Move Would Open Door
To Gazprom and Tighten
Kremlin Grip on Energy

By GREGORY L. WHITE in Moscow and GUY CHAZAN in London
June 1, 2007; Page A9

Russian regulators could move as early as today to revoke a production permit from a $20 billion BP PLC natural-gas project in Siberia, in a test case of just how far the Kremlin will go in its drive for control over the energy sector.

As the Russian government has tightened its grip over strategic oil-and-gas assets in recent years — effectively nationalizing one of the country’s biggest oil producers and forcing foreign investors to cede control of projects to Russian state companies — opportunities for international oil giants have withered.

Even so, investors have taken Russian officials at their word that foreign companies still are welcome to participate in big projects as long as control is held by the Russian partner. That was the outcome at the $20 billion Sakhalin-2 project, in which Royal Dutch Shell PLC and its Japanese partners last year agreed to sell a controlling stake to Russian natural-gas giant OAO Gazprom after Russian regulators threatened to shut down the project.

Now events around the Kovykta gas field in eastern Siberia have raised fears there could be less room for foreign companies.

Russian licensing authorities accuse a company controlled by BP’s 50%-owned Russian venture, TNK-BP Ltd., of failing to meet production targets at the giant field. The panel empowered to revoke the license holds a regular meeting today, and officials have said Kovykta is likely to be on the agenda.

TNK-BP admits it is producing far less gas than the license mandates, but blames that on its inability to get government approval for an export pipeline to China. TNK-BP’s appeals to amend the license to reduce production targets have been rejected.

Industry officials and analysts suspect the regulatory pressure is a negotiating tactic on behalf of Gazprom, which has been talking for months with TNK-BP about joining the project. Publicly, however, Gazprom officials say they aren’t interested in Kovykta because of the investment required and questions about whether there is enough demand for the gas.

If the Russian authorities revoke the license, Gazprom would be able to bid for it at a future auction, while TNK-BP could be barred by legal restrictions now under consideration. But Gazprom might later invite BP in as a minority partner in the project.

“At this point, BP not losing everything would be seen as a positive surprise,” said Rory MacFarquhar, an analyst at Goldman Sachs in Moscow.

A person close to BP yesterday said momentum in discussions with Gazprom has picked up in recent days, though the outcome remains unclear. BP Chief Executive Tony Hayward met his Gazprom counterpart, Alexei Miller, in Moscow yesterday, but details of the session weren’t released.
 
“It’s not like a straight negotiation with a normal commercial company,” said one person close to BP. “There is so much politics involved.”

Some analysts have speculated the Kremlin might be pushing for a deal in the days before a summit of leaders from the Group of Eight leading nations, which begins Wednesday. But the Kremlin has in the past held major energy deals hostage to political issues. Relations with London are at a low point after Moscow refused to extradite a former KGB agent accused in the poisoning death of a Russian dissident in London last year.

Given the difficulties of navigating Russia’s politicized energy sector, some in BP would be satisfied just to minimize the damage to BP’s reputation as it gets squeezed out.

“For BP, Kovykta has essentially no value,” as developing it depends entirely on the Kremlin, said the person close to BP.

The fate of Kovykta could provide clues to the future of TNK-BP, which was hailed as a breakthrough when it was formed in 2003 but now seems out of step with the Kremlin’s preference for Russian control. BP’s partners in the company, three Russian billionaires, have indicated they don’t want to sell their stakes. But people familiar with the situation say they wouldn’t resist if the Kremlin sought to have Gazprom or state oil company OAO Rosneft buy them out.

The government hasn’t given clear signs. Igor Shuvalov, a Kremlin economic aide viewed as a liberal, said in an interview in November that while a sale to Gazprom would give the gas giant a major boost, “it would send the wrong signals” about state intervention and should be opposed. But earlier this year, Energy Minister Viktor Khristenko said in an interview, “If it’s attractive on the economics, then the acquisition will be made; there’s no politics in this.” Russian officials have explained past takeovers by state companies as purely economic.

Gazprom officials, meanwhile, don’t conceal their interest in TNK-BP, which is Russia’s No. 3 crude producer. In an interview this year, Gazprom Deputy Chief Executive Alexander Medvedev said, “There are a series of assets in the TNK-BP group that are interesting for us,” though he noted there was no sign TNK-BP’s Russian shareholders wanted to sell.

Any takeover would raise the question of whether BP would see its 50% stake reduced in line with Russian desires for local control. Analysts said that would be a setback for BP, which has depended on TNK-BP for growth in production and reserves.

