BP venture pays $1bn in back taxes as Russia gets tougher

by Carl Mortished

TNK-BP, the British multinational BP’s Russian joint venture, has paid $1.4 billion (£740 million) to the Kremlin in settlement of a major dispute over back taxes.
The payment, confirmed yesterday by Alexei Kudrin, the Finance Minister, settles claims for taxes owed during the 2002 and 2003 fiscal years, but the deal sets the stage for another payout relating to disputed Kremlin tax demands for 2004 and 2005.

The tax settlement occurs as pressure from Russian regulators increases on TNK-BP’s operations. The Russian General Prosecutor’s office said this week that it was starting criminal proceedings against Rospan, a Siberian oil production company controlled by TNK-BP, for producing oil without licences.

According to TNK-BP, Rospan was awaiting renewal of the licences, which are required to conduct drilling activities but had not received any response from the regulator.

TNK-BP’s billion-dollar tax settlement, which includes both the tax owed and the penalties and fine, is the biggest settlement since the multibillion-dollar series of tax claims that brought Yukos, the ill-fated oil giant once controlled by Mikhail Khodorkovsky, to insolvency.

According to TNK-BP’s accounts for 2003, the aggregate tax expense in 2002 and 2003 was $416 million, less than a third of the recent settlement. A spokesman for BP said that the settlement was a fraction of the original demands.

The pattern of tax demands and regulatory intervention into foreign oil interests in Russia is causing anxiety among the financial community. Certain companies, such as Sibneft, the vehicle sold by Roman Abramovich to Gazprom, have not faced huge tax claims.

“Some companies within Russia have not been subject to back tax claims and others have,” a leading oil analyst said.

The TNK-BP payment relates to a period immediately before the creation of the joint venture and reflects the tax liabilities of the companies that form the venture, including Sidanco, BP’s former Russian vehicle, and Tyumen Oil, controlled by BP’s Russian partners, Mikhail Fridman, Len Blavatnik and Viktor Vekselberg.

The TNK-BP joint venture agreement contained tax indemnities to cover the historic liabilities of both parties, suggesting that the partners will negotiate which side will pay the final sum.

Speculation is mounting that the Kremlin is preparing for the buyout of BP’s Russian partners. Gazprom has already declared its interest in owning the half-share in TNK-BP that will became available next year when the Russian partners are able to sell their interest. The deal would be attractive to Gazprom, which already owns 50 per cent of Slavneft, a Russian oil producer in which TNK-BP owns the other half.

Source: The Times