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Houston Chronicle: Kremlin puts the squeeze on BP’s hopes: It’s the latest foreign producer to be pressured

BP station in Moscow

(BP, operator of this gasoline station in Moscow, was welcomed to the Russian energy market three years ago, but now is subjected to back-tax bills. MIKHAIL METZEL: AP)

By HENRY MEYER
Associated Press
Nov. 18, 2006, 12:20AM
 
MOSCOW — BP, which entered the Russian energy market three years ago with the blessing of President Vladimir Putin, has become the latest foreign producer to feel the icy power of the Kremlin as the state increases its control of oil resources.

The company’s joint venture TNK-BP, Russia’s third-biggest oil and gas producer, has been hit with back-tax bills and threatened with license annulments. Last week, prosecutors opened a criminal investigation against a TNK-BP executive.

Its difficulties mirror those seen by Royal Dutch Shell, Exxon Mobil and Total in their Russian projects.

Awash in oil money after years of high prices, a confident Russia is moving to ensure that the state has a major role in all key energy projects — even if that means using scare tactics against Western investors, analysts say.

“This is all part of a general policy of increasing state control over the oil and gas sector. Of course it’s worrying and it means a change in the investment climate,” said Valery Nesterov, an analyst from Moscow-based brokerage Troika Dialog.

Barrels of reserves

Back in 2003, BP’s rivals looked on enviously as it acquired billions of barrels of reserves by forming a partnership with Russian oil firm TNK, giving it access to huge, untapped oil fields in the world’s second-largest crude exporter after Saudi Arabia.

At an energy conference in London held in the gilded splendor of an early 19th century mansion, Putin stood side by side with British Prime Minister Tony Blair and hailed the multibillion-dollar deal as a sign of investor confidence in Russia.

But the BP-managed company, which expended huge efforts imposing Western standards of corporate governance in the often unruly Russian business world, now faces the prospect that TNK shareholders will be pressured to sell to the state, analysts and people close to the situation say.

“It’s a continuation of the Yukos affair,” Nesterov added, referring to the Kremlin-driven campaign that began shortly after the BP deal and led to the nationalization of most of Russia’s former top oil company and the jailing of its founder.

Billionaire Mikhail Khodor- kovsky had been negotiating to sell Yukos to a U.S. oil giant — reportedly one of the reasons authorities moved against him to prevent a strategic asset from falling into foreign hands. In the end, Yukos’ main production arm was taken over by state oil company Rosneft.

Analysts say the Kremlin now is applying pressure on the Russian shareholders who control half of TNK-BP to sell their stake to either state-run gas monopoly Gazprom or to Rosneft.

The two billionaires who own most of TNK, Pyotr Aven and Viktor Vekselberg, denied this week that they were in talks to sell their shareholdings or were under government pressure to do so.

But a person familiar with the situation told the Associated Press that the Russian shareholders in TNK “are sitting and waiting to be told who to sell to.” He spoke on condition of anonymity because of concern about official reprisals.

Under the terms of the TNK-BP deal, signed in June 2003, the Russian partners agreed not to sell their stake for four years in order to provide BP with a stable business environment — a restriction that ends next spring.

But the head of BP said Friday that the company would like to retain at least a 50 percent share of its joint venture.

“We wouldn’t like to reduce our shareholding,” CEO Lord John Browne told Reuters News Service after a speech at Columbia University.

Shell, Exxon Mobil and Total, which all signed deals in the 1990s that Russian officials now criticize as humiliatingly unfair, also have been under greater scrutiny of late.

In September, regulators froze a key environmental permit at the $20 billion Shell-led oil and natural gas project on Sakhalin island, and they have threatened to halt all work on it because of alleged ecological violations.

Full control

Russian regulators have warned that a license for an Arctic oil field being developed by France’s Total could be at risk because of violations, and Exxon Mobil has faced an environmental audit of its oil and gas project in Sakhalin.

The so-called Production Sharing Agreements, or PSAs, signed when state coffers were empty and investment was desperately needed, gave full control of energy projects to foreigners and allowed them to recoup all their costs before paying any royalties.

Shell angered the Russian government last year when it announced that costs had doubled to more than $20 billion. This shot down a proposed deal for Gazprom to enter the project, and the government is now reportedly demanding renegotiation of the PSA and better terms for Gazprom.

The strong-arm tactics have alarmed foreign investors.

William Browder, chief executive of Hermitage Capital, the largest investment fund in Russia, said BP and other large oil companies simply couldn’t afford to stay out of Russia with dwindling reserves available to them elsewhere in the world.

“If I was sitting in the boardroom of Shell, BP and Exxon Mobil and thinking about Russia, I’d be scared,” he said. “But at the moment, Russia doesn’t seem to suffer any real consequences for playing hardball. In a world where there’s no oil, foreign companies are lining up to work regardless of how the Russians treat them.”

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