The struggle for control of TNK-BP is the first big test for Tony Hayward's leadership of BP. Since taking over as chief executive from Lord Browne a year ago, he has focused on reforming the company's structure and operations, to cut costs and raise performance. The threat to BP's future in Russia is forcing Mr Hayward to take on a huge strategic challenge as well. There are good reasons for him to hope that he can achieve at least a qualified success. BP needs Russia but Russia also needs companies such as BP. If Mr Hayward fails, however, BP will face a much darker future. The 2003 deal to form TNK-BP, owned 50:50 by BP and the Alfa-Access-Renova group of Russian billionaires, was Lord Browne's last great strategic triumph. With 26 per cent of the world's proven gas reserves and 6 per cent of the world's oil, Russia is a country where every big international company wants to operate. The creation of TNK-BP put BP ahead of all its rivals. TNK-BP last year provided a quarter of BP's oil production, a fifth of its oil and gas reserves, and a third of its reserves of oil alone. It has also made a vital contribution to building up those reserves, keeping BP's headline reserves replacement ratio above 100 per cent of its production. The latest attacks on TNK-BP are different from the pressure that has been applied to other international oil companies in Russia, which was clearly politically inspired. For example, the campaign in 2006 that led to Royal Dutch Shell being forced to cede control of the Sakhalin 2 oil and gas project to Gazprom, the state-controlled gas company, was led by the natural resources ministry's environmental agency. At TNK-BP, it is conflict between BP and the Russian shareholders that is at the heart of the company's problems. However, the dispute is being fought in the context of manoeuvring over BP's future in Russia that is more obviously political. TNK-BP was forced to agree last year to sell its stake in the vast Kovykta gas field in eastern Siberia to Gazprom, after being threatened with losing its licence for the field. As part of that deal, BP, TNK-BP and Gazprom agreed to set up a joint venture to operate inside and outside Russia. Negotiations over the details of that joint venture are still under way. Although the AAR tycoons have continually denied that they want to sell their stakes in TNK-BP, it is generally assumed by analysts that the dispute will be resolved by Gazprom or Rosneft, the state-controlled oil company, buying them out and taking control. One suggestion is that TNK-BP could be folded into Gazpromneft, Gazprom's oil division, in which BP would then be allowed a 25 per cent stake. Whatever the outcome, it seems likely that the conflict between BP and AAR cannot be settled without a resolution of the negotiations with Gazprom. The pressure on TNK-BP, including calls from AAR for the removal of Robert Dudley, its American chief executive, seems likely to worsen the terms of that eventual solution for BP. That perception has weighed on BP's shares, which have fallen 5 per cent this year, compared to a 1 per cent drop for Shell. Over the past three years, as the price of oil has doubled, Shell's shares have risen 14 per cent: BP's less than 2 per cent. BP could always pack up and leave Russia, as ExxonMobil has chosen to leave Venezuela. If it did so then for a short time, BP's growth might even look faster, because it would be abandoning TNK-BP while the Russian company's production was still on a plateau, enhancing the impetus BP will get from new projects coming on stream, such as Thunder Horse in the Gulf of Mexico and its developments in Azerbaijan. In the longer term, however, , walking away from such a resource-rich country as Russia, at a time when international oil companies are struggling to get access to reserves, would be taking a huge risk with BP's growth potential. Losing Russia would be such a strategic setback that it would inevitably revive bid speculation over BP. With its long-term growth outlook uncertain and under pressure to secure additional resources, BP would be vulnerable to any bidder with deep enough pockets. There would not be many of those, but Exxon could be one. Speaking on Thursday at the annual meeting of Rosneft, in which BP has a stake, Mr Hayward reiterated the group's commitment to Russia as "one of the world's greatest hydrocarbon provinces.' Neil McMahon of Sanford Bernstein, the investment company, points out that Russia's oil production has been falling, and there are grave doubts about its ability to meet the expected growth in demand for its gas both at home and abroad. Gazprom and Rosneft on their own have neither the financial resources nor all the technical capabilities to develop Russia's vast resource base, particularly in the Arctic conditions. So the country will need foreign investment. Some pundits in Moscow argue that the country does not need to develop its resources so quickly, so foreign companies can be treated badly without any adverse consequences. But the Russian government's recent proposals for tax breaks for oil companies suggest that Vladimir Putin, the prime minister, recognises that there is a problem. "You could get a deal between BP and Gazprom that gives Gazprom a position in BP's international liquefied natural gas business, which is a big win for Russia because it increases its global dominance in gas,' Mr McMahon says. "And it could send a signal to international oil companies that as long as they don't mess the Russians about too much, they will be able to stay in the country and earn a reasonable return.' If he can secure such a deal, Mr Hayward will have passed his first test as well as anyone could have hoped. Copyright The Financial Times Limited 2008