Cultural Challenges and Opportunities at TNK-BP

Association of European Businesses, 17 June 2005 Paul McMorran

• TNK-BP background and business snapshots

• What about cultural differences?

• Building a TNK-BP Culture

• Challenges and opportunities

Overview

TNK-BP presence

TNK

ONACO

SIDANCO (57%)

RUSIA Petroleum(29%)

Rospan (44%)

ААRВР

TNK-BPSIDANCO (25%)

RUSIA Petroleum (33%)

Moscow retail

50%50%50%50%BP

Alfa Access Renova

• Reserves and production

• Long-term growth rates

• Leveraging on existing Russian partnership

• World-class technology

• World-class management

• Strong international partner

ААRВР$1.4bn SLAVNEFT (50%)

$6.15bn ($2.4bn + $3.75bn in ВР shares)

TNK-BP transaction

BP Directors:Patrick Chapman

Brian Gilvary

Tony Hayward

Lamar McKay

AAR Directors:Len Blavatnik

Alex Knaster

Viktor Vekselberg

Jean-Luc Vermeulen

TNK-BP Board of Directors

Chairman – Mikhail Fridman (AAR)Deputy Chairman – Richard Olver (BP)

COOMcVay

Executive DirectorKhan

EVPUpstreamDibtsev

EVPDownstreamConsidine

EVPTechnology

Dupree

EVPField

ServicesBrezitsky

CFOPotter

EVPPPM

WrightEVP

SupportServicesBennett

EVPStrategy& Bus.

DevelopmentSliger

EVPInternalAffairs

Kondrashov

ChiefLegal

CounselMaydannik

BP TNK External Hire

Board of Directors

President & CEODudley

TNK-BP leadership team

EVPSupportServicesBennett

VPHuman

ResourcesCridland

VPComms &

PAHenshaw

EVPSupportServicesBennett

COOMcVay

Executive DirectorVekselberg

• 2004 Production: 1.45 million bopd (2nd. in Russia, 7th. worldwide, non-state oil companies)

• Year-End 2003 Liquid Reserves:– SPE Total Proved: 9.1 billion bbl– SPE Total Proved + Probable: 17.4 billion bbl

• Total number of fields: 250 – Well Stock: 15,000 producing and 9,500 idle

• Pipeline (km): 28,000

• Retail Sites: Over 2,100

• Refineries: 6

• Employees: 100,000 in Russia and Ukraine

• Operate over 11 time zones

TNK-BP operations

TNK-BP

1,5 million boe/day

$1.9 billion (2005)

Vertically Integrated (Upstream + Downstream)

100,000

Russia & Ukraine

4.3 billion boe (SEC)

127% (SEC)

9 (SEC)

$20+bn ?

903

4,0 million boe/day

$14.4 billion (2005)

4 Business Streams (Upstream, Downstream, Chemicals, Gas/Power/Renewables/IST)

100,000

Global

18.3 billion boe (SEC, 2003)

89% (SEC)

14 (SEC)

$200bn (Market Capitalization)

1800 (?)

TNK-BP

Production

Capital Investment

Structure

Employees

Geography

Reserves

RRR

R/P

Value

HR Staff

How does TNK-BP compare with BP?

TNK-BP: Two years after the Deal

History

• BP-AAR deal announced February 11, 2003

• Legal agreements signed June 2003

• TNK-BP operational September 1, 2003

Today

• TNK-BP fully operational almost 22 months

• Robust 2003 and 2004 performance:– Production growth 13%– Exports 52% of production– Enhanced debt structure– Five year strategy adopted– Strong 2005 business plan

But what about cultural differences?

Between heritage organizations, some obvious differences:• “Western” vs. “Russian” national cultures• Global vs. regional operations and experience

And some less obvious: • Public company vs. owner-founder heritage• Business environment and organizational maturity• Distinctive corporate cultures (TNK, Sidanco, and BP)

Example: Executive Reward

• Owner-Founder tradition

• Individually negotiated

• Mostly cash

• Discretionary bonus

• High probability targets

• Penalties/fines when considered necessary

• Investor owned, employee managed

• Structured programmes, driven by the market

• Emphasis on internal equity

• “Stretch” targets

• Combination of cash, deferred cash, & shares

• Substantial benefits & expatriate items

• Motivation should be positive

Executive Reward

10

… but not only differences

Between heritage organizations, many striking similarities:

• Focus on results, and commitment to achieving them

• Responsiveness to new business opportunities

• Creativity and innovation

• Committed, professional workforce

• Strong sense of teamwork

Making TNK-BP Work

• Our goal is to become a world-class Russian company and industry leader in Russia

• We continue to build value across the organization by:

– Driving operational performance through selected technologies and processes

– Imposing high standards of corporate governance

– Major steps towards world-class HSE performance

– Developing people

– Building TNK-BP’s own corporate culture

Building a TNK-BP culture

Cultural challenges

• Integration between diverse heritages and cultures does not happen by itself; it must be led from the front

• Performance requires the right incentives

• Performance, initiative and creativity will thrive only if our corporate culture nurtures them

Steps forward • Mix of heritages across senior and middle management

• Diverse operational and functional teams, to build understanding and facilitate exchange of knowledge

• Culture-building activities across the organisation

Leadership heritage

Corporate activities facilitated by HR include:

4. Leadership events

5. Secondments between BP and TNK-BP

6. Executive development

7. Developing young professionals

8. Building English and Russian language capability

Building a TNK-BP culture

In Q4 2003, for Headquarters executives:

