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Financial Times: Lex Column: TNK-BP and Rosneft

Published: March 24 2007 02:00 | Last updated: March 24 2007 02:00

Taking out insurance in Russia is a sensible idea, but the premiums can be huge. TNK-BP, BP’s Russian joint venture, is an anomaly in Russia’s energy landscape: a big player with a high degree of foreign ownership but no government involvement.

It finds itself under pressure from Russian officials and many think the endgame is that Gazprom will end up with a majority stake in the joint venture.

As with Moscow’s professed environmental concerns over Royal Dutch Shell’s project in Sakhalin, its current indignance regarding TNK-BP’s giant Kovykta gas field has more than a hint of the absurd about it. Officials are demanding that Kovykta begins pumping 9bn cubic metres of gas per year, even though none can be exported yet. Unless the locals have worked out a way to breathe the stuff, that is unreasonable – a regional population of less than 3m implies per capita gas usage at more than three times the rate of the European Union.

TNK-BP, therefore, has an interest in holding its nose and participating in the upcoming auction of the carcass of Yukos. In particular, it will bid for Yukos’s 9.4 per cent stake in Rosneft. Rosneft itself is the natural buyer of the stake, but the Kremlin needs at least two participants for the auction to have even the appearance of credibility. By cosying up to Rosneft, TNK-BP also counters Gazprom’s influence.

BP’s half of TNK-BP accounts for perhaps a third of the supermajor’s unproven resources and is worth $17.5bn at current prices. At a minimum bid price of $7.5bn, BP’s implied share of the cost of the Rosneft stake would be $3.75bn. A theoretical “insurance premium” of 21 per cent might sound large, but then the stakes are very high. Given that a minimum bid would still leave Rosneft room to acquire its own shares at a discount, it may be enough for TNK-BP to simply show up on the day.

Copyright The Financial Times Limited 2007

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