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Bloomberg: Gazprom Gains BP Gas Field as Putin Tightens Control (Update3)

By Torrey Clark and Lucian Kim

June 22 (Bloomberg) — OAO Gazprom took control of BP Plc’s stake in a Siberian deposit with enough natural gas to supply Asia for five years as President Vladimir Putin ends foreign ownership of Russia’s biggest energy assets.

State-run Gazprom will pay as much as $900 million for the 63 percent of the Kovykta field held by BP’s TNK-BP unit and half its regional pipeline unit, and agreed to set up a $3 billion global venture, executives from the three companies said in the Kremlin today. BP’s shares rose as much as 1.6 percent today.

“This is almost a billion dollars more than they might otherwise have gotten,” said Roland Nash, the head of research at Renaissance Capital investment bank in Moscow. “All global hydrocarbon companies are in the process of renegotiating their positions in Russia, and the government holds all the trumps.”

Russia, the world’s largest energy producer, has used tax claims and environmental inspections to pressure foreign investors into relinquishing major oil and gas projects started before Putin came to power in 1999. Royal Dutch Shell Plc ceded control of its $22 billion Sakhalin-2 project to Gazprom in December. First Deputy Prime Minister Sergei Ivanov said June 13 foreign companies “will never operate” major fields again.

BP depends on its Russian venture for almost 1/10th of its profit, a fifth of its reserves and a quarter of its output, Chief Executive Officer Tony Hayward said in Moscow earlier this week.

Gazprom Pays

Gazprom will pay $700 million to $900 million for the Kovykta stake, BP said in a statement today. Gazprom is willing to pay $600 million to $800 million in cash, Gazprom Deputy Chief Executive Officer Alexander Medvedev said after signing the agreement in the Kremlin today.

TNK-BP will invest the proceeds to develop new production sites, TNK-BP Chief Executive Officer Robert Dudley said.

Moscow-based TNK-BP has the right to buy back 25 percent of Kovykta within 12 months of the sale, which must be completed in 90 days, said billionaire Viktor Vekselberg, a TNK-BP shareholder and director of gas projects at the company, at the Kremlin.

Gazprom will also own half of the new venture with BP and TNK- BP, which will be formed within a year and will pool $3 billion of Russian and international assets, Medvedev said.

“It’s about reciprocity and opening up foreign assets to Gazprom in a large cooperation agreement, and also expanding BP’s operations in Russia,” BP Vice President James Dupree said after the signing today.

BP may contribute production, processing and marketing assets worldwide, while TNK-BP may offer Russian assets, including the ZAO Rospan project, near gas fields held by Gazprom, Dudley said at the Kremlin.

License Threat

Today’s accord ends years of questions over the development of a field that may hold as much gas as Canada.

Russia’s Natural Resources Ministry has repeatedly threatened to revoke the Kovykta license held by TNK-BP’s OAO Rusia Petroleum unit for failing to produce enough fuel. TNK-BP argued the volume it was supposed to produce far exceeded the local demand.

The ministry is waiting for Gazprom to present a development plan for Kovykta before deciding on the license, spokesman Rinat Gizatulin said by telephone today. Threats by environmental regulators to halt Shell’s Sakhalin-2 project ended after Gazprom gained control of the project.

“It’s just a reminder that if you want to do business in the natural resource sector, you have to do it jointly with Gazprom or one of the other state-controlled companies,” said Andrea Nannini, who helps manage $700 million in two funds at Bankinvest Asset Management in Copenhagen. “At the end of the day, it’s another example, like Shell in Sakhalin, of how the government is increasing its grip on the Russian energy sector.”

Sought Help

TNK-BP had sought Gazprom’s participation in the project. The Russian company said there would be no demand for Kovykta gas before 2017. TNK-BP was blocked from selling gas to nearby markets in China and South Korea because Gazprom holds a monopoly on Russia’s gas pipelines and export.

Gazprom, which has a quarter of the European gas market, is looking to expand in Asia by building a new pipeline to China. Kovykta, near the Mongolian border, is one potential source for that pipeline, Medvedev told reporters in the Kremlin today.

Gazprom’s plan for Kovykta will also include construction of petrochemicals capacity, Medvedev said.

“The most difficult part of the talks was that Gazprom is very large and we are very small,” said Vekselberg, estimated to be Russia’s 10th richest man with a fortune of $10.7 billion by the Russia edition of Forbes. “It was a learning experience for me.”

BP’s shares narrowed gains to 583.5 pence at 4:35 p.m. in London, a 7 percent gain, after rising as much as 1.6 percent earlier today.

To contact the reporters on this story: Torrey Clark in Moscow at [email protected] ; Lucian Kim in Moscow at [email protected]

Last Updated: June 22, 2007 12:10 EDT

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