• Recognising cultural differences

• Valuing different perspectives

• Identifying what to keep, from each heritage

From 2004, in Headquarters and Regions:

• Communicating where we want TNK-BP to be

• Defining behaviours which make this possible

This year, across TNK-BP:• Code of Business Policies and Corporate Standards• Workshops to support company-wide launch

1. Leadership Events

Goals:

• Accelerate development of skills needed to meet strategic TNK-BP business objectives

• Develop agents of change, who will catalyse the process of organisational development at TNK-BP

• Drive two-way transfer of knowledge, corporate culture and mutual understanding between BP and TNK-BP

• Prepare high-potential Russian staff for promotion to positions of greater responsibility

2. Secondment to BP

Programme Features:

• Secondees selected from HQ and regional nominees

• Destinations: BP centres of excellence, mainly in US, UK

• Programmes customised to individual development needs

• Duration typically 18-24 months, less in some cases

• Secondees occupy real positions as part of an operational team• Individual mentoring and management coaching, with clear objectives and periodic progress appraisal

• Post-secondment career plan, periodically reviewed

Secondment to BP (continued)

Experience Exchange with Expatriates

Expatriate Name: John Doe Stream/BU/Function: HSSE (for illustration only) Job Title: Generic HSSE Leader Date into current job: 01 September 2003 Team Leader: Vice President, Function Location: Nizhnevartovsk

Skills, Knowledge and Experience, relevant to TNK-BP• Solid understanding of the business impact of loss prevention, based on 20 years’ international experience in upstream and chemical industries. Ability to convey this convincingly to others.• Expertise in investigation of industrial incidents and analysis of causes. • Expertise in development of industrial risk management strategies.• Specific expertise in management of hazardous materials, particularly asbestos.

KPI 2004 KPI 2005

Sergei Ivanov

Deputy Head of Department

Sveta Ivanova

Senior Specialist

Yuri Ivanov

Specialist

Team Member

• Enroll (in Q3) in an internationally-recognised Loss Control Leadership programme, with coaching by J.Doe

• Take lead role in 2 major incident investigations in Q4

• Develop specific expertise, by year end, in management of asbestos, and related health and safety issues

• Successfully complete Loss Control Leadership programme, leading to professional certification in Q4

• Take primary responsibility for incident investigation within the business stream by end Q3

• Develop and implement in Q2, under J.Doe’s guidance, a risk management strategy for asbestos

• Complete 50% of Loss Control Leadership programme by year end leading to professional certification in 2006

• Report on all major incident investigations within the business stream by end Q3

• Develop and implement in Q2, under J.Doe’s guidance, a risk management strategy for road accidents

• Successfully complete Risk Management certification programme by Q4

• Take responsibility for one major incident investigation within the business stream by end Q4

• Develop and implement in Q2, under J.Doe’s guidance, a risk management strategy for alcohol-related incidents

• Enroll in an internationally-recognised Loss Control Leadership programme, with coaching by J.Doe

• Report on 2 major incident investigations during Q4

• Develop specific expertise, by year end, in analysis and prevention of industrial road accidents

• Enroll in a Risk Management certification programme

• Assist at 2 major incident investigations during Q4

• Develop specific expertise, by year end, in analysis and prevention of incidents involving alcohol at work

From 2004 :

• Two new executive development programmes, developed and delivered in-house

• TNK-BP partnerships established with two leading business schools

Two programmes, with distinct leadership target groups:

1. “Creating a World Class Company” INSEAD business school, France

2. “International Oil and Gas Leadership” Thunderbird business school, USA

3. Executive Development

Features common to both programmes:

• In-house seminars, developed specifically for TNK-BP

• Providers are world leaders in executive development

• Global best practice, applied to our particular business environment

• “Action learning” approach, using real business issues, proposed by senior TNK-BP executives

• Seminars build individual leadership capability, but also team culture

Executive Development (continued)

Young Specialists: University graduates, recruited fresh-out with qualifications directly relevant to our business, and less than 3 years seniority

Goals:

• Structured development programme, catering to specific needs of each business stream, over first 3 years

• Coherent programme framework and quality control across the organisation, led by corporate HR

• Corporate events for all YS. International networking

• Distinctive identity for young TNK-BP professionals

4. Developing Young Professionals

• TNK-BP is committed to becoming a bilingual organisation

• Language facilitates (or impedes) exchange of knowledge between Russian and expatriate professionals

• HQ interpretation budget runs to $ millions, but the real

cost of bilingual communication (and miscommunication)

is much greater

• Huge demand for English and Russian language tuition,

to address immediate business needs and longer-term

career development

Bilingual communication affects every part of our business.

Developing language capability is a strategic imperative

5. Building Language Capability

• Learning Standard in place, and in use. We can define proficiency, set targets, and measure progress

• Executive language KPI’s linked to 2004/5 bonuses, with good results

• Self-study English programme established, with 200 participants

• Selected providers, improved control over quality and cost

• e-learning prototype for English developed and evaluated

Building Language Capability (continued)

As we• Overcome cultural stereotypes and build understanding• Exchange knowledge and create innovative solutions • Harness latent intellectual capital• Align individual aspirations with Company strategy

We have the means to

• Build a world-class oil and gas company, here in Russia

• Rejuvenate a mature industry

• Create spectacular new opportunities for business, and for individual careers

• Live and breathe a unique corporate culture

Cultural Challenges and Opportunities