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RIA Novosti: Will TNK-BP lose Kovykta deposit?: Putin says Shell tried to ‘lure Gazprom into buying its shares’

EXTRACT: Russian President Vladimir Putin was much clearer on this issue than Gazprom at a news conference with foreign journalists on June 1. Talking about Kovykta and the Sakhalin-2 project, he emphasized that in the 1990s the agreements were signed with Western companies on very unfavorable terms. The president illustrated his statement with the recent Sakhalin-2 saga. The British-Dutch Royal Dutch Shell was in change of this LNG project. For a long time, it tried to lure Gazprom into buying its shares.

THE ARTICLE

11:46 | 06/ 06/ 2007   

MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) – The Federal Agency for the Management of Mineral Resources had all the grounds to revoke on June 1 the license of the Russian-British JV TNK-BP for the development of the Kovykta gas condensate deposit in the Irkutsk Region.

In late May, a related department, the Federal Service for the Oversight of Natural Resources checked on the project once again and confirmed the obvious violation – the company will not produce 9 billion cubic meters of gas this year as it has to under the license. In effect, it has produced only 33 million cubic meters since the start of the year. Nevertheless, the Federal Agency for the Management of Mineral Resources suspended its decision on the license, but promised to take it within a fortnight.

Officials did not explain the need for this extension. Some experts believe this is just a diplomatic maneuver. On June 6-8, the G8 summit is to take place in Germany, and on June 8-11 the International Economic Forum will be held in St. Petersburg. The Russian authorities simply do not want to upset Russia’s Western partners by revoking the license from a Russian-British JV before these events are over.

Kovykta is a strategic reserve with some 3 trillion cubic meters of gas; and when the license is revoked, the deposit will get into a list of undistributed resources where it can stay for an indefinite time.

However, there is much evidence that TNK-BP, which already owns more than 62% of the deposit, will remain in the project but on different terms.

The British oil-and-gas giant BP has long been trying to involve the Russian gas monopoly Gazprom in Kovykta development. Early this year, it offered Gazprom a controlling interest in the deposit because even in this case BP will still get substantial economic gains. Without Gazprom, TNK-BP will not be able to reach the rated capacity at Kovykta and abide by the terms of the license agreement.

Now the JV does not have access to Gazprom’s pipe and, hence, to the Russian gas consumers. The plan to export Kovykta gas to China has also been suspended. The Irkutsk Region, where the JV is allowed to sell the fuel it produces, can at most consume 2.5 billion cubic meters of gas.

So far, BP has been unable to sign a partnership agreement with Gazprom. However, on the eve of the agency meeting, BP chief executive Tony Hayward held another round of talks with his colleague from Gazprom Alexei Miller. The subject of discussion was not disclosed in full, but it probably motivated Russian officials to suspend the revocation of the license.

Gazprom is making a pause and does not show much interest in Kovykta. Its official spokesman Sergei Kupriyanov said on June 2 that a potential revocation of the TNK-BP license had nothing to do with Gazprom. He confirmed that TNK-BP was offering Gazprom different options of partnership on Kovykta, but said that for Gazprom “this was not a priority project.”

But it looks as if Gazprom is trying to enter the project on even better terms than BP had suggested. Gazprom’s informal sources admit that it badly needs more gas both for domestic consumption and exports. Deposit development is the only way of resolving this problem. New reserves are essential for raising the company’s costs. Gazprom has announced its intention to become the world’s leading energy supplier.

Russian President Vladimir Putin was much clearer on this issue than Gazprom at a news conference with foreign journalists on June 1. Talking about Kovykta and the Sakhalin-2 project, he emphasized that in the 1990s the agreements were signed with Western companies on very unfavorable terms. The president illustrated his statement with the recent Sakhalin-2 saga. The British-Dutch Royal Dutch Shell was in change of this LNG project. For a long time, it tried to lure Gazprom into buying its shares. But late last year, the Federal Service for the Oversight of Natural Resources discovered numerous environmental violations in the project, after which Shell had to make even bigger concessions to Gazprom, which eventually got the controlling interest. The grievances of the Russian environmental protection agencies gradually disappeared.

“Gazprom was invited by the partners to join the project even earlier, before the environmental rows, but turned the offer down,” Putin said about Sakhalin-2. “But then environmental problems emerged and the threat of fines was looming. I think that Gazprom’s decision to take part in the project has simply saved it,” he explained. The president recalled that Gazprom had paid a market price for the project – $8 billion – and that its partners in the deal were happy about it.

Putin said he did not know how the Kovykta shareholders and Russian environmental agencies would settle the conflict. But he is absolutely positive about BP. All it has to do is abide by Russian laws.

“We welcome its participation in the Russian economy and would support it, but we proceed from the premise that it will operate in conformity with the current laws,” the president said.

Therefore, the chances that Gazprom and TNK-BP will distribute their roles in Kovykta development are still there.

The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti.

http://en.rian.ru/analysis/20070606/66764481.html

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