Interview with M. Friedman: Let’s start fighting and then settle the conflict

On Monday the head and co-owner of TNK-BP, M. Friedman, announced of his resignation. M. Friedman explained to Kommersant the reason of his decision, of another conflict with BP and the ways to settle it.

Q: On Monday you said you are planning to leave the position of the head of TNK-BP. Why?
A: First of all I would like to say that TNK-BP is like our child, we are its founders and shareholders, we have devoted many years to it and I don’t want my quitting to have a negative impact on the company’s operational activity. My decision has unfortunately caused a furious reaction, a lot of different theories have appeared and most of them are so exotic that they would never come to my mind…

Q: For example?
A: For example, that it is connected with I. Sechin’s coming to Rosneft and a rumor about the amalgamation of TNK-BP with Rosneft. Returning to the reasons of my decision to quit the post of the head of TNK-BP, I would like to say that it this step is a reflection of the processes that started in Jan 2011 when our partner BP announced of its intention to found a strategic alliance with Rosneft. After that there was a number of events, including our claim to the Stockholm tribunal which blocked this deal. But this event pushed us to seriously analyze the conception of our relationships with BP. 
We have been partners with BP for 10 years and we have the whole bunch of questions. Our partnership is sometimes scandalous but we should admit: TNK-BP for BP is one of the most successful investments for more than a century of the company’s history. BP has earned a great deal of funds within this time and we haven’t made losses as well. We have never complained about our partnership and in general didn’t consider that we lost from selling 50% in TNK. But there are always some problems between the partners, and the situation with Rosneft has proved it. We think that there was nothing wrong in BP’s intentions to work with Rosneft. But the actions of BP are the violation of the shareholders agreement of TNK-BP, a very serious one, and the company is to be responsible for that.
It is like in families: if one in a couple decides to change a partner for a younger or a more beautiful one, it happens sometimes, they are supposed to settle first of all the issues with the previous partner – divorce. And no one was planning to separate with us. We said that we understood the intention of BP to work with Rosneft and, for example, we were ready to look for compromises with Gazprom, but meanwhile to ask to change the structure of the partnership. 
As a result the trust in BP as a partner shattered. All that time we treated the company with understanding being aware of its problems after the oil spill in the Gulf of Mexico. When it faced sharp liquidity problems, we supported BP morally and financially having purchased its assets in Venezuela and Vietnam at the market price. In general, we showed a partnership approach without escalating our relationships. 
In the multiple discussions the representatives of BP showed the understanding of out position and agreed that the parity management has run dry, a decade of the company’s forming is over and new forms of cooperation need to be found for both companies. Unfortunately, it was only discussions, nothing more. No certain actions were made, in spite all our attempts, and we thought that the most preferable variant for BP was to freeze the situation with Rosneft and simply return to the previous way of living. Then we decided to make a claim to the Arbitration Court to prove the fact of the violation of the shareholders agreement from the part of BP. In the case of making such a decision by the Tribunal, TNK-BP has good reasons to make claims to the Court and be paid financial consideration from BP. According to the lawyers of TNK-BP, it might be very significant amounts.

Q: But BP says you were aware of the coming deal of BP and Rosneft.
A: We weren’t absolutely! If they say this, they are telling lies. There were many discussions about their potential interest in the Arctic and that they were holding some negotiations with Rosneft. But we were loyal about it as we realized: by our shareholders agreement, if BP reaches preliminary agreements on the partnership at the shelf, the company is to discuss it with the management of our JV and suggest TNK-BP replacing it in the deal. Nevertheless, the contents of the negotiations on the Arctic with Rosneft have never been released to us.
The main unexpectedness in the announced deal between BP and Rosneft was the large-scale exchange of shares and the foundation of a strategic alliance that is the fundamental violation of the shareholders agreement with TNK-BP. We heard for the first time about that part of the deal a day before signing the agreement. R. Dudley told me there would be a nominal exchange of shares with Rosneft to work together in the Arctic, via TNK-BP. Nothing was ever mentioned about the Rosneft’s obtaining 5% in BP, BP – 9.5% in Rosneft and that the companies would found a global strategic alliance. 

