BP in Russia (A)

Abstract

In his tenure at BP, Robert Dudley had developed a reputation for coolness under fire. Which was a good thing, since his assignments frequently put him in the cross hairs of powerful and angry interests.

Dudley, the son of a U.S. naval officer, grew up on the Gulf Coast of the United States and then moved with his family to the Chicago suburbs for his high school years. He studied chemical engineering at the University of Illinois and earned an MBA at Southern Methodist University in Dallas. Then he went to work for AMOCO, the Chicago-based oil giant, and became known for developing fields and doing deals in Texas, Scotland, Russia and China. After BP acquired AMOCO in 1998, Dudley was identified as a top talent and brought to London to be part of group of young executives that served directly under CEO Lord Browne – a group mockingly referred to as Browne's “teenage mutant ninja turtles.”

In 2003, Browne sent Dudley to Russia to be CEO of TNK-BP, a 50/50 joint venture between BP and AAR, the holding company for a group of Russian oil oligarchs. According to the founding agreement, BP was to have operational control of the company. This put Dudley in charge of building TNK-BP's operation, which consisted of substantial reserves in Russia. By 2008 however, the political winds in Russia had changed and AAR began demanding more control of the organization. When BP refused, Dudley and his BP staff were harassed by Russian government officials and Dudley fled the country.

Dudley returned to London to join the senior management team at BP, where fellow “turtle” Tony Hayward had taken over the company from Lord Browne. Early on, Hayward had pledged to improve safety at BP. Then in April 2010, the Deepwater Horizon, a BP oil platform in the Gulf of Mexico, blew up, killing eleven and unleashing a torrent of oil into the Gulf of Mexico. Day after day and week after week, the oil spilled into the Gulf and washed onto the U.S. southern coastline. BP became the target of U.S. anger and Hayward, in particular, engendered criticism. Hayward asked Dudley to oversee the clean-up effort, but after a series of egregious PR gaffes by Hayward, the BP board asked Dudley to take over as CEO.

At the helm of a company wounded by a major disaster, Dudley shocked the business world in January 2011 by announcing a deal in which BP would swap 5% of its shares for 10% of the shares of Rosneft, the Russian state-owned oil company. As part of the new strategic alliance, the two companies agreed to spend $2 billion jointly exploring 125,000 sq km of the South Kara Sea in the Russian Arctic, an area equivalent in size and potential oil to the North Sea. The agreement stipulated that BP would invest in technological development for the proposed oil and gas field and be allowed to book one-third of the reserves and profits from the field. Work in the Arctic was expected to begin in 2015.

While analysts debated the wisdom of the deal (hadn't BP already had enough trouble in Russia?), BP's partners in TNK-BP were apoplectic. They claimed that BP's agreement with them made TNK-BP BP's exclusive partner in Russia. TNK-BP sought and received an injunction to halt the deal and withheld BP's dividend.

In April of 2011, after the injunction was upheld by a Swedish arbitration panel, Rosneft agreed to extend the deadline for the share swap until May 16, 2011. At Dudley's first BP shareholder meeting as CEO, he confirmed that BP had offered AAR participation in the Arctic and cash and jointly offered with Rosneft to buy them out but that no deal had been struck. For its part, AAR's CEO stated, “We trust that BP will use the extension it has got from Rosneft to ensure that both the Arctic opportunity and the share swap are pursued through a structure consistent with BP's obligations under the TNK-BP shareholder agreement. AAR … has no plans to exit.” Many speculated that Dudley and BP had once again miscalculated in Russia. Others, however, contended it was only a matter of time before BP would resolve this difficulty and emerge with the rights to develop one of the world's few remaining untapped oil fields.