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The Economist: Some you win, some you lose

EXTRACT: Last year, under duress, Royal Dutch Shell and its partners agreed to sell a majority stake in a big oil and gas project called Sakhalin II to Gazprom, the state-owned gas firm.

May 31st 2007
From The Economist print edition

The oil giant hopes to find gas in Libya, but may lose it in Russia

FOR an illustration of the roller-coaster that Western oil firms ride in their attempts to get at foreign oil and gas, look no further than BP. On May 29th the oil giant announced its return to Libya after an absence of over 30 years.

Muammar Qaddafi, Libya’s “Brother Leader”, who ordered the expropriation of BP’s Libyan operations in 1974, is now allowing the firm to return to search for gas. At the same time another country in which BP operates is having second thoughts of a different sort. Earlier this week a Russian court ruled that it had no authority to review the licence terms for a gas field in which BP owns a share through its Russian joint-venture, TNK-BP. This paved the way for the Russian government to decide on June 1st whether to revoke the licence, and so deprive BP of a prized asset.

The Libyan deal, says BP’s new boss, Tony Hayward, constitutes its biggest single investment in exploration. The firm will spend at least $900m, and perhaps as much as $1.2 billion, simply looking for gas. If it finds any, it might spend up to $800m appraising its discovery, and untold billions more developing it. Even if its Libyan venture is successful, however, BP may not make much money from it. The head of Libya’s state-owned National Oil Corporation says it will receive some 78% of any gas produced. Another local partner will take another slice, leaving BP with less than 19%. The Libyan government has driven hard bargains with foreign oil firms, and BP is a relative late-comer.

In Russia, by contrast, BP was thought to be a trailblazer when it gained access to the country’s huge and underexploited oil and gas reserves in 2003 through the creation of TNK-BP, in which it owns a 50% share. Vladimir Putin himself presided over the signing of the shareholder agreement. TNK-BP now accounts for roughly a quarter of BP’s oil output, though only a tenth of its profits. Just as importantly, it consistently finds more oil than it pumps, which BP has struggled to do elsewhere.

But Mr Putin seems to have gone off foreign investment in energy. Last year, under duress, Royal Dutch Shell and its partners agreed to sell a majority stake in a big oil and gas project called Sakhalin II to Gazprom, the state-owned gas firm. Gazprom, which has a monopoly on gas exports, has also refused to build a pipeline through which a consortium led by TNK-BP could send gas to China from a field called Kovykta. With no other customers but the tiny local population, the consortium has not produced as much gas as stipulated by its licence, providing Russia’s zealous inspectors with an excuse to pounce.

As The Economist went to press, the government seemed likely to order the confiscation of the field on June 1st. Even then, however, BP’s Russian troubles will not necessarily be at an end. Rumours abound that Gazprom or Rosneft, the state-owned oil giant, might attempt to buy out the Russian oligarchs who own the other half of TNK-BP, or press BP to sell some of its shares. All the shareholders say their stakes are not for sale—but in Mr Putin’s Russia, that is not a big obstacle.

http://www.economist.com/business/displaystory.cfm?story_id=9257851

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