Following the 1991 collapse of communism in the Soviet Union, many energy companies saw the former Soviet republics as a potential energy El Dorado, where hugely profitable deals could be struck with the post-Soviet leadership. As the Russian Federation in 1992 tumbled into hyperinflation, the timing seemed perfect to move in with Western cash and expertise. Since those halcyon days, however, Moscow has reasserted increasing control over its energy assets, bankrupting Yukos and squeezing Shell out of its Sakhalin development, to name but two instances.

BP is the world's third-largest global energy company, based in London. BP's crown jewel in Russia is TNK-BP, of which it owns 50 percent; Russian billionaires Viktor Vekselberg, Mikhail Fridman and Leonid Blavatnik own the other half through their Access Renova and Alfa Group companies. TNK-BP accounts for a fifth of BP's global reserves, a quarter of BP's production, and nearly a tenth of its global profits.

In June 2003, amid much fanfare, BP and Russia's TNK signed a multibillion-dollar contract to create a joint energy venture, BP-TNK, at a London energy conference while Russian President Vladimir Putin made a state visit to Britain. Under the terms of the contract, the biggest single foreign investment deal in post-Soviet Russia, BP was to commit $6.15 billion to the new joint venture. After noting that the agreement and a Baltic pipeline memorandum would make Britain Russia's largest foreign investor, British Prime Minister Tony Blair told conference attendees, "The things that bind us together in politics, security and economics are very important. Together we can achieve our mutual goals of global stability, economic growth, and international development."

Buoyed by the deal, in April 2004 BP reported first-quarter profits of $4.72 billion, a 17-percent increase on the same period the previous year.

TNK-BP is now Russia's third-largest oil producer. In November 2006 TNK-BP settled a back-tax bill reportedly for $1.4 billion, thought to be the second-largest tax settlement ever paid by a Russian firm.

Worse was to come; in June 2007 TNK-BP was forced to sell its stake in the Kovykta gas field at a discount price to Gazprom. TNK-BP reportedly agreed to sell Gazprom its majority interests in Kovykta for $700 million to $900 million, a figure that analysts said was a fraction of what TNK-BP's stake was actually worth, as Kovykta reportedly has enough natural gas to supply all of Asia for five years.

Bad as 2007 was, 2008 is not proving a banner year either. In March the Federal Security Service searched TNK-BP's Moscow headquarters and BP's offices and last week returned to BP's bureau to conduct new searches without stating what they were seeking. In March, TNK-BP employee Ilya Zaslavskii was arrested on suspicion of industrial espionage.

TNK-BP nevertheless remained upbeat, with Executive Vice President, Upstream Sergei Brezitskii telling the press earlier this month, "A 1 percent drop of oil production in 2008 and its subsequent growth in 2009 was expected, according to the five-year development plan of the company adopted in 2007. Later, this forecast was revised, and now we are expecting that our oil production in 2008 will remain at the level of 2007 and start growing in 2009." TNK-BP Chief Operating Officer Timothy Summers stressed the company's importance to the Russian economy, telling journalists that this year TNK-BP will pay $30 billion in taxes compared with $20 billion paid in 2007, noting, "As to the taxes and other payments into the budget, given the oil price at roughly $100 per barrel, the payments of the company in 2008 will amount to approximately $30 billion," before concluding that TNK-BP since 2003 has paid $48 billion in taxes.

There have been months of speculation in Moscow that the state-controlled natural gas giant Gazprom wants to buy a majority stake in TNK-BP. Neither BP nor the Russian shareholders say they are prepared to sell.

The possible entry of Gazprom, whose market capitalization currently stands at $362 billion, potentially changes everything. According to Russian President Dmitry Medvedev, Gazprom accounts for approximately 20 percent of Russia's federal budget revenue, while Gazprom's capitalization has increased an astounding 46 times since 2000. Those with long memories will recall that in December 2006, Gazprom secured a majority stake in the Sakhalin-2 Russian oil and gas field formerly led by Royal Dutch Shell; at the time, Medvedev was chairman of Gazprom's board of directors. Sakhalin-2 contains estimated reserves of 1.1 billion barrels of oil and 500 billion cubic meters of natural gas; the "friendly" buyout left Royal Dutch Shell with a 27.5-percent stake.

Now Vekselberg, Fridman and Blavatnik have spoken to BP Chief Executive Tony Hayward about TNK-BP CEO Robert Dudley, suggesting that he step down. BP is backing Dudley and issued a statement commenting, "BP fully supports Bob Dudley's position as president and CEO of TNK-BP. Mr. Dudley is a highly experienced and outstanding industry executive who has consistently managed the business in the interests of all its shareholders, and BP has absolute confidence in him."

While Kremlinology remains a dark and arcane science, BP management doubtlessly is scrutinizing Medvedev's May 27 remarks when he said of Gazprom, "Our company's role is exceptional. Gazprom has been in the vanguard of the Russian economy and has become a structure that is regarded on an international scale and that people have to reckon with." For TNK-BP's British partners, the day of reckoning is drawing ever closer. It's enough to make a British stiff upper lip tremble.

(e-mail: [email protected])

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