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THE HERALD (Scotland): Putin rattles sabre at BP over delays in gas project

June 05 2007

Vladimir Putin waded into the row about the $20bn (£10bn) Kovykta gas field, saying he had lost patience with BP and its partners, heightening fears the big oil and gas company could lose at least part of its investment.

Following threats by Russian regulators to revoke the licence for the Siberian field, the Russian president pinned the blame for alleged delays in getting production from Kovykta up to speed squarely on shareholders in the TNK-BP venture.

“If the members of the consortium are doing nothing to meet licence obligations, how much longer do we have to tolerate this?” he told western reporters.

“I would like to stress that the field has reserves of three trillion cubic metres. To understand its importance for our country it is equal to almost all reserves of Canada,” Putin said in an interview reported on a government website.

Coming two days before world leaders convene for the G8 summit in Germany, Putin’s comments amounted to an extraordinary attack on one of the world’s leading firms. The tenor of the remarks will concern western politicians and the bosses of other companies which are doing business in Russia or considering investing there.

His intervention comes days after the resources ministry postponed a decision on whether to remove the licence for Kovykta from TNK-BP, which is owned by BP and three Russian oligarchs who control 50% of the shares.

While the postponement appeared to be intended to soothe nerves before the G8 meeting, Russian agencies reported that the ministry would go ahead with revoking the licence at its next meeting later this month.

Any such move would be expected to result in Russia’s Gazprom taking control of Kovykta, in which BP has invested hundreds of millions of dollars, at a bargain price.

The state-owned company recently won control of the Sakhalin-2 project offshore Siberia from Royal Dutch Shell and its partners following allegations about breaches of environmental regulations.

Led by Oleg Mitvol, who fronted the investigations regarding Sakhalin, Russian officials insist that TNK-BP has not met a commitment to operate Kovykta at the rate of nine billion cubic feet production of gas daily.
However, sector watchers say that when the original licence was drafted in 1996 the operator of Kovykta was required to produce nine billion cubic metres daily by 2007 for the local market in eastern Siberia.

The licence was awarded to a firm called Russia, in which TNK-BP has acquired a 63.2% stake.

The local market has only developed to require 2.5 billion cubic metres, compared with 1.5 billion cubic metres currently being produced from Kovykta.

TNK-BP would have an incentive to produce more if it could export to nearby China, but Gazprom has a monopoly on gas exports.

Admitting that the Resources Ministry had been raising the question of withdrawing the licence, Putin said the decision would be up to officials.

However, he made it clear that TNK-BP would face an uphill struggle winning his support.

“We can talk about many reasons here, including access to the pipeline system. But they knew about it when they bid for the licence. They knew about these problems and possible restrictions and they nevertheless bought the licence,” he said.

Sabre-rattling by Putin regarding Kovykta will be regarded with unease by Tony Hayward, who recently became chief executive of BP following the recent resignation of Lord Browne.

TNK-BP currently produces two million barrels oil daily, the half share of which has helped BP compensate for high-profile setbacks in the US.

Prime Minister Tony Blair is credited with helping Browne broker the deal to create TNK-BP four years ago, showing the importance attached to the venture by ministers.

BP declined to comment on Putin’s remarks.

Seperately, TNK-BP said it would double investment in the Uvat oil project in west Siberia to £750m next year to help boost production.

Shares in BP firmed 3p at 570.5p.

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