• Nail-Biter: Russian regulators who oversee licensing for oil-and-gas assets today could discuss revoking the permit given to BP’s 50%-owned Russian venture, TNK-BP, for the Kovykta natural-gas project.
 
• The background: The Kremlin has tightened its grip over energy assets in recent years, and opportunities for international oil giants have withered.
 
• The message: The fate of Kovykta could provide clues to the future of TNK-BP, which now seems out of step with Russia’s desire for control.

Write to Gregory L. White at greg.white@wsj.com and Guy Chazan at guy.chazan@wsj.com

Deborah Hargreaves
Friday June 1, 2007

Consumers have more clout than they realise. Certainly, many companies have converted to green causes under sustained customer pressure. And while much of what the corporate sector says about climate change can be dismissed as hot air, there are the beginnings of some very real initiatives.

Most leading companies now espouse some kind of green strategy towards reducing their carbon footprint. Of course, it is easier for those businesses with low emissions such as banks to boast about their environmental credentials. It often backfires when the big polluters in the oil and power sectors try to do the same. Shell has taken a lot of flak over its adverts showing flowers sprouting from a refinery and BP’s move to brand itself “beyond petroleum” has been met with much scepticism.

It was therefore brave of Scottish and Southern Energy to suggest it will try to sell less of its core product. The electricity producer has earmarked a range of financial incentives for users to cut down on their consumption.

This is very much driven by customer interests. SSE says about 10% of its consumers are eager to cut down. It sees its plan as a bit like a loyalty card and a way to hold on to customers in a fiercely competitive market. Investors rewarded its foresight with a jump in the shares.

Another reason for firms to boost their green credentials is pre-emptive. With President Bush finally converting to the cause, many businesses are concerned that if they do not cut down on carbon, they will be forced to do so.

Ryanair is obviously getting edgy about the media coverage of the environmental consequences of cheap flights. While this is yet to have a discernible effect on customer behaviour, it can only be a matter of time.

There is already some anecdotal evidence that people are starting to feel guilty about taking too many short-haul flights. A poll in last week’s Guardian showed that almost half of air travellers questioned said they had changed their behaviour because of the environmental impact of flying.

This is potentially bad news for budget airlines whose entire business model revolves around encouraging people to fly more. Governments have so far shied away from shackling the airline sector, but it remains vulnerable to regulatory intervention.

For smart companies, there is a business opportunity in climate change. There is plenty of money to be made from cleaner energy and environmental technology. Share prices for clean technology companies have been rocketing in the US. Investors are keen to jump on the green bandwagon.

With governments still parleying about the need to cut emissions levels, the real influence lies with the consumer and the investor. Spending power is what makes the corporate sector sit up and listen.

deborah.hargreaves@guardian.co.uk

http://business.guardian.co.uk/story/0,,2092887,00.html

As Baghdad burns, destabilising the entire region and sending the price of oil soaring, Calgary booms

Naomi Klein
Friday June 1, 2007

The invasion of Iraq has set off what could be the largest oil boom in history. All the signs are there: multinationals free to gobble up national firms at will, ship unlimited profits home, enjoy leisurely “tax holidays”, and pay a laughable 1% in royalties to the government.

This isn’t the boom in Iraq sparked by the proposed new oil law - that will come later. This boom is already in full swing, and it is happening about as far away from the carnage in Baghdad as you can get, in the wilds of northern Alberta. For four years now, Alberta and Iraq have been connected to each other through a kind of invisible seesaw: as Baghdad burns, destabilising the entire region and sending oil prices soaring, Calgary booms.

Here is how chaos in Iraq unleashed what the Financial Times recently called “North America’s biggest resources boom since the Klondike gold rush”. Albertans have always known that in the northern part of their province there are vast deposits of bitumen - black, tarlike goo that is mixed up with sand, clay, water and oil. There are approximately 2.5 trillion barrels of the stuff, the largest hydrocarbon deposits in the world.

It is possible to turn Alberta’s crud into crude, but it’s awfully hard. One method is to mine it in vast open pits: first, forests are clear-cut, then topsoil scraped away. Next, huge machines dig out the black goop and load it into the largest dump trucks in the world (two stories high, a single wheel costs $100,000). The tar is diluted with water and solvents in giant vats, which spin it around until the oil rises to the top, while the massive tailings are dumped in ponds larger than the region’s natural lakes. Another method is to separate the oil where it is: large drill-pipes push steam deep underground, which melts the tar, while another pipe sucks it out and transports it through several more stages of refining, much of it powered by natural gas.