Q: Did BP realize you would never agree to that?
A: Of course it did. The value of our package in TNK-BP besides the company’s assets is also made up from the fact of our exclusive partnership with BP. So the alliance of BP with another partner in Russia has nothing in common with the shareholders agreement and doesn’t correspond to our financial interests. It was not pleasant for us to start fighting against this deal as there was I. Sechin who was behind the alliance, and the deal was supported by V. Putin… But I’m very grateful to the Government that took the rational position. It was not delighted by our proceedings but I talked many times to the highly-ranked chairmen and they said: it is your right, your rights are violated and you can put it in question.

Q: I. Sechin seemed to be least delighted about your legal claims to BP…
A: We have discussed this problem with him many times and it seemed to me that he assessed the actions of BP less complementary as BP was supposed to notify Rosneft of the legal risks. The state company of course wasn’t familiar with our shareholders agreement. As far as we know, BP assured Rosneft in a written form that their agreement wouldn’t violate the rights of the third parties, including AAR.

Q: Did BP simply hope for a political resource?
A: Seems like that but I don’t know for sure. But BP has a bad image of the political situation and the Russian Government. It thought that if the deal had been approved at the top, we would never do anything to protect our interests as we would be afraid of the Government. In our situation the Government turned out to be smarter and more decent than BP. And there was no discrimination of TNK-BP, even when everything was settled, from the Government. 

Q: But there recently were some claims upon Samotlor and nobody hid that it is an order.
A: The Ministry of Natural Resources has its own views and it is not connected with the deal with Rosneft.

Q: In the spring 2011 you were negotiating with BP and Rosneft about leaving TNK-BP. Why did that deal collapse?
A: we had never a goal to quit from TNK-BP. We were offered different forms but we kept saying that we weren’t ready to exchange our stake for cash. A significant part of the shares of AAR in TNK-BP, from our point of view, was to be converted into the shares of BP or Rosneft as we are not going to leave the oil business. We are very active people who are able to achieve the result. Why do we need cash? Sit on the coast of the sea or sail on yacht? Yes, it is good, but not for me.

Q: In that case you would have simply become a portfolio investor.
A: I don’t think so. Having obtained the shares of BP, we would have become its largest shareholder. And there would be such a structure with which it wouldn’t be a portfolio investment.

Q: What was the stake you aimed for?
A: It doesn’t matter any more as the deal in that form was banned.

Q: Finally you turned away from the deal, the existing structure of shareholders was saved, why couldn’t TNK-BP kept working in that mode?
A: The company is normally functioning in such a mode. The results of work of TNK-BP for 2011 are very good. All the analysts think so. But when there is no trust in partners, when the management structure doesn’t correspond to the interests of both parties and there is no constructive dialog between the shareholders, the strategic development of the company, in my view, is under a threat. I don’t want to stay the head of such a company.

Q: By having the right for signature you could manage the company as you want to.
A: No. There is no Board of Directors in the company, and I’m as a shareholder not ready to take a responsibility for decisions made by me as its head. I’m an interested party in this situation. In this case the management is independent. 

Q: BP thinks there might have been grounds for legal claims against you as a head of TNK-BP.
A: It’s strange to hear it as it was the initiative of BP that in early 2009 I was appointed and in February 2012 re-appointed a CEO. If BP had certain claims, it would have long ago made them and it would have hardly asked me to head the company for another 2 years 3 months ago. There were no violations of the shareholder agreement from my part.

Q: Did BP suggest you settling the issues between the shareholders directly, without the Board of Directors? 
A: One of the main goals of the Board of Directors, which has independent directors, is to make the decisions by the issues in which the shareholders have different opinions. Independent directors in the name of Gerhard Schroeder, James Lang and Alexander Shokhin perfectly managed with this goal. We suggested BP finding candidates to replace Gerhard Schroeder and James Lang within the shortest period of time after their leaving. But there was a long legal procedure and the search of the third candidate has never started.
The representatives of BP in the Board of Directors first of all, in my view, act in the interests of BP though it contradicts to the fiduciary responsibility of directors. And they reject any decision contradicting the interests and the strategy of BP. At first we tried to settle the issues without the quorum, in the absence of 2 independent directors but such a form presupposes the mutual agreement of the parties, almost gives the right for veto. Based on our previous experience, we know there are many issues by which the shareholders have different opinions, and in this situation the presence of 3 independent directors is extremely important. TNK-BP without the independent directors is a step back. 

