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Bloomberg: BP to Lose $18 Billion Field Amid Russian Crackdown (Update2)

By Torrey Clark

June 1 (Bloomberg) — BP Plc’s Russian venture will probably lose its license to a Siberian field with enough natural gas to supply Asia for five years as President Vladimir Putin extends state control over foreign energy projects.

A Natural Resources Ministry commission should annul BP’s permit for the $18 billion Kovykta field at its meeting today, Oleg Mitvol, the deputy head of the ministry’s environmental inspectorate, said in Moscow. A draft of the commission’s minutes for today’s meeting says the license will be revoked, Interfax said, citing a copy of the document.

The Russian government has used tax, license and ecological audits to restore state dominance over the oil industry, the world’s biggest this year. BP depends on Russia for a quarter of its production and 18 percent of its proven oil and gas reserves, while projects such as Kovykta promise future growth.

“Investors see Kovykta as a test case,” said Chris Weafer, the chief strategist at Alfa Bank, whose shareholders are among BP’s partners in TNK-BP. “Unless the Kremlin offers BP compensation, it will undermines investors’ understanding of the rules of the game and foreign majors’ reason for being in Russia, adding oil and gas reserves.”

The Natural Resources Ministry has threatened to revoke the license to Kovykta, held by TNK-BP’s OAO Rusia Petroleum unit, for more than four years. The ministry threatened to revoke Royal Dutch Shell Plc’s $22 billion Sakhalin-2 venture last year after months of environmental audits, led by Mitvol, which stopped after Shell ceded control to state-run OAO Gazprom.

Hayward Meets Miller

BP Chief Executive Officer Tony Hayward failed to convince Gazprom Chief Executive Officer Alexei Miller to join the Kovykta project when the two men met in Moscow yesterday, the newspaper Vedomosti reported today, citing unidentified Gazprom officials.

The Russian government now controls more than a third of Russia’s oil production through Gazprom and OAO Rosneft. Rosneft has become the country’s largest crude supplier this year, acquiring OAO Yukos Oil Co.’s oil assets as the government dismantles what was once Russia’s largest crude exporter. Gazprom acquired OAO Gazprom Neft in 2005 after the company, then known as OAO Sibneft, unraveled a failed merger with Yukos.

Seeking Ties

BP had sought close ties with the Kremlin, and former CEO John Browne traveled to Moscow to introduce Hayward to Putin. The British company bought $1 billion of shares in Rosneft, whose chairman Igor Sechin is deputy chief of Putin’s staff, during its July 2006 initial public offering.

TNK-BP legitimized Rosneft’s purchase of its own shares at the first Yukos bankruptcy auction this year by bidding. TNK-BP dropped behind the state company to become third among Russia’s oil companies after selling an oil unit to Rosneft last year.

“BP’s investment in currying favor with the Kremlin wasn’t sufficient to save Kovykta,” said Kim Iskyan, co-head of research at UralSib Financial Corp. “Its hold on gas assets was always questionable, given Gazprom’s acquisitiveness.”

TNK-BP’s unit violated the license requirements at Kovykta by failing to supply 9 billion cubic meters of gas to the Irkutsk region, Mitvol said after his inspectors finished their last review of Kovykta May 25. They recommended taking away the license to the subsoil resources agency and its license-revocation commission.

“If we look at the situation from the legal point of view, there’s only one resolution,” Mitvol said in an interview in Moscow yesterday. “The company loses its license.”

TNK-BP has defended the license, saying the terms require only that it meet the gas demand in Irkutsk. The company asked at least twice to have the government’s 9 billion-cubic-meter estimate lowered, saying it’s based on an unfulfilled plan to increase gas use in the region, where current demand is no more than 2.5 billion cubic meters a year.

The Czech Republic, with a population of 10 million, or more than three times that of the Irkutsk region, consumes about 9 billion cubic meters of gas a year.

TNK-BP has invested about $500 million in the project, which may cost $18 billion to develop. TNK-BP has sought Gazprom’s support to build a pipeline to ship gas to China and Korea, a market that Gazprom is planning to supply itself.

To contact the reporter on this story: Torrey Clark in Moscow at [email protected] .

Last Updated: June 1, 2007 07:21 EDT

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