Both techniques are costly: between $18 and $23 per barrel, just in expenses. Until quite recently, that made no economic sense. In the mid-80s, oil sold for $20 a barrel; in 1998-99, it was down to $12 a barrel. The major international players had no intention of paying more to get the oil than they could sell it for, which is why, when global oil reserves were calculated, the tar sands weren’t even factored in. Everyone but a few heavily subsidised Canadian companies knew that the tar was staying put.

Then came the US invasion of Iraq. In March 2003, the price of oil reached $35 a barrel, raising the prospect of making a profit from the tar sands (the industry calls them “oil sands”). That year, the US Energy Information Administration “discovered” oil in the tar sands. It announced that Alberta - previously thought to have only 5bn barrels of oil - was actually sitting on at least 174bn “economically recoverable” barrels. The next year, Canada overtook Saudi Arabia as the leading provider of foreign oil to the US.

All this has meant that Iraq’s oil boom has not been delayed; it has been relocated. All the majors, save BP, have rushed to northern Alberta: ExxonMobil, Chevron and Total, which alone plans to spend $9bn-$14bn. In April, Shell paid $8bn to take full control of its Canadian subsidiary. The town of Fort McMurray, ground zero of the boom, has nowhere to house the tens of thousands of new workers, and one company has built its own airstrip so it can fly in the people it needs.

Seventy-five percent of the oil from the tar sands flows directly to the US, prompting Brian Hall, an energy consultant with Colorado-based IHS, to call the tar sands “America’s energy security blanket”. There is a certain irony there: the US invaded Iraq at least in part to secure access to its oil. Now, thanks partly to economic blowback from that disastrous decision, it has found the “security” it was looking for right next door.

It has become fashionable to predict that high oil prices will spark a free-market response to climate change, setting off an “explosion of innovation in alternatives”, as New York Times columnist Thomas Friedman wrote recently. Alberta puts the lie to that claim. High prices have indeed led to an R&D extravaganza, but it is squarely focused on figuring out how to get the dirtiest possible oil out of the hardest-to-reach places. Shell, for instance, is working on a “novel thermal recovery process” - embedding large electric heaters in the deposits and literally cooking the earth.

And that’s the Alberta tar sands for you: the industry already contributing to climate change more than any other is frantically turning up the heat. The process of refining bitumen emits three to four times the greenhouse gases produced by extracting oil from traditional wells, making the tar sands the largest single contributor to Canada’s growth in greenhouse gas emissions. The $100bn in projected investments from the tar sands have also turned Canada into a global climate renegade.

That money is the primary reason why, at next week’s G8 summit in Heiligendamm, my country’s oil-friendly prime minister, Stephen Harper, will join George Bush in opposing all serious attempts to cap or reduce greenhouse gases. Back at home, his government fully supports the oil industry’s plans to more than triple tar sands production by 2020, with no end in sight. If prices stay high, it will soon become profitable to extract an additional 141bn barrels from the tar sands, which would place the largest oil reserves in the world in Alberta.

Developing the sands is devouring trees and wildlife - the Pembina Institute, the leading authority on the tar sands’ environmental impact, warns that boreal forests covering “an area as large as the state of Florida” risk being levelled. Now it turns out that the main river feeding the industry the massive quantities of water it needs is in jeopardy. Climate scientists say that dropping water levels are the result - fittingly enough - of climate warming.

Contemplating the collective madness in Alberta - a scene even the Financial Times has labelled “some dystopian fantasy” - it strikes me that Canada has ended up with more than Iraq’s displaced oil boom. We have its elusive weapons of mass destruction too. They are out near Fort McMurray, in the jet-black goo beneath the earth’s crust. And with the help of trucks, pipes, steam and gas, these weapons are being detonated.

* A version of this article appears in the Nation

www.nologo.org

http://environment.guardian.co.uk/climatechange/story/0,,2092931,00.html

By Russell Hotten
Last Updated: 12:12am BST 01/06/2007

BP chief executive Tony Hayward has held talks with his counterpart at Russian energy monopoly Gazprom ahead of a meeting today that could decide the fate of the UK company’s involvement in the huge Kovykta gas field in Siberia.

The agency that awards licences for exploration and development is due to decide whether to strip BP’s joint venture in Russia, TNK-BP, of the right to operate at the gas field, a project that would be a huge revenue earner for the UK company. Separately, the agency Rosnedra is also to consider revoking licences for UK firm Imperial Energy.

