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The Wall Street Journal: BP May Lose Project To Russia Power Grab

Wall Street Journal BP Russia graphic

Move Would Open Door
To Gazprom and Tighten
Kremlin Grip on Energy

By GREGORY L. WHITE in Moscow and GUY CHAZAN in London
June 1, 2007; Page A9

Russian regulators could move as early as today to revoke a production permit from a $20 billion BP PLC natural-gas project in Siberia, in a test case of just how far the Kremlin will go in its drive for control over the energy sector.

As the Russian government has tightened its grip over strategic oil-and-gas assets in recent years — effectively nationalizing one of the country’s biggest oil producers and forcing foreign investors to cede control of projects to Russian state companies — opportunities for international oil giants have withered.

Even so, investors have taken Russian officials at their word that foreign companies still are welcome to participate in big projects as long as control is held by the Russian partner. That was the outcome at the $20 billion Sakhalin-2 project, in which Royal Dutch Shell PLC and its Japanese partners last year agreed to sell a controlling stake to Russian natural-gas giant OAO Gazprom after Russian regulators threatened to shut down the project.

Now events around the Kovykta gas field in eastern Siberia have raised fears there could be less room for foreign companies.

Russian licensing authorities accuse a company controlled by BP’s 50%-owned Russian venture, TNK-BP Ltd., of failing to meet production targets at the giant field. The panel empowered to revoke the license holds a regular meeting today, and officials have said Kovykta is likely to be on the agenda.

TNK-BP admits it is producing far less gas than the license mandates, but blames that on its inability to get government approval for an export pipeline to China. TNK-BP’s appeals to amend the license to reduce production targets have been rejected.

Industry officials and analysts suspect the regulatory pressure is a negotiating tactic on behalf of Gazprom, which has been talking for months with TNK-BP about joining the project. Publicly, however, Gazprom officials say they aren’t interested in Kovykta because of the investment required and questions about whether there is enough demand for the gas.

If the Russian authorities revoke the license, Gazprom would be able to bid for it at a future auction, while TNK-BP could be barred by legal restrictions now under consideration. But Gazprom might later invite BP in as a minority partner in the project.

“At this point, BP not losing everything would be seen as a positive surprise,” said Rory MacFarquhar, an analyst at Goldman Sachs in Moscow.

A person close to BP yesterday said momentum in discussions with Gazprom has picked up in recent days, though the outcome remains unclear. BP Chief Executive Tony Hayward met his Gazprom counterpart, Alexei Miller, in Moscow yesterday, but details of the session weren’t released.
“It’s not like a straight negotiation with a normal commercial company,” said one person close to BP. “There is so much politics involved.”

Some analysts have speculated the Kremlin might be pushing for a deal in the days before a summit of leaders from the Group of Eight leading nations, which begins Wednesday. But the Kremlin has in the past held major energy deals hostage to political issues. Relations with London are at a low point after Moscow refused to extradite a former KGB agent accused in the poisoning death of a Russian dissident in London last year.

Given the difficulties of navigating Russia’s politicized energy sector, some in BP would be satisfied just to minimize the damage to BP’s reputation as it gets squeezed out.

“For BP, Kovykta has essentially no value,” as developing it depends entirely on the Kremlin, said the person close to BP.

The fate of Kovykta could provide clues to the future of TNK-BP, which was hailed as a breakthrough when it was formed in 2003 but now seems out of step with the Kremlin’s preference for Russian control. BP’s partners in the company, three Russian billionaires, have indicated they don’t want to sell their stakes. But people familiar with the situation say they wouldn’t resist if the Kremlin sought to have Gazprom or state oil company OAO Rosneft buy them out.

The government hasn’t given clear signs. Igor Shuvalov, a Kremlin economic aide viewed as a liberal, said in an interview in November that while a sale to Gazprom would give the gas giant a major boost, “it would send the wrong signals” about state intervention and should be opposed. But earlier this year, Energy Minister Viktor Khristenko said in an interview, “If it’s attractive on the economics, then the acquisition will be made; there’s no politics in this.” Russian officials have explained past takeovers by state companies as purely economic.

Gazprom officials, meanwhile, don’t conceal their interest in TNK-BP, which is Russia’s No. 3 crude producer. In an interview this year, Gazprom Deputy Chief Executive Alexander Medvedev said, “There are a series of assets in the TNK-BP group that are interesting for us,” though he noted there was no sign TNK-BP’s Russian shareholders wanted to sell.

Any takeover would raise the question of whether BP would see its 50% stake reduced in line with Russian desires for local control. Analysts said that would be a setback for BP, which has depended on TNK-BP for growth in production and reserves.

• Nail-Biter: Russian regulators who oversee licensing for oil-and-gas assets today could discuss revoking the permit given to BP’s 50%-owned Russian venture, TNK-BP, for the Kovykta natural-gas project.
• The background: The Kremlin has tightened its grip over energy assets in recent years, and opportunities for international oil giants have withered.
• The message: The fate of Kovykta could provide clues to the future of TNK-BP, which now seems out of step with Russia’s desire for control.

Write to Gregory L. White at [email protected] and Guy Chazan at [email protected] and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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