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Financial Times: Lex Column: BP/Shell/Russia

Published: September 19 2006 03:00 | Last updated: September 19 2006 03:00

The latest delay to its Thunder Horse project in the Gulf of Mexico will heighten investors’ concerns about BP’s US business. Unfortunately, further uncertainty is building on the other side of the globe.

In Russia, Gazprom is said to be interested in taking on the half of TNK-BP owned by financial investors. That may unnerve BP shareholders. There is, however, a creeping sense of inevitability about some sort of deal eventually being struck. As it stands, TNK-BP’s 50/50 structure could constrain its ability to secure stakes in new upstream projects in Russia. Gazprom’s de facto role as middleman-in-chief for Eurasian gas flows means its co-operation is essential if TNK-BP is to monetise its stake in Kovykta, a massive Siberian gas field. Having already recovered its outlays on the joint venture, the extra risk for BP may actually be outweighed by the potential benefits.

Royal Dutch Shell’s Russian problems are of a different order. Russia’s tightening of the screws on Shell’s Sakhalin-2 project may be partly motivated by pride. Sakhalin-2 is operated under a long-standing production sharing agreement (PSA), typically used to shield foreign operators in less-stable regimes. That seems anachronistic to Russia’s politicians now that it has recovered from the humiliation of its 1998 debt crisis. Cost overruns at Sakhalin-2 have dented Shell’s case, since PSA terms allow for recovery of costs before the government sees a cent.

When it comes to rewriting history, the Kremlin is a past master. To renege on these contracts altogether, however, would be a big step into the unknown. More likely, as with Kovykta, political elements would like to see Gazprom have a significant say in one of the country’s flagship gas projects. They also know that Shell can ill-afford delays to one of its biggest sources of production growth over the next few years.

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