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Associated Press: BP May Lose License to Kovykta Gas Field

By ALEX NICHOLSON 06.01.07, 6:11 AM ET
 
BP PLC is likely to lose its license to develop a giant Siberian gas field that could be used to supply Asian markets, a senior environmental official said Friday.

Oleg Mitvol, the deputy head of Russia’s environmental watchdog, Rosprirodnadzor, said he expects the license to be revoked as state regulators met to determine whether BP (nyse: BP – news – people ) had been under-producing at the Kovykta field and should therefore lose the rights to develop the 2.1 trillion cubic meter field.

Mitvol cited draft minutes from the meeting which recommend that BP’s permit be pulled for failing to meet a 9 billion cubic meter per year production target. BP has countered that it was only meant to meet local demand, which is far lower.

Meanwhile, the opportunity to export gas to China, which would spur development of the field, has so far been blocked by Gazprom – the only company allowed by law to export Russia’s gas.

The meeting comes against a backdrop of rising state control in the oil and gas industry: In December state gas monopoly OAO Gazprom took control of the Sakhalin-2 liquefied natural gas development on the Pacific Coast, elbowing Royal Dutch Shell PLC (nyse: RDSA – news – people ) into a minority position, amid a series of environmental checks.

Investors are watching for a decision at Kovykta intently: A deal similar to Sakhalin-2 where BP keeps a stake, albeit a minority one, would be palatable, they say. However, were BP to lose the license with no compensation, the investment climate would take a battering.

“There’s no way that any strategic assets such as Kovykta will stay in the ownership of a foreign company. The fact they will lose control is a given,” said Chris Weafer, chief strategist at Alfa Bank in Moscow.

“The worst-case scenario is that they get kicked out … then we’ll have the whole uncertainty factor back again that would be bad for the investment climate and bad for assets.”

A back-taxes campaign against the Yukos oil company and a parallel criminal case against its founder Mikhail Khodorkovsky hammered investor confidence in Russia; foreign funds lost billions as the company’s value evaporated.

But investors quickly forgot their jitters in the face of surging oil prices. Foreign oil companies are now clamoring to cut deals with Rosneft and Gazprom, viewed as the state’s gatekeepers to Russia’s energy riches.

The Kovykta field, located in the north of Siberia’s Irkutsk region, contains enough gas to supply the EU for nearly five years at 2005 levels, according to BP’s statistical review.

Copyright 2007 Associated Press. All rights reserved.

 

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