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The Guardian: Kremlin may force BP to share oil venture

· Local partners in TNK-BP could sell 50% to state
· Russia already pushing for sale of troubled gas project

Terry Macalister in Moscow
Tuesday March 20, 2007

BP has warned western investors that it could soon be forced to share control of its highly profitable Russian joint venture, TNK-BP, with a Kremlin-controlled energy group such as Gazprom or Rosneft.

The change could come after the end of a “lock-in” period in December when its local private partners, the Alfa and Access/Renova groups, can sell their 50% stake in Russia’s third largest oil producer. The other half is owned by BP.

BP’s warning comes after the forced sale of part of Shell’s Sakhalin-2 oil and gas development in eastern Russia to Gazprom at the end of last year.

Bob Dudley, TNK-BP’s chief executive, said sharing power with a large energy group such as Gazprom or the newly expanded Rosneft should not be seen as a huge problem for his group. “Having one’s main investors linked to oil and gas is a good thing and might create additional markets for the company,” he said.

The future shape of the TNK-BP ownership structure was raised by institutional investors on a recent bond roadshow in Europe and north America. It is also known to be a concern inside BP and has been seen by some as a reason why Mr Dudley failed to win the group chief executive role which has come up with the early retirement of John Browne. “BP needs a safe pair of hands in Moscow at a time of potential upheaval and Mr Dudley is just the right person to best look after BP’s position,” said one industry insider.

Mr Dudley is keen to stress that TNK-BP is a separate and independent Russian company and that it is his job to look after all his shareholders – not just BP. He insists he has an excellent working relationship with the Alfa and Access/Renova groups and hopes they will not sell out.

The Russian business, which will report pre-tax earnings of more than $11bn for 2006, is of enormous importance to BP because it has been producing much of the oil and gas growth for the wider group, which has run into a host of scandals in the US over failings leading to the Texas City refinery explosion, pipeline spills in Alaska and suspected propane trading irregularities. Output for TNK-BP is 1.85 million barrels of oil and gas a day – almost a quarter of the group’s overall production.

TNK-BP is already under pressure from the Russian government to hand over part of the Kovykta gas project in east Siberia to a local partner such as Gazprom, and Mr Dudley said he was confident a formal agreement could come as early as this summer. Kovykta has been fraught with difficulties for some time. There has long been a row over whether the gas should travel west to Russia as potential pipeline operator Gazprom wants, or west to China as BP wants, while the field operator, TNK-BP subsidiary Rusia Petroleum, has been harassed by the licensing and environmental authorities for alleged failings.

The problems have been interpreted by many in the west as the latest turn of the screw on foreign and privately owned local oil companies which began with the effective liquidation of Yukos and continued with the squeezing of Shell to cede part of the Sakhalin-2 gas project to Gazprom.

But Mr Dudley says many investors are overestimating the importance of Kovykta.”Kovykta is just one of 16 major projects we are working on. It gets all the publicity because it is politically interesting but this is disproportionate because this is an industrial project that would need $30bn worth of investment in future, too large for TNK-BP on its own anyway.”

Mr Dudley says his company is still held in high regard by the Russian state because it has delivered on all its promises and produced big profits and state revenues. “Lord Browne promised to increase production, introduce more transparency, bring in new technology and be a good corporate citizen and I think we have done that very well,” Mr Dudley said.

The company won 23 new licences in Russia last year and 12 more are in the pipeline. Its spending in Russia has gone from $2.4bn in 2006 to $3.4bn this year and it plans to buy Occidental Petroleum’s business in west Siberia for $485m. Support for these moves from Alfa and Access/Renova underlined their commitment, Mr Dudley said. “If they are planning to exit the business, I do not think they would have approved this acquisition.”

Texas City explosion

BP will face a blizzard of criticism today as the US chemical safety board (CSB) delivers its final report into the explosion and fire that killed 15 at the Texas City refinery. An unsafe culture was responsible, Carolyn Merritt, the CSB chairwoman, told an industry conference in San Antonio yesterday. “As the investigation unfolded, we were absolutely terrified that such a culture could exist at BP,” she said. BP said its global operations had all been reviewed since the accident.,,2037959,00.html

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