Gazprom has no stake in Kovykta, but the Kremlin appears to have a strategy to see Russia’s vast energy assets return to state control. The Kovykta affair has echoes of Royal Dutch Shell’s experience at Sakhalin-2, where after months of pressure the Anglo-Dutch company relinquished control of the project to Gazprom.

BP said Mr Hayward met Gazprom chief executive Alexei Miller yesterday to discuss “their many areas of mutual business”. A BP spokesman would not say if Kovykta was on the agenda. Mr Hayward was in Moscow for a TNK-BP board meeting that had been planned several months ago, he said.

Meanwhile, Rosnedra said it would review three licences given to Imperial, plus those awarded to several other firms.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/06/01/cnbp01.xml

Jeffrey Jones
reuters news agency

CALGARY, Alberta–Royal Dutch Shell Plc’s Canadian unit is still committed to the idea of a $16.2 billion Arctic gas pipeline, but must be assured of better returns before going ahead, its outgoing chief executive said Thursday.

Clive Mather, who retires next week as Shell absorbs its formerly publicly traded Canadian unit, said the Mackenzie Valley Pipeline’s backers face a hard decision on making the huge investment due to surging costs and “fragile” economics.

Mather made the comments a day after the Rex Tillerson, CEO of Mackenzie partner Exxon Mobil Corp. , said the project may have to wait until the cost environment improves.

“Do we remain committed? We very much remain committed to the principle,” Mather said in an interview. “We’ve got to work out a solution with all of the other partners in this to a point where we can actually get to an investment decision, and that’s going to be tough.”

Project leader Imperial Oil Ltd.is in talks with Ottawa in hopes of wresting financial support to improve the economics of the line, which would ship up to 1.9 billion cubic feet of gas to southern markets, much of it from three big fields on the Beaufort Sea coast. Shell owns one of them.

The proponents want the government to allow accelerated depreciation, to pay for infrastructure like roads and to guarantee that third-parties will sign up to ship gas on the 1,200 km line to Alberta.

Imperial’s cost estimate more than doubled in March, reflecting soaring prices for labour and materials like steel.

Tillerson’s comments were among the strongest that the development is on shaky financial ground.

“I still remain quietly confident,” said Mather, who took the helm at Shell Canada, one of the country’s biggest oil companies, three years ago.

“This was always going to be difficult. It’s been going already for many years, but the fundamentals are strong – I mean the fundamentals associated with bringing that stranded gas to market, the fundamentals associated with opening up a potential new (supply) basin in the North.”

Indian and Northern Affairs Minister Jim Prentice declined Thursday to say if Ottawa would offer more incentives.

“This is a private sector enterprise and it will have to achieve private sector rates of return and it will have to make sense on free market principles. So I await to see whether that is the case or not with this project,” Prentice said.

“If it isn’t, then the proponents in the free enterprise system will have to consider alternatives.”

Mather, 59, is the last CEO of Shell Canada before it is integrated into the Anglo-Dutch oil major’s worldwide operations. Royal Dutch Shell bought out minority shareholding for $8.7 billion (Canadian) in April.

The personable British executive, a Shell veteran, is not involved in the integration of the business, best known for its massive oil sands holdings and national gas station chain.

But he said the unit, which employs about 5,000 people, will be structured like the parent’s businesses, split more along business lines than regional ones, with refining and marketing a good candidate for that.

However, Royal Dutch Shell has been clear about Calgary remaining a major centre in its operation, he said.

Mather said “as a good oil and gas man” he will miss running a fully integrated company, which mines oil sands crude, processes it, refines it and sells it at the gas pump.

“The other thing I like is having a public company and the share price. I am a very competitive animal and I like the challenge of seeing my stock out there, seeing how we do and seeing how others do,” he said.

(Additional reporting by David Ljunggren in Ottawa)

May 31, 2007 06:16 PM

http://www.thestar.com/Business/article/220090

Vanguard (Lagos)
1 June 2007
Hector Igbikiowubo

IN yet another twist to the unfolding scenario in the Niger Delta, Kedere youths in Ogoniland have shut the valve on the Bomu manifold located on the Trans-Niger pipeline, effectively shutting-in 150,000 barrels per day of crude oil output from the Shell Petroleum Development Company operated joint venture.

This caused oil prices to rebound slightly after falling sharply the previous day.
 
