TNK-BP (RUSSIA) 2008 – (A07-09-0006)
1. Why did BP create TNK-BP? Are the partners equally committed and motivated to create a successful venture?
2. How has the JV performed? Has it met expectations?
3. Why has the JV experienced so many problems?
4. Does the Russian government have a specific agenda for the JV?
5. What options does BP have? What would you recommend?

1. In comparison with its competitors, the production growth of BP was constrained by its mature oil fields. As a result of the constrained production growth, BP’s financial performance was lagging behind compared to the financial performances of their competitors (e.g. ExxonMobil, Shell). Therefore, BP was aggressively looking for new oil reserves (p. 2). Russia was the world’s largest natural gas producer; the proven reserves were ranked 7th worldwide and there were huge opportunities for further exploitation. It seems like the Russian part of the joint venture is less motivated. They have done this deal to improve profits and to increase their benefits and potential growth.

2. For BP, the joint venture worked out quite well. As stated in the text: “TNK-BP accounted for nearly one-quarter of BP’s oil production.” If the joint venture comes to an end, this would have serious (financial) implications for BP. Also, in the period 2002-2006 the net profit grew from 1.5 million dollars to 6.4 million dollars.

3. One of the issues was that the partners were not in agreement as to the level of non-Russian growth. The Russian shareholders thought that BP was “blocking efforts to expand TNK-BP outside of Russia because that would compete with BP’s own operations.” According to the Russians, the CEO (Dudley) only acted on behalf of 50 percent of the shareholders, meaning that he didn’t act in the interest of the Russian shareholders (of AAR). Another obstacle was the amount of foreign managers/expatriates, according to the Russian shareholders there were too many of them. This ultimately led to the visa problems for the BP expatriates, who were not allowed to enter Russia in early 2008. Dudley blamed a TNK-BP executive for setting up this via problem. The Russian shareholders said that TNK-BP should reduce the “venture’s reliance on foreign specialists”. Besides this, there was an obvious cultural gap between the shareholders of BP and the Russian shareholders. Fridman stated beforehand that the difference/cultural gap between the Western style of doing business and the Russian style of doing business would provide the biggest challenge.

4. Russia was confronted with several problems in 2008: a) aging oil fields and poor maintenance. This could be solved by accepting expatriates like those of BP who were willing to invest in modernizing the oil fields. Here I cite Browne, who commented that he knew that “they [Russian Shareholders] are reinforcing President Putin’s agenda of modernization.” b) a tax and regulatory regime that was increasingly viewed as confiscatory by oil companies. c) a dearth of Russian and foreign investments in exploration and development.

5. There are several options available for BP as mentioned in the article:

a) “One option was to take the dispute to the highest levels in the Russian government, perhaps even Putin himself.” However, according to Sechin, this option would have limited value.
b) “A second option was to seek British government help, which had been offered.” The British Prime Mininister Brown was going to visit President Medveded in July.
c) A third option was legal action against AAR for violating the shareholder agreement.
d) “The last option was that BP could sit tight, continue to run the business, and resist the Russian shareholders.” Although BP said Dudley would keep his job, this seems to be impossible.

It would be advisable for BNP to do anything to keep the joint venture TNK-BP alive, since the revenues are high and losing stake in the JV would have serious financial implications for BP. So I would suggest to have a lot of meetings with the Russian shareholders, trying to come to an agreement.