Q: In 2008 when did the first conflict between the shareholders break out?
A: This is the deviation from the principles of the current shareholders agreement presupposing the presence of the independent directors. There were many decisions which were made because the independent directors supported us, including in the situation with the alliance foundation between BP and Rosneft. Even the director nominated by BP agreed with us. They are responsible professionals who realize that we are absolutely right from the point of view of the company. BP wants to return us back to 2008, but what have we been fighting for? We have been fighting for the mechanism of settlement of the disputable situations but not for restrictions for TNK-BP when it contradicts to the interests of BP.

Q: What does contradict to the interests of BP in this situation?
A: TNK-BP and BP are in one business, and it means that in the large-scale understanding we are competitors. In general, the existing structure has stopped meeting the interests of each of the parties. Either AAR or BP should finally control the company. Our partners understand it but they are not ready for negotiations at all and so they are spinning out time. It is their standard practice. How to settle the existing contradictions is the issue of negotiations. There are different variants.
For example, BP becomes a minority shareholder and gradually leaves the capital of TNK-BP. This is not a quick process and might take a long time. We consider the possibility of reducing the package if some part of it is converted into the shares of BP. If we follow this way, it might tale 5-7 years.

Q: Can there appear another, third shareholder of TNK-BP?
A: Everything is possible and real. We are open for offers. 

Q: Rosneft?
A: They have completely different interests at the moment and it seems to me there is the memory of the previous events from BP. There are no certain offers and it can be interesting for any one.

Q: Can you partners in AAR manage their stakes in TNK-BP themselves? They say they were ready to sell the company’s shares.
A: Each of the partners of AAR has the right to manage their shares and the rest partners have the priority right for purchase. But in all the issues we have a common position and all the Russian shareholders would like to stay in the oil business.

Q: What is the real value of TNK-BP now? Does the conflict between the shareholders increase it or reduce? 
A: There is no certain amount. All will depend on the company’s development. We have purchased the geological exploration asset in Brazil and as soon as its commercial reserves are confirmed, the value of TNK-BP will be higher. The potential purchaser won’t take into account the presence of the conflict between the shareholders but its financial and operational results – everything is fine with it.

Q: Are you still keen to keep the proceedings at the Arbitration Tribunal?
A: Of course. We are absolutely sure in our  position. As soon as it is confirmed by the Tribunal, there will be real grounds that the Board of Directors of TNK-BP decides to make a claim to the Court asking BP for compensation. 

Q: But BP also thinks that one of the Russian shareholders – Renova of V. Vekselberg has violated the agreement having not offered TNK-BP its oil and gas assets.
A: It’s funny. Many years ago Renova purchase the airport with a fueling complex in its structure, but it is not the oil business. How can that be compared with the deal with Rosneft? BP realizes it as well as that the Board will support the claim of TNK-BP against it. So the normal management structure and working Board of Directors are not in the interests of BP. That’s why BP always calls for making decisions at the level of shareholders. So BP will gain an opportunity to postpone the issue on the forming of a normally functioning Board of Directors for an undetermined period. 

Q: Is the turning away from paying the dividends is a way of pressurizing BP which needs cash now?
A: Well, we need cash as well. I would say in general the situation in the business is not that favorable to pay large dividends. The oil price is not stable now, there is a threat of a serious crisis. Moreover, in the absence of the functioning Board the company might be allowed to take loans in the financial markets.
BP needs higher and higher dividends as it has serious problems with liquidity due to the necessity to pay compensation for the oil spill in the Gulf of Mexico and in disappointing financial and production results. So BP insists on the payment of dividends, warns by making the company do it via the international Arbitration Court. Meanwhile the management of TNK-BP thinks that it would be right to leave the funds, that were supposed to be directed for dividends, at the company. 

