Rosneft, Sechin had asked Hayward to bid as part of a charade. Under Russian law, a sale by auction was only valid if there were at least two bidders, so to maintain good relations BP agreed to act as the patsy. BP opened the bidding at $7.5 billion, and immediately dropped out after being outbid by a mere $97 million. At the same meeting with Sechin, Hayward also agreed to buy a 1 percent stake in Rosneft for $1 billion when the company was floated in London in June. Rosneft, Hayward knew, was Sechin’s pride. With 170,000 employees and $9 billion capital expenditure every year, it had, since its employment of former Morgan Stanley banker Peter O’Brien as chief financial officer, sought international acceptance. A billion dollars seemed to Hayward a fair price to gain access to the Kremlin’s oil oligarch.
Convinced of the strength of his position, Hayward encouraged Alexei Miller once again to bid for Alfa’s 50 percent stake in TNK-BP. Spotting Fridman at a meeting in the Kremlin, Gazprom’s chief made an offer. Peter Aven called Putin to ask for his reaction. Putin was again unambiguous. Despite his reservations, he liked the 50/50 shareholding as a good example of cooperation, and he wanted BP to stay in Russia. “Tell Miller that Alfa’s share is not for sale,” he said. In Fridman’s opinion, Hayward’s tactics had failed. Events in London would reinforce his skepticism.
Ever since Christmas, John Browne had been struggling to prevent a London newspaper publishing an embarrassing account by Jeff Chevalier, his former boyfriend, about their relationship. Browne’s homosexuality had never been concealed from BP’s directors. Many of his male friends had attended BP functions, and Chevalier was a frequent guest at parties and weddings, and even had traveled with Browne to Peter Sutherland’s home in Spain. The end of their relationship, Sutherland and his fellow directors had heard during 2007, was messy. Browne was threatened with embarrassment by Chevalier’s account of their relationship, which he was offering to British newspapers. “I can’t talk about it,” explained Browne. “There’s a massive injunction which even covers myself not to speak.” Some within BP speculated that an agent employed by the oligarchs, BP’s estranged Russian partners, had led Chevalier to Associated Newspapers in a plot to destroy Browne, but there was no evidence for that conspiracy theory. Others were convinced that Peter Sutherland and Roddy Kennedy, BP’s influential head of media relations and an éminence grise, found Browne’s sexual behavior offensive to their Irish Catholicism. Neither man appeared willing to offer support after Browne’s vulnerability was amplified in February 2007, when Wall Street and the City of London had been spooked by his admission that BP would miss its five-year production targets. The “Sun King’s” shine had evaporated. Despite Browne having clawed BP back from the dark days, its shares had risen just 4.5 percent, compared to 15 percent by Shell and 36 percent by Exxon. In July 2006, BP’s and ExxonMobil’s shares were both trading at about $76. By February 2008, ExxonMobil’s would be $90, while BP’s were $66.
Browne’s estrangement from his fellow directors had deepened. In America, Lamar McKay was negotiating settlements for the criminal damage in Texas City and Alaska, but could barely mitigate BP’s embarrassment by pleading guilty and paying about $70 million in fines. Those incidents had permanently tarnished Browne’s professional reputation. His impatience, bravado and unsettling certainty about his decisions could no longer be tolerated. Resolutely, the directors decided he should leave in July 2008, five months earlier than agreed, but cushioned by $32 million in benefits. That decision changed on May 1, 2007. Over breakfast with Sutherland, Browne revealed that his application to prevent a newspaper publishing Chevalier’s account of their relationship had spectacularly imploded: a judge had criticized Browne for submitting an untruthful statement to the court. Browne hoped to remain at BP, but later that morning was advised by two trusted media specialists that his position was untenable. After 41 years’ service, he abruptly resigned, losing about £15 million of his expected benefits.
The premature transition from Browne to Tony Hayward was, Fridman lamented, a lost opportunity to make a deal, but also a chance to squeeze some advantage from BP. Hayward had become critical of Browne, even though Thunder Horse and Prudhoe Bay had become Hayward’s ultimate responsibility. “We have a management style,” Hayward had said on BP’s website in December 2006, “that has made a virtue out of doing more for less. 100 per cent of the task completed with 90 per cent of the resources.” Browne’s penny-pinching, Hayward admitted after becoming chief executive, compounded by “dreadful” bureaucracy and inefficiency, had impaired BP’s performance. “I’ve had to eat a bit of humble pie,” he confessed. “I’ve had to recognize my failings.” BP’s profits in 2007 would fall 22 percent to $17.2 billion, compared to Shell’s $28 billion and ExxonMobil’s $40 billion. The cure, said Hayward, would be a “fundamental shift in the way BP works.” Four layers of bureaucracy would be removed, the “Green Book” dumped, the adversarial management style abandoned, and, as a sign of the new austerity, the Armani-style beige suits worn by BP security men would be replaced by traditional dark gray. But there would be no change in BP’s relationship with the oligarchs. Hayward’s wishful thinking coincided with their decision to take advantage of the upheaval in London and intensify the pressure.
In June 2007, German Khan announced that Kris Sliger, an Ame
rican responsible for business development who blocked TNK’s developments in Cuba and Kurdistan, should be dismissed. The oligarch’s next missile was aimed at Robert Dudley, who Khan insisted must be replaced by a Russian. “If 50 percent of the shareholders have no confidence in the CEO,” said one of the partners, “he should go.” Khan’s philosophy, Dudley knew, was always “Win, win, win on every issue, big or small.” For Russians, fighting was natural. In October 2007, Khan delivered a personal message to Dudley: “The government is going to squeeze you to leave the country.” “I’ve ignored it,” Dudley reported to London. Hayward accepted Dupree’s advice to resist the Russians.
In Moscow, the oligarchs had arrived at a profound conclusion. Their treatment as inferiors by BP’s executives reflected colonial arrogance, an unshakable confidence in the superiority of American and British culture over Russian. “Of course we’re different,” said one of the oligarchs, “but we’re smart enough, and their culture doesn’t work here.” “I’ve read many more books and know more about art and music than Hayward,” said another oligarch, “so I don’t know why he thinks he’s superior.” Their grievances echoed identical discontent with the oil majors voiced over previous decades in Venezuela, Mexico and elsewhere. Unintentional arrogance soured relationships between oil majors and oil producers. In the bond between BP and TNK, the repercussions were unpredictable.
Tony Hayward did not anticipate any unusual difficulties at TNK-BP’s regular board meeting at the Eden Roc hotel in Antibes in November 2007 at which Fridman and the other Russian partners were present. Before the meeting began, Fridman approached Hayward. “We have a big problem,” he said. “President Putin says we cannot have a non-Russian running a Russian oil company.” Skeptically, Hayward replied, “Thank you, Michael, but I would have to hear that from the president personally.” “This is a problem that will not go away,” warned Fridman. “Hayward has refused to fire Dudley and does not want to cut a deal,” Fridman reported before the board met. In that potentially incendiary atmosphere, Dudley presented a plan to expand TNK-BP in Russia, funded by a 75 percent cut in the annual dividend. The Russians were furious. Oil prices and profits were rising. They wanted to expand across the world, not to spend money in Russia. “This is war,” one partner announced as they flew back in a private jet from Nice. “But first we must talk to our friends.” Nothing could be done without the “emotional support” of the Kremlin.