TNK­BP: AN INSIDE LOOK AT THE HISTORICAL DEAL
Exclusive interview with Bob Dudley, Group Vice President, BP, and proposed President and CEO of TNK-BP

 What specifically has put to rest the concerns BP has had in the past about corporate governance in Russia, and TNK in particular, to the extent that you feel confident enough to make such a huge landmark investment?

 We’re very confident about the governance framework for TNK­BP. Although there were widespread concerns over governance in the 1990s, there has now been real reform and there is a new climate that we believe favors long­term investment and long­term relationships. Legal reforms and economic recovery have played a part in creating this climate.

BP is well placed to gauge the degree to which Russia – and our own situation here ­ has changed, having remained in Russia despite having a difficult time initially. We believe there is now scope to develop strong, stable, credible, corporate governance and in particular to develop our relationship with TNK.

We have taken the utmost care to build a strong framework for TNK­BP. We have designed the transaction in a way which ensures that there is a genuine continuing common interest in success. The payment process, the pricing structure and the agreement by AAR to retain their interest at least until 2007 all underpin our confidence that the risks are limited and manageable.

BP and AAR have agreed to apply international corporate governance principles, as practiced by BP, and to share representation on the Board. Apart from these legal and structural factors, which act to safeguard shareholder interests, we believe that the governance of TNK­BP at a practical level will be successful because of the trust that we have now built up in working with our Russian partners over a number of years.

 What can you tell us about the integration process and how it is going?

 The integration process is going well. In fact it has been smoother and moved more quickly than I originally thought was possible. We have just completed phase 1 where we achieved a good understanding of both TNK and Sidanco businesses models and work processes. The businesses model and high level organisational structure for the new company has been created with a clear view of the processes that will be in place to make the company operational on it’s first day of existence (Day One). We have also appointed the senior management of the company and are well on the way to identifying the next levels of managers who will come from TNK, Sidanco and BP.

The next phase of the integration process has been launched, which directly involves the newly appointed management team in agreeing the business processes needed for the new company after Day One and the personnel selection process for the remainder of the organisation. They will also be identifying major synergy opportunities in the company.

All of this will have the company well prepared to begin operations when the deal is closed later in the summer.

 Many observers have predicted that the BP ­ TNK deal will act as an impetus for other international oil majors to invest in Russia on a similar scale. Do you share this opinion? If so, do you expect potential major investors to wait until after the parliamentary and presidential elections to commit themselves?

 The creation of TNK­BP is an historic event, and we are all involved in this. BP was able to feel confident about making this deal because of our experience operating in Russia and our association with this particular set of Russian partners. That is something unique among the international oil majors. They do not have that history and may be more reticent about investing on a similar scale. Also the opportunity set for such an investment by an international oil major is smaller as a result of this deal and the Yukos/Sibneft merger.

I do not think any serious investor in the Russian oil industry will be looking to make that decision on the basis of any near term political process. Our industry is a very long cycle business and any company making a substantial investment would need to be confident that they could succeed in the venture for many years into the future. That is why BP’s experience on the ground was so valuable in giving us that confidence.

I think that the Russian government and President Vladimir Putin understand that with new investment other Russian companies will be able to repeat our experience, attract international capital and high technology, create a successful and competitive business and go to international markets. Our deal could become a turning point in the development of the Russian economy that is why the President of Russia is following our work with great interest.

 In the light of the unconfirmed reports earlier this year about moves by the Ministry of Natural Resources to revoke Rusia’s license for the Kovykta field, and Rosneft and Gazprom ambitions to export gas to China, are you confident that the auctions for licenses to exploit the untapped major Eastern Siberian gas fields will be conducted on an even playing field?

 Licenses at Kovykta and VC (Verkhnechonskoye) are held respectively by RUSIA Petroleum Company, and Verkhnechonskneftegas, a subsidiary of RUSIA Petroleum. They are the operating companies for these two projects.

The Ministry of Natural Resources is reviewing many licenses in Russia in an ongoing process to ensure greater activity and investment within the sector. Both these projects are long term ones and do not form part of the growth target mentioned for TNK­BP. This will come mainly from Volga­Urals and West Siberia.

BP’s position with regards to Gazprom has consistently been that Gazprom would be welcome into the project to supply Kovykta gas to China on commercial terms and that remains the case.

The issue of RUSIA Petroleum’s Kovykta license is different from the question of whether future potential auctions of unlicensed acreage will be conducted on a level playing field. I hope that in the future such auctions will be conducted in a fair and transparent fashion.

 Where does BP­TNK stand in the debate concerning the East Asian pipeline to Nakhodka or China? What is your policy concerning the wider issue of private ownership of pipelines in competition with Transneft?

 TNK­BP wishes to see hydrocarbons delivered to customers in East Asia by the most cost effective routes, targeted at regions of high demand and future growth.

As regards the question of private pipelines, the key for Russia is to expand the capacity of the pipeline system to export hydrocarbons to markets in Western Europe and East Asia. This could be done though private sector means if Transneft is unable to expand export capacity on its own. TNK­BP believes that as a monopoly transporter, Transneft should be regulated by an independent regulatory body and managed on a fair and transparent basis, which does not discriminate against any producer.