The Independent on Sunday: Russians ready to seize back BP’s Siberian gas reserves

EXTRACTS: The row is strikingly similar to that experienced by Shell over the $20bn Sakhalin 2 gas project, which at the time was Russia’s largest direct foreign investment. After months of warnings from Mr Mitvol over environmental breaches committed by Shell, and threats to revoke its licence, the Anglo-Dutch oil major and its Western partners were forced to sell a majority stake in the project to Gazprom at the beginning of the year. Mr Mitvol, who enjoys close ties with President Vladimir Putin, is the same regulator who targeted Shell over its giant Sakhalin 2 project.

THE ARTICLE

By Tim Webb
Published: 20 May 2007

BP is set to lose its prize asset in Russia as the country’s government continues to wrest back control of its natural resources from Western-owned companies.

Russian energy authorities announced earlier this year that BP’s Russian subsidiary, TNK-BP, was in breach of its licence to operate the huge Kovykta gas field in Siberia.

Oleg Mitvol, the head of Rosprirodnadzor (RPN), the Russian energy and mining regulator, subsequently launched an inspection of TNK-BP’s performance. It is believed that he is close to recommending that the company should be stripped of its prize.

TNK-BP, which is listed in Moscow, has a market capitalisation of $30bn (£15bn), with much of its value tied up in the Kovykta field. Mr Mitvol, who enjoys close ties with President Vladimir Putin, is the same regulator who targeted Shell over its giant Sakhalin 2 project.

He is expected to file his report into Kovykta by the end of this month to Rosnedra, another Russian energy authority, which will make the final ruling on TNK-BP’s future.

The loss of the Kovykta field would be a bitter blow to BP, which is still reeling from the early resignation of Lord Browne, its former chief executive, who quit after it was revealed that he had lied to a High Court judge over how he met his boyfriend. Lord Browne was replaced earlier this month by Tony Hayward.

BP, like other energy majors, is struggling to replace its faltering reserves, and the loss of such a key gas field will put its share price under pressure. Initial estimates for fully developing the Kovykta field and building a pipeline to export the gas to China put the cost at a minimum of $15bn.

If, as now seems likely, RPN concludes that TNK-BP is still not meeting the terms of its licence, it can recommend that it be revoked. In an interview with The Independent on Sunday, Mr Mitvol said: “If nothing good changes, we will give the documents to Rosnedra.”

Asked what the likelihood was of RPN’s report being “good news” for TNK-BP, he said: “The chance is very low.”

Mr Mitvol added that once a new bill restricting foreign participation in Russia’s natural resources is passed, the government can pick up the licence.

This week, Rusia Petroleum, which is majority owned by TNK-BP and owns the Kovykta field, will challenge RPN and Rosnedra over the possible revocation of its licence at a preliminary court hearing in the Siberian city of Irkutsk. But even if Rusia Petroleum is successful, it is unlikely the court’s jurisdiction would be recognised by the Kremlin.

TNK-BP has not booked the reserves at Kovykta, but analysts estimate it holds almost 2 trillion cubic metres (m3) of gas. The Russian government claims that, under the terms of its licence agreed 15 years ago, TNK-BP is obliged to produce 9 billion m3 each year from the field.

Last year, TNK-BP produced just 1.5 billion m3. BP says there is not enough demand in the Irkutsk region for 9 billion m3. Plans to build massive pipelines to export the gas to Asian markets need the backing of Russia’s state-owned gas giant Gazprom.

The row is strikingly similar to that experienced by Shell over the $20bn Sakhalin 2 gas project, which at the time was Russia’s largest direct foreign investment.

After months of warnings from Mr Mitvol over environmental breaches committed by Shell, and threats to revoke its licence, the Anglo-Dutch oil major and its Western partners were forced to sell a majority stake in the project to Gazprom at the beginning of the year.

Most analysts say that the allegations of environmental breaches made by RPN were a pretext to allow the Russian state to take back a chunk of its natural resources. Similar motives are thought to be behind the claim that TNK-BP has also violated the terms of its licence, this time by not producing enough gas.

http://news.independent.co.uk/business/news/article2562640.ece

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