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Financial Times: BP and Gazprom reach deal over Kovykta

By Ed Crooks in London and Catherine Belton in Moscow
Published: June 22 2007 10:45 | Last updated: June 22 2007 14:15

Gazprom is to buy TNK-BP’s controlling stake in the vast Kovykta gas field in Siberia, a deal that cements state-controlled Gazprom’s control over the Russian gas sector and resolves a long-running stand-off with BP’s Russia venture.

BP and TNK-BP have also signed a memorandum of understanding on creating a strategic alliance with Gazprom for investing in long term strategic projects or asset swaps across the globe, BP said in a statement on Friday.

BP and Gazprom plan a wider international joint venture as part of the deal.

TNK-BP is to cede its 62.89 per cent holding in Kovykta to Gazprom, but has been given the option to buy a stake of 25 per cent plus one share in Rusia-Petroleum, the licence holder of the Kovykta field, at a market price, BP said. The option is to be activated once agreement is reached on international projects.

Gazprom is paying TNK-BP between $700m and $900m for the Kovykta stake and a half-share of a local company that is building gas infrastructure in eastern Siberia. The exact sum will be set in the next 90 days.

The pressure placed on BP over Kovykta is the latest move in Russia’s strategy of exerting more control over its natural resources, and using its leverage to help Gazprom.

However, BP sought on Friday to put a positive gloss on the news. ”This historic agreement lays the ground for powerful co-operation between BP, TNK-BP and Gazprom,” said Tony Hayward, BP chief executive. ”We will be initially looking for projects of at least $3 billion, but the potential for future growth could be very significant.”

People close to the talks had long suggested that wider global co-operation between BP and Gazprom, whether through a joint venture or asset swaps, was likely to resolve the dispute. Gazprom has been pursuing a strategy of international expansion, and wants to develop expertise in more technically sophisticated markets such as liquefied natural gas.

Kovykta is a very small part of TNK-BP’s current production, but was important for its future prospects, having the potential to supply large volumes of gas, perhaps for export to China, in the next decade.

The Russian authorities say the TNK-BP led group has breached the terms of its licence by failing to produce enough gas.

Talking about the field recently, Vladimir Putin, Russia’s president, indicated BP could retain a role in the Kovykta project:

He said the dispute over Kovykta was ”not about BP, not about the foreign partner, but about all the shareholders that took the obligations to develop this field, and unfortunately didn’t meet the licence terms”.

He reserved particular ire for TNK-BP’s billionaire Russian shareholders and suggested they won the licence to develop the field in the early 1990s in a corrupt deal. Dismissing suggestions TNK-BP had been blocked from developing the field because Gazprom refused to build a pipeline, Mr Putin said: ”They already knew this when they got the permit.”

”I am not even going to talk about how they obtained the permit,” he said. ”We will let it rest in the conscience of those who did this at the beginning of the 1990s.”

Copyright The Financial Times Limited 2007

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