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Saturday, June 30, 2007

TNK-BP, Gazprom Clinch Kovykta Deal

Kovykta Production Station06-28-2007 - MosNews Weekly by Dietwald Claus - On Friday, TNK-BP and Gazprom signed a memorandum of understanding according to which the Anglo-Russian company would sell its stake in the giant Kovykta gas condensate field to Gazprom. TNK-BP retains an option to buy back a 25 percent + 1 share by the end of the year. The two companies also agreed to form a $3 billion international investment committee. The agreement may be the successful finale to BP's 10-year struggle to become a major player in the Russian gas market. It also indicates that Gazprom is willing to seek compromises with foreign energy companies. sWhile just last week it seemed that TNK-BP would lose completely the right to exploit one of the world's largest gas condensate fields, it will now receive $700 million - $900 million for its 63-percent stake in RUSIA Petroleum, the company that holds the Kovykta license. The final sum is not yet known, but industry experts think it will be roughly equal to the total amount TNK-BP has invested into the field so far. When in November 1997 BP formed a strategic partnership with Sidanco, then one of Russia's largest oil and gas companies, the move was hailed by Prime Minister Tony Blair as demonstrating "the growing confidence of international business in Russia's economic future." The deal included a stake in one of the world's largest gas reserves, the Kovykta field, containing an estimated 2 trillion cubic meters of natural gas. For $571 million, this was one of the best deals in BP's history - or so it seemed. But no sooner had BP CEO John Browne and Onexim Bank head Vladimir Potanin signed the agreement in a 10 Downing Street ceremony, when BP found itself in the middle of a feud between Potanin and Mikhail Fridman of Alfa Bank. Eventually, BP formed a partnership with TNK in 2003 and the resulting TNK-BP gained control over 63 percent of RUSIA Petroleum, whose other shareholders include Potanin's Interros holding (26 percent) and the Irkutsk regional administration (11 percent). But by this time, the political landscape in Russia had changed. While during the 1990s the state had agreed to often very favorable terms for foreign companies, it now felt that many of these had been disadvantageous for Russia. The government began to put pressure on energy companies to revise many of these arrangements. In the case of the Sakhalin-2 project, the foreign operators were hounded by Russia's environmental protection agency until they agreed to turn over control to Gazprom. In the case of BP, the approach was more complex but equally effective. Under the licensing agreement for the Kovykta field, TNK-BP (through RUSIA Petroleum) was obligated to produce at least 9 billion cubic meters by 2005. To make the project economically viable TNK-BP requested access to Gazprom's pipelines, which the gas monopolist refused, stalling the project's further development. The Russian government has frequently stressed the importance of using Kovykta gas to supply local consumers in East Siberia, rather than exporting it to neighboring China and other Asian markets as TNK-BP had originally intended. Some small-scale deliveries to the nearby settlement of Zhigalovo began at the end of December 2006. Ultimately, TNK-BP found itself in a paradox: while the oil business was going well - 35.5 percent of BP's total 2,475 million barrels per day production in 2006 was from Russia - the gas side of the operation was floundering: only 6.4 percent of BP's 238 million cubic meter per day production in 2006 was from Russia, even though Russian reserves without Kovykta are 29 percent of BP's total gas reserves. When in 2005 the Natural Resources Ministry threatened to revoke TNK-BP's Kovykta license, BP saw the writing on the wall and suggested a compromise: Gazprom should buy out the stake owned by TNK-BP's Russian shareholders. But the shareholder agreement prohibited a buyout until 2007. The ministry agreed to a revised development plan and granted a one-year grace period. By late 2006, however, the ministry began to move in on TNK-BP again, and on June 1, 2007, threatened to pull the plug on Kovykta. Three weeks later, the company agreed to sell to Gazprom and form an international investment group. While this demonstrated that Gazprom is able to use the legal and political system to pursue its goals, the outcome is not a disaster for TNK-BP. According to Artyom Konchin of Aton Capital, Gazprom cannot be compared to the „robber barons of the 90s." This is underlined by the fact that Gazprom has been consistent in paying prices „close to market value" for those assets it wants to acquire from private companies, as „has has been the case with Sakhalin-2, and others as well," Konchin continues. By offering TNK-BP a fair compensation for its sunk costs, Gazprom has shown that it is willing to compromise and take into consideration the interests of others. BP will remain in Russia and finally take on a more significant role, while in return it will help Gazprom overcome stiff political opposition - particularly in Europe - to its plans to enter the international downstream gas market. According to Konchin, the outcome of the Kovykta saga shows that "both Gazprom and BP played their hands really well." According to analysts at Dresdner Kleinwort, "the deal indicates an encouraging attitude being adopted by the Russian authorities towards BP's position as a pre-eminent IOC [international oil company] investor into the country." Dresdner Klein­wort also has put out a ‘buy' recommendation for BP. This, too, was the gist of BP's official press release on Friday, which quoted BP CEO Tony Hayward as saying: "Our aim is to establish a venture that is strategic and long term, with mutual benefits for both companies, both inside and outside Russia." According to BP spokesman Toby Odone, the deal will have "no impact on the bottom line," as the Kovykta field has never been part of BP's assets. Odone also said that BP will exercise its option to buy the 25 percent-plus-one-share stake in the Kovykta field by the end of this year. Financial markets seem to have taken the deal in a stride. While shortly after the announcement shares for BP dropped slightly from $70.42 to $69.23, they quickly recovered and opened at $70.25 on Monday.

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