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The Wall Street Journal: BP Set to Leave Russia Gas Project

Wall Street Journal Chart

Sale of Majority Stake
To Gazprom Would Tighten
Kremlin’s Grip on Energy
By GUY CHAZAN in London and GREGORY L. WHITE in Moscow
June 22, 2007; Page A3

BP PLC, facing pressure from the Kremlin, is close to a deal that would cede its holdings in a $20 billion Russian natural-gas project to state-controlled gas monopoly OAO Gazprom, according to people familiar with the matter.

If sealed, the deal would mark the Kremlin’s latest move to take control of Russia’s energy resources, a process that often has come at the expense of Western companies and investors. It comes amid uncertainty in world energy markets, which are increasingly dependent on Russia’s reserves at a time of rising demand and tight supply, and could send a chill through the investment climate in Russia.

Under a deal taking shape in Moscow but still not finalized, BP’s Russian joint venture, TNK-BP Ltd., would sell its 62.7% stake in the Kovykta field to Gazprom for close to $1 billion, the people familiar with the discussions said.

BP and Gazprom would then launch negotiations on forming a $3 billion global joint venture involving projects in Russia and elsewhere, these people said. Each side would contribute assets valued at $1.5 billion to the venture. TNK-BP may be invited back into Kovykta as a minority shareholder, one of these people said.

Negotiations were continuing late yesterday, these people said, and the situation remained fluid. A TNK-BP spokesman said there were “some significant outstanding issues” and no deal had been reached but added that “it’s possible there may be something sooner rather than later.”

Gazprom had been in negotiations with BP for months about entering the Kovykta project, but few observers thought the discussions would end with BP being pushed out of the field altogether. Russian regulators have threatened to revoke TNK-BP’s license for Kovykta, which Russian officials say holds nearly as much natural gas as Canada, because BP and its partners weren’t meeting production targets. Regulators had indicated Gazprom’s entry into the project would resolve any license issues.

The proposed deal would be the latest example of the Kremlin squeezing foreign investors out of energy assets. Six months ago, Royal Dutch Shell PLC sold control of Sakhalin-2, an energy project in the far east of Russia, to Gazprom after Russian regulators threatened to shut down that venture for alleged environmental violations.

A deal would leave open the issue of the future of TNK-BP itself, a 50-50 venture between BP and three Russian billionaires. That structure no longer seems to fit with the Kremlin’s desire for Russian control over large energy companies. While Gazprom has expressed interest in buying out the Russian shareholders, there is no sign a deal is imminent. The people familiar with the deal said it would have no bearing on the future of TNK-BP.
 
The fate of both Kovykta and TNK-BP are bellwethers for the Kremlin’s willingness to allow foreign investment in the energy sector in a country that has the world’s largest reserves of natural gas and is No. 6 in oil. BP has invested about $600 million in the Kovykta project, which is expected to cost about $20 billion. The project is in early stages, and BP never booked any of its reserves.

BP officials have stressed that Kovykta has no value in its current state, with the prospects for export routes uncertain and little infrastructure near the field. They repeatedly have said they wanted Gazprom to have majority control of the project because it has a monopoly on exporting Russian gas and officials had hoped to sell output to markets in China.

At an investment conference in Moscow Monday, BP Chief Executive Tony Hayward said TNK-BP, into which BP put $8 billion in 2003, “has been a very profitable investment for us.” He noted that BP’s share in TNK-BP accounts for a fifth of BP’s global reserves, a quarter of its production and nearly a tenth of its global profits. As for Kovykta, he said: “I consider this issue to be no more than one of those bumps in the road.”

President Vladimir Putin told reporters early this month that the government was losing patience with the investors in the project and raising questions about how the Russian shareholders in Kovykta acquired their stakes in the 1990s.

He denied that Russia was targeting foreign investors in the Kovykta project, noting Russian shareholders were involved as well. He also denied the Kremlin wanted to see BP give up control over TNK-BP.

•  Stepping Back: A BP joint venture is near an agreement to cede its interest in a massive Siberian natural-gas field to Kremlim-controlled Gazprom.

•  Under Scrutiny: BP has been negotiating amid regulatory pressure from the Kremlin, which has moved in recent years to take control of major oil-and-gas assets.

•  Market Indicator: The BP talks could be a bellwether for Western investors in Russia, an increasingly important energy supplier amid global concern over tight supplies.

Write to Guy Chazan at [email protected] and Gregory L. White at [email protected]

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