The International Leaders Forum Moscow, 16 th March, 2007 Andy Alexander Vice President, Upstream Supply Chain Management TNK-BP Management Promoting Fair-play and Open Competition in the Supply Chain

2 2 “Illegal Practices” in the Supply Chain. Information brokering to enable a supplier to win contract. “Kick-backs” to influence contract award. Conflict of interest. Employees with external equity interest. Contract execution – penalty regimes, change orders. Cartels between suppliers/sharing of business. Counterfeiting (eg inspection certificates). “Facilitation” payments – customs clearance etc.

3 3 The “Second Oldest” Profession? A global issue. –1914 press cuttings detail Siemens/Japanese navy scandal. Has impacted BP. –In 1993 Paolo Sorreli convicted of illegal information brokering for North Sea projects. Eleven others settled out of court. Significant business impact: –Reputation easily damaged by corruption. –Operational integrity. –Sub-optimal performance. –Cost.

4 4 The Scale of Spend….the “Prize”. TNK-BP alone spends over $4 billion annually on third party goods and services. After the BP and Statoil incidents in the early 1990’s the Information Coordination Group (ICG) was established. –They estimate between 3 and 5% of budgets could be wasted if adequate controls not in place. External Internal ….and in Russia the trend is to reduce reliance on internal contractors. In TNK-BP we have significantly increased the 3 rd party share of our spend.

5 5 The Supply Chain process in TNK-BP is under Transformation…. The early TNK-BP process was dominated by the DKK’s (Contracting Committees) which negotiated final pricing. A project team with external consultancy support was formed early 2005 to re-engineer the process. Full implementation will start mid –Procedures and Instructions. –Organisational change. –Training. –Common SAP-based system. In addition to delivery of improved HSE and operational performance through our suppliers, it aims to provide a fair and transparent environment.

6 6 Key Principles. Procurement Policy and Standards. Ethical certification of employees. Ethical clauses in tenders and contracts. –Penalties only where appropriate. Segregation of duties. Establishment of professional contracting organisations. Tight controls at key stages (pre-qualification; strategy; bid list; selection). Individual accountability with assurance. Sealed bid tendering. Independent “Back Office” and “deep dive” audits.

7 7 It has already started for some of our Long Term Contracting. Sector teams have been established to support our key drilling and wells services (“List 1”) contracting. –Comprising SCM, technical and business professionals. –Covers $1.4 billion of annual spend. By end of 2007 we target 30% long term contract coverage for List 1 services. Open contractor registration on-line at Centralised mandatory pre-qualification process for List 1 services across the company. –Questionnaire completed on line, supported by audits. –Approval of pre-qualified contractors by EVP Upstream; EVP Technology and VP SCM.

8 8 Key Aspects of “List 1” Services Long Term Contracting Process.… Contractor briefing meetings: –Coaching to contractors of new process. –Tender debriefs. Sealed tender packages with detailed scopes of work; remuneration; terms and conditions. Adequate bidding time. Detailed evaluation procedure in place prior to bid opening. –Objective selection criteria. –Separate commercial and technical evaluation teams. Contractor communication/clarification process carefully managed after bid opening. All commercial and technical issues resolved prior to award approval.

9 9 Impact…. Positive feedback from contractors. Provided highly competitive environment. Introduced new regional contractors. Provided us the equipment to the specification contained within the contract. Significantly reduced opportunities for fraud.