Financial Times: End of dispute means BP can continue to do business in Russia

By Ed Crooks
Published: June 23 2007 03:00 | Last updated: June 23 2007 03:00

Tony Hayward, BP’s new chief executive, has been to Russia four times already this year. It is a country he cares about, and with good reason: last year TNK-BP, the Russian joint venture, contributed a quarter of the group’s total production and about a sixth of its reserves.

Its contribution to the growth of BP’s reserves was even bigger. Last year, additions of proved reserves of oil and gas replaced just 34 per cent of BP’s production, excluding affiliates such as the half-owned TNK-BP. Including those affiliates, the added reserves replaced 113 per cent of production, thanks to the extension of TNK-BP’s rights to the Samotlor oil field, Russia’s biggest.

So the resolution of the dispute over Kovykta, in which TNK-BP had been threatened with losing its licence to operate the field, with no compensation, is welcome if for no other reason than that it ends some of the uncertainty over BP’s presence in Russia. Its shares rose modestly yesterday to reflect that, up 4p to 583½p.

“BP has got something out of this,” says Andrew Neff of Global Insight, the analysis firm. “If Russia had gone ahead and revoked the licence, that would have sent a very negative signal about BP’s future in the country.”

The outcome looks very like the settlement imposed on Royal Dutch Shell for its Sakhalin 2 project off Russia’s far east coast.

BP is likely to end up with a minority interest in Kovykta, and is being paid well below a fair market price.

For 62.89 per cent of Kovykta plus half a small local gas infrastructure company, Gazprom is to pay $700m-$900m (£351m-452m). Based on the field’s potential to supply large volumes of gas for export to China starting in the middle of the next decade, that stake would be worth $3bn-plus, according to Alex Turkeltaub of Frontier Strategy Group. But those sales would always have required Gazprom’s co-operation, and gas that cannot be sold is worthless.

BP had not booked any of Kovykta’s reserves or production into its reported figures.

It is unclear, too, how significant the $3bn-plus three-way joint venture between BP, TNK-BP and Gazprom will be. The companies have to decide which assets to include, and agree values for them: never an easy process.

But at least for now, it seems BP is one of the companies that will be able to keep doing business in Russia.

Copyright The Financial Times Limited 2007

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