Q: Plan them for the investment program or on the deposit account?
A: Both variants are possible. The main thing is to have a liquidity basis as we see a serious worsening of the environment in future.

Q: Why does M. Barsky return to TNK-BP? In what status?
A: He is a helpful person for the company from the point of view of its development. In my view, he has good qualities for entrepreneurship, strategic thinking. But he won’t have the executive functions. BP was against his appointment for the position of CEO, I don’t think it has changed its mind.

Q: In fact Lukoil doesn’t have any perspectives for development in Russia. Does TNK-BP see any?
A: There are not so many undeveloped deposits at the continental sites in Russia. But we have the Uvat project, Yamal, Verkhbechonsky deposit. So we don’t complain.

Q: TNK-BP asked Mr. Putin to grant it access to the shelf. On what conditions are you interested in it as a Russian company it is not ExxonMobil or ENI?
A: I think steps towards the Russian companies will be made, V. Putin has spoken about it. And though there is a good interest in the shelf from the part of the majors, I think that one should start fighting and then settle the issue. The profitability of the oil business in the rest of the world is higher than in Russia where one of the highest tax levels for the oil companies. We are used to that, so from the point of view of the investment attractiveness for the Russian companies these conditions are much clearer and finally we have more chances for success.

Q: What else needs to be changed in the state policy of the development of the oil and gas sector?
A: The main thing is to realize that the oil and gas sector is the basis for forming the budget but one should not keep raising and raising it as at some moment it will be more profitable to invest overseas than in Russia.

Q: The executive Vice-president and co-owner of TNK-BP, G. Khan, said that the conflict between the shareholders is well reflected in the company as its management mobilizes to achieve the result. It is the same now?
A: Frankly speaking, in our history there were many conflicts. We treat them calmly. I have seen many times when in the situation of the conflict the management works better but not worse. It is explained by the fact that both parties control the situation better as each of them is afraid that something might happen inside the company not in its interests. The management realizes the entire responsibility for making the decisions and works with the maximum pay back.

Q: At the escalation of the conflict with the claims against BP the minority shareholders made claims to the Court. Who stood behind them is not still clear but such a style is not strange for Alfa-group. Or someone has started to repeat it?
A: It is the practice of the minority shareholders all over the world. It is a purely normal process. Moreover, I think if the minority shareholders keep making claims at the Russian Courts and win such claims, it will be very good for the market. Because when a minority shareholder with  one share makes a claim to the Court and challenges a large and strong corporation, the public opinion is on the side of the minority shareholder. So I think that in the case the minority shareholders prove their rights have somehow been violated and are paid compensation, it will mean our market and legal system are mature. I don’t know who stands behind the claims of against BP. 

Q: Have you managed to get acquainted with the new Government? Will anything change in the approaches to the sector?
A: I don’t think so. I know some of the ministers. I regard very well the new Vice-Prime Minister for the Fuel and Energy Sector, A. Dvorkovich.

Q: The plans on the consolidation of various state assets on the basis of Rosneftegas are being discussed now. Will such a large corporation somehow influence on the sector?
A: I’m not a fan of such an approach. It seems to me that at first everything should be set to rights in separate state companies and then one is to think of the consolidation. It will extremely difficult to manage such a company. 

Q: They say in the process of forming the new Government they wanted some of the managers of Alfa-group to be in it. It is true? 
A: No, there weren’t such offers.

Q: Have you been asked to serve in the Government? V. Lisin for example was supposed to be the Minister of Transport, V. Rashevsky – Minister of Energy…
A: No, I haven’t been asked. I would prefer to develop my own business.

Q: After D. Medvedev became a President, the businessmen were divided into those who are more loyal to him or to Mr. Putin. Is there any difference?
A: There might have been such a division. I don’t know. But it has nothing to do with us. I don’t aim for the status of a friend of either of Mr. Putin or Mr. Medvedev, I’m a businessman and I am in a professional relationship with them. In general, I’m not fond of setting special relationships with the Government. I prefer to set up relationships with close people, family, friends. 









http://www.kommersant.ru/doc/1947448
Translated by Galiya Musabekova