May 24, 2007

TNK-BP Fights for Kovykta License

By Miriam Elder
Staff Writer
http://www.moscowtimes.ru/ stories/2007/ 05/24/001.html

TNK-BP will defend its right to develop the Kovykta gas field in east Siberia at an Irkutsk court next week, officials said Wednesday, as the British-Russian firm appeared to move closer to resolving a years-long standoff over Gazprom's entry into the project.

The opening hearing, scheduled for Monday, marks the first concrete attempt by TNK-BP to hold on to its license amid accusations by state officials that it has failed to fulfill production quotas.

The Natural Resources Ministry's environmental agency deployed four officials Wednesday to conduct an on-site investigation of the purported license violations, said Oleg Mitvol, the agency's deputy head.

Mitvol said he expected the investigation to wrap up by Friday.

"The investigation should answer one concrete question -- are they fulfilling their license requirements or not?" he said by telephone.

Even though TNK-BP holds Rusia Petroleum separately from its publicly traded TNK-BP Holding, TNK-BP shares fell 6.5 percent to $1.72 on the RTS exchange Wednesday amid a slide of Russian stocks. Some analysts said the drop was partly political fallout from the dispute between London and Moscow over the murder of former security services officer Alexander Litvinenko. (Story, Page 5.)


Kovykta license holder Rusia Petroleum, in which TNK-BP holds a 62.9 percent stake, is obliged to produce 9 billion cubic meters of gas per year. But it has been producing less than 1 bcm to supply weak local demand after Gazprom blocked the construction of a pipeline to China.

Analysts have long expected TNK-BP to become the next target of a Kremlin-driven strategy to bring major oil and gas projects under majority state control. The field, estimated to hold gas reserves of 1.9 trillion cubic meters, would fit well with Gazprom's strategy of boosting production in east Siberia, analysts said.

"Recently talks [with Gazprom] have been active and more frequent than at other times in the past," said Peter Henshaw, TNK-BP's vice president for communications.

TNK-BP CEO Robert Dudley has said he expected the two sides to reach a deal by summer. The company's negotiating team is headed by Viktor Vekselberg, who heads the company's gas development as well as TNK-BP shareholder Renova.

Yet Gazprom officials on Wednesday continued to deny any ongoing negotiations with TNK-BP, a 50-50 joint venture between oil giant BP and a trio of Russian oligarchs -- Vekselberg, Mikhail Fridman and Leonard Blavatnik.

Gazprom deputy CEO Alexander Medvedev said there were "no negotiations at this time" in an interview with the Financial Times published Wednesday.

"There were contacts with TNK-BP on Kovykta in the past, but no longer," Gazprom spokesman Sergei Kupriyanov said.

"Why do we need [Kovykta]? We call this field a suitcase without a handle. It's a shame to throw it away, but it's heavy to carry."

Gazprom is also believed to be holding talks with the other shareholders in the $20 billion project. Interros, currently controlled by metals oligarchs Vladimir Potanin and Mikhail Prokhorov, holds a 25.8 percent stake in Rusia Petroleum, with the Irkutsk regional government holding the remaining 10.8 percent.

An Interros spokesman declined to comment on the talks.

TNK-BP's relations with authorities in the region, where the court case is taking place, remained good, TNK-BP spokeswoman Marina Dracheva said. "One of the courts' responsibilities is to provide legal clarification on documents. There is nothing antagonistic in that," she said.

TNK-BP would likely send legal representation to Monday's hearing, and the company expects representatives of the ministry's environmental agency to attend, she said.

"The court will be looking into the essence of the licensing agreement," she said.

The license obliges TNK-BP to produce 9 bcm annually starting in 2006, but the company says it does not expect local demand to surpass even 2.5 bcm by 2009.

Without access to Gazprom's jealously guarded pipeline monopoly, many companies turn to environmentally harmful gas flaring to avoid breaching the terms of their license. Others, such as TNK-BP, constrain themselves to limiting production.

Natural Resources Minister Yury Trutnev said last week that he expected TNK-BP's license to be revoked.

Mitvol's agency does not have the power to revoke licenses. But the outspoken official is seen as the public face of the Kremlin's campaign to ensure a state presence in all major oil and gas projects. He headed the onslaught against Sakhalin-2 last year as operator Shell handed over a 51 percent stake to Gazprom after months of pressure from the environmental agency.

"The point at which BP gets leveraged out of its holdings in Kovykta seems to be ... close," said Roland Nash, chief strategist at Renaissance Capital.

The Kremlin could be waiting until after the Group of Eight summit in Germany's Baltic resort of Heiligendamm to strike a deal as a way of avoiding undue international attention ahead of what is already expected to be a tense meeting, Nash said.

"But relations between Russia and the West are tail-spinning so much that perhaps they wouldn't care so much," he added.

Aside from seeking entry into Kovykta, Gazprom has also said it is interested in buying the 50 percent stake of TNK-BP's Russian shareholders when a clause obliging them to maintain ownership runs out at the end of this year.

"The incentive to get a deal done across the board -- for both BP and the Russian government -- is high," Nash said.

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