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Kommersant: TNK-BP Receives Unfavorable Verdict in Kovykta Inspection

EXTRACT: “…it is likely that the report from Rosprirodnadzor will help Gazprom in its attempt to wrestle control of the company from TNK-BP. In Mr. Nesterov’s opinion, the situation will play out similarly to Sakhalin-2, in which the environmental oversight authorities ceased their attacks once Gazprom joined the project.”

THE ARTICLE

Gazprom and TNK-BP Will Continue to Haggle Over Field

Jan. 29, 2007

Last Thursday the Russian environmental oversight agency (Rosprirodnadzor) in Irkutsk Oblast completed its inspection of the degree to which the company RUSIA Petroleum, which is controlled by TNK-BP, is fulfilling the conditions of its license to exploit the Kovykta gas condensate field in the Irkutsk region.

The field, which is believed to contain 1.9 trillion cubic meters of gas, is one of the largest in Russia. According to the terms of the contract, which took effect in 2006, RUSIA Petroleum is supposed to extract at least 9 billion cubic meters of gas annually from the field. The oversight agency claims in the inspection report, however, that the company has only extracted 33.8 million cubic meters to date: a breach of contract.

Significantly, the report does not recommend that the company be stripped of its license. The document states that the volume of gas consumed in Irkutsk Oblast to 2010 will be only 2.5-2.6 billion cubic meters, and that volume is fully covered by the potential volume that RUSIA Petroleum will be able to extract (2.57 billion cubic meters in 2011) once reactivated wells are taken into account.

The report from Rosprirodnadzor notes that the necessity of making changes in the conditions of the licensing agreements has been considered several times, but although RUSIA Petroleum sent the appropriate documents to Rosnedra, the Russian mining and drilling oversight agency, in November 2006, a spokesman for TNK-BP said yesterday that the company had never received an official response. Since “decisions to change the licensing conditions set by the agencies that issue the licenses were not made,” Rosprirodnadzor has left the question of TNK-BP’s license up in the air. The final decision now depends on Rosnedra, which could take up the question on Rosprirodnadzor’s request.

Because the company has thus been caught breaking one of the conditions of its contract, however, information obtained by Kommersant suggests that as a result Gazprom may receive a maximum stake in RUSIA Petroleum. Currently, the license to exploit the Kovykta field is owned by RUSIA Petroleum, whose majority shareholder (62.4%) is TNK-BP. Shares in the company are also owned by Interros (25.8%) and the Irkutsk regional committee for the management of government property (11.2%). Analysts believe that RUSIA Petroleum will not be stripped of its license to operate in the gas field. “This story has already made a great many waves, and I think that the Russian authorities understand that revoking the license would be unfortunate in terms of work with foreign investors,” said Troika Dialog analyst Valery Nesterov.

However, it is likely that the report from Rosprirodnadzor will help Gazprom in its attempt to wrestle control of the company from TNK-BP. In Mr. Nesterov’s opinion, the situation will play out similarly to Sakhalin-2, in which the environmental oversight authorities ceased their attacks once Gazprom joined the project.

On Friday TNK-BP President Robert Dudley confirmed that Gazprom is due to join the Kovykta project by the middle of this year. Whether Gazprom will pay its way with money or assets has not yet been decided, but TNK-BP is clear that it wants to retain “a significant share in the project.”

Officials from Gazprom declined to comment, but a Kommersant source close to the proceedings said that TNK-BP is ready to concede around half of its share in RUSIA Petroleum to Gazprom. However, TNK-BP is known to want to retain at least a 33% stake in the project, and Gazprom is said to be holding out for leaving TNK-BP no more than 25%, which would give the Russian gas giant a 74.4% stake. Sources say that the entire project is worth $2 billion, a number that Gazprom is said to consider an overestimate.

Natalia Grib, Denis Rebrov, and Renata Yambaeva

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