Shell announced Wednesday that 150,000 bpd of crude oil production has been locked in at its Bonny Light terminal in Nigeria after pipelines were sabotaged.

While explaining the development a company spokesman, who did not want his name in print, explained that negotiations were currently ongoing to get the youths to open up the manifold to allow free flow of crude oil from the wells.

“Although we do not have any response from the youths yet, we believe that before the close of business activities today, we will have cause to cheer,” he said.

The shut in volume effectively brings the total shut-in volume in the country to about 850,000 barrels per day.

Militant attacks in the region have cut peak Nigerian crude production by around 25 percent for more than a year.

The attack comes the day after the new Nigerian President Umaru Yar’Adua found militants receptive to his conciliatory inauguration speech, raising hopes of increased stability in the crude-rich Niger Delta Region.

Feelers from the creeks indicates that the militants may have decided to give Yar’Adua measured respite. Perhaps this disposition informed the release of the four American hostages on Wednesday by the Niger Delta Frontier Force (NDFF).

At 10:43 a.m. in London, benchmark Brent crude contracts for July delivery were up 42 cents at US$68.55 per barrel.

Meanwhile, New York crude contracts for July delivery were up 54 cents at US$63.68 a barrel.

http://allafrica.com/stories/200706010001.html

EXTRACT: TNK-BP’s woes appear to mirror those faced by Shell at Sakhalin-2 last year. Shell and its Japanese partners sold a majority stake to Gazprom after months of pressure by Mitvol’s agency over purported environmental violations. Shell CEO Jeroen van der Veer met with Miller 10 days before agreeing to sell to Gazprom at a Dec. 21 meeting with Putin at the Kremlin.

THE ARTICLE

Friday, June 1, 2007. Issue 3669. Page 1.
By Miriam Elder
Staff Writer

BP’s new chief Tony Hayward held talks with Gazprom CEO Alexei Miller in Moscow late Thursday, as a deal on the gas giant’s entry into BP’s flagship Kovykta project appeared imminent.

Hayward and Miller “discussed issues of mutual interest” during talks at Gazprom’s central Moscow offices, BP spokesman Vladimir Buyanov said.

Neither BP nor Gazprom would comment on whether the two discussed Kovykta, the huge gas field in eastern Siberia that TNK-BP has been fighting to keep amid mounting state pressure.

Several sources said President Vladimir Putin wanted a deal on Kovykta to be struck before he left for the Group of Eight summit in Germany, which begins Wednesday.

Oleg Mitvol, deputy head of the Natural Resources Ministry’s environmental watchdog, has recommended that TNK-BP be deprived of its license at Kovykta for failing to fulfill production quotas. TNK-BP owns Kovykta through its majority share in license holder Rusia Petroleum.

“We understand that [the issue of Kovykta] is not to be decided by us,” Gazprom spokesman Sergei Kupriyanov said Thursday. “Is everything all right with the license? So what is there to talk about?”

Gazprom has denied holding talks with TNK-BP over Kovykta, which is estimated to hold 1.9 trillion cubic meters of gas but is at an early stage of development.
 
The ministry’s subsoil agency will not discuss Kovykta during a meeting Friday, agency spokesman Vitaly Tsoi said. The agency’s license review commission meets every two weeks.

“Kovykta will not be looked at,” Tsoi said. “Forget about Kovykta for now.”

Yet a ministry source said the commission would likely review the Kovykta license Friday. “I’m about 94 percent certain they will look at it,” the source said.

Under the license, Rusia Petroleum is obliged to produce 9 billion cubic meters of gas per year. It has been producing less than 1 bcm in the absence of an export pipeline to China.

Industry and Energy Minister Viktor Khristenko said Thursday that Russia was in talks with China to build a gas pipeline to the country.

The pipeline should be partially completed in the next five to six years, Khristenko told Reuters at a Paris energy conference, adding that he hoped additional pipelines would be built from fields in eastern and western Siberia. The “volumes, capacities and timeframe for such gas transport distribution systems are being discussed,” he said.

Analysts say the ministry’s increasing focus on Kovykta could indicate that negotiations on Gazprom’s entry into the project might be drawing to a close.

Yet Kovykta remains an anomaly in the country, lacking a state-controlled Russian partner as the Kremlin seeks to bring major oil and gas projects under state control.

TNK-BP owns 63 percent in Rusia Petroleum. Interros, currently controlled by billionaires Vladimir Potanin and Mikhail Prokhorov, holds 26 percent and the Irkutsk regional government holds 11 percent.