RusEnergy

03-16-2005 The Moscow News By Catherine Belton - British Petroleum's booming Russia venture TNK-BP is waiting on tenterhooks for a government decision that could determine whether the firm will be able to continue growing over the next decade. The Cabinet is due Thursday to consider a proposal made by Natural Resources Minister Yury Trutnev to prohibit foreign companies from bidding for licenses to develop strategically important fields. The proposal to bar access for companies with less than 51 percent Russian ownership is putting TNK-BP's long-term development plans in doubt. The company is 50-50 owned by BP and its Russian partners in Tyumen Oil and was formed largely in an attempt by BP to bid on new projects. To top things off, even as oil prices soar above $50, industry growth is expected to start a steep and extended slowdown this year, a big turnaround from the rapid growth rates of the last few years that have made Russia the fastest-growing oil patch in the world. The International Energy Agency forecasts Russia's growth in output to be just 3.8 percent this year amid growing export bottlenecks, increasing government control, a tougher tax environment and investor fears still emanating from the aftershocks of the government's takeover of the nation's biggest oil exporter, Yukos. The forecast puts production growth at less than half the average rate over the last five years and at the lowest since 1999, when oil prices were at $10. These factors have thrown BP and other foreign oil majors into an environment of uncertainty that is making some think twice about investing in Russia at all. TNK-BP CEO Robert Dudley, however, is sticking to his guns. He said he expected the company's production growth to fall back to 7 percent this year, still faster than the overall forecasted industry average but significantly lower than the double-digit growth it has posted since its landmark creation in February 2003. Its options for growth face severe restrictions over Trutnev's announcement. Dudley said TNK-BP had considered bidding for "a whole group in Timan Pechora," including several vast fields in the Far North region that contain nearly 200 million tons in oil reserves and were to be auctioned off early this year. But the auction was postponed this month while Trutnev's proposal finds its way into law. "While we're hopeful, we understand that it's the government's prerogative to just take further time until their own policy has been more clearly determined," Dudley said in a recent interview. If BP was any other oil company, it might just back away as U.S. oil giant ExxonMobil now appears to be doing. ExxonMobil was once a prime contender for taking a major slice of Yukos before its owners were thrown in jail and the company brought to its knees under nearly $28 billion in back taxes. "There's not a country in the world that we have to be in," Exxon president Rex Tillerson told an investor conference in New York last week, Interfax reported. The possibility of Exxon further expanding its activities in Russia is "foggy," Tillerson said. Russian officials "have not made it clear to us as a potential investor exactly how they want us to participate and under what terms." Asked whether Exxon was investing enough globally to increase output, company CEO Lee Raymond told the investor conference: "We think if we're going to continue to invest billions of dollars, we're not going to abandon our belief in the rule of law," Dow Jones reported. BP, however, has too much at stake to pull out. It put up $8 billion when it joined forces with Tyumen Oil in the largest foreign direct investment deal in Russia yet. It recently unveiled a restructuring plan that placed its value at $18.5 billion. TNK-BP's troubles start with the fact that most of its vast assets are in Soviet-era waterlogged fields. Ninety-two percent of the entire company's fluid output is water. "We like to call ourselves the biggest water company in Asia," Dudley joked during a Moscow investor conference late last week. While the company has a couple of new green fields such as the Uvat field, without access to major new projects, it is going to find it difficult to continue growth. "I think through the application of really sophisticated technologies we can continue this decade," Dudley said in the interview. "But after that, like all companies, we are going to have to transform ourselves through new projects." To that end, TNK-BP executives are engaging in tricky negotiations with government officials involved in formulating the new policy on license bids. They appear to have the backing of influential British officials. Former British Energy Minister Tim Eggar was in Moscow last week hoping to gain clarity during meetings with government officials on how changes to the subsoil law would affect British investors, including TNK-BP. "As an ex-British minister, I can accept that every country has the right to make its own decisions on its natural reserves," said Eggar, who is president of the Russo-British Chamber of Commerce. "Russia is not operating any differently from many other countries like Saudi Arabia. ... But clearly from the companies' point of view ... if they are not going to be able to invest on a level footing with Russian companies, it's a disappointment and a setback." He said current record-high oil prices would inevitably drop, and "if Russia is going to sustain oil production growth [when that happens], it's going to need very significant additional investments." "Russia would be mistaken if it believed that no matter what policies it pursued foreign oil companies will invest," he said. "They are not going to do that unless they are confident they are going to get an adequate return on their investment." A clue to a possible way out of TNK-BP's problem is the Sakhalin-5 bloc in the Far East, where BP is working in a new joint venture with state-owned oil firm Rosneft. The Russian side has a 51 percent stake in the project, which is separate from TNK-BP. "TNK-BP might have to seek to do deals with Rosneft like BP has in Sakhalin," said Stephen O'Sullivan, co-head of research at United Financial Group. "This could be the model. It might be the only way they get access. "But it's possible they will be only interested in fields that are so strategic that state-controlled Gazprom would want to keep them for itself," he said. Dudley, though, is holding out hope for a mechanism that will allow TNK-BP to make bids on Russian fields. "I think there's still a debate," he said. "The Russian Federation is a very big group, and the process that will lead to a consensus is still evolving." In the meantime, TNK-BP is also busy negotiating to make sure it keeps a project to develop the vast Kovykta field in East Siberia, a venture that BP CEO Lord Browne has called "the tomorrow" for TNK-BP. But the $18 billion export project has been stalled for years and looks likely to remain so amid a control dispute with state-controlled Gazprom. At the end of January, Trutnev said his ministry would make a decision on whether to revoke TNK-BP's rights to develop the field in two weeks. For now, Trutnev has let that deadline slip. "We continue to work with him and present our plans," Dudley said. "Talks have been very constructive. ... I think he understands the reality of this project and its importance. There is no magic deadline." Gazprom, too, appears to have toned down its rhetoric for the time being. Senior Gazprom officials last year publicly questioned whether TNK had legitimately won the rights to the field, but now they are locked in delicate negotiations over the company's merger with Rosneft. "Gazprom's attentions are right now focused elsewhere, and I think everyone realizes that," Dudley said. The state's growing tax take also appears to be starting to chafe. Last year, TNK-BP reaped an estimated net income of $4 billion, but it had to pay $6.5 billion in taxes, excise and customs duties. "It will be difficult to grow without tax regimes that allow [companies] to invest in projects that have a seven-year payback," Dudley said. And, as oil prices continue to soar, Dudley sees missed opportunity for Russia. "We could find that we look back at this time in history and find that Russia has missed out on this period of high oil prices because of bottlenecking [in export pipelines]," he said at the conference. The only major new route in the works -- a pipeline to the Pacific port of Nakhodka -- is not likely to be up and running this decade, he said. The problem, he said, has to be solved. "This is imperative for the country, not the company," he said.