The New York Times: Moscow Presses BP to Sell a Big Gas Field to Gazprom

By ANDREW E. KRAMER
Published: June 23, 2007

MOSCOW, June 22 — Under pressure from the Russian government, BP agreed on Friday to sell one of the world’s largest natural gas fields to Gazprom, the natural gas monopoly, in the latest apparently forced sale that benefited a Russian state company.

BP’s local joint venture, TNK-BP, sold the field after Russian authorities threatened to revoke the company’s license to develop it.

Indeed, a committee of the Natural Resources Ministry had scheduled a meeting for Friday to consider revoking the license, the same day Gazprom invited BP’s chief executive, Tony Hayward, to sign the sales agreement.

Under the deal, TNK-BP will sell its 62.8 percent stake in the Kovykta field, a vast natural gas in eastern Siberia, northwest of Irkutsk. The field holds about two trillion cubic meters of natural gas, or the equivalent of enough natural gas to satisfy the entire world’s demand for one year.

Gazprom agreed to pay $700 million to $900 million for the field and for TNK-BP’s 50 percent stake in a smaller company that is developing a gas distribution network in Siberia, the East Siberian Gas Company. The final price is still being negotiated. Analysts have estimated the Kovykta field is worth far more.

As part of the deal, BP will also be compensated by joining a new joint venture with Gazprom to invest more than $3 billion in Russia and elsewhere in the world, though few details were disclosed.

Finally, under the complex arrangement, TNK-BP was given options to buy back 25 percent of the Kovykta field later — but only if the new joint venture is deemed successful.

This provision suggested Gazprom is leveraging access to Russia’s domestic energy reserves to force BP to help Gazprom expand globally, a strategic goal for Gazprom, which has said it wants to be a global energy player along the lines of Exxon Mobil or Chevron, rather than a strictly Russian company.

Mr. Hayward presented the arrangement as the start of a new, strategic partnership with Gazprom — playing down the sale of the field. BP’s stock rose 0.7 percent on the news.

“This historic agreement lays the ground for powerful cooperation between BP, TNK-BP and Gazprom,” Mr. Hayward said in a statement. The companies, he said, would establish a committee to look at possible joint investments globally.

BP still retains its 50 percent stake in TNK-BP, Russia’s third-largest oil company, which is principally focused on oil development in western Siberia. The joint venture accounts for a quarter of the BP’s worldwide oil production. BP has not publicly criticized the Russian government’s actions.

Instead, Mr. Hayward, in a speech in Moscow on Monday, praised BP’s business here and encouraged other companies to invest in Russia. He called the gas field dispute just “one of those bumps in the road.”

Oil analysts, however, said BP lost a major asset. “BP clearly got fleeced,” said Alex Turkeltaub, a managing partner at Frontier Strategy Group, a consulting firm in Cambridge, Mass., that specializes in political risk analysis.

Mr. Turkeltaub played down the value of the partnership agreement, noting that BP has no need for Gazprom as a partner outside of Russia. “This is all window dressing,” he said. “I don’t see any substance in it now.”

The licensing troubles come as the latest setback for BP, after the company came under scrutiny in the United States for a refinery explosion in Texas and a pipeline spill in Alaska, and after the early retirement this spring of BP’s longtime chief executive, Lord John Browne.

Mr. Hayward took over in the midst of negotiations over the Kovykta field — and in a souring atmosphere here for Big Oil, which once viewed Russia as a new frontier to diversify away from the troubled Middle East.

As the Kovykta deal shows, however, Russia is pursuing a policy of state control, accepting American and European oil companies only as junior partners in projects run by the Russian government companies, Rosneft for oil and Gazprom for gas.

Russia has effectively nationalized large swaths of the oil and gas industry, though without baldly seizing assets from foreign oil companies, something that sets the process here apart from the Middle Eastern nationalizations of the 1970s. Instead, they have pressed tax, environmental or other regulatory violations to force sales.

Tax authorities bankrupted what was once Russia’s largest private company, Yukos Oil; it was sold at auction principally to Rosneft and Gazprom.

Last autumn, Royal Dutch Shell and two Japanese partners sold a controlling share in their $20 billion Sakhalin II oil and gas development to Gazprom after environmental regulators threatened to sanction the company for allowing runoff from pipeline construction into salmon streams; the threat was dropped after Gazprom entered the project.

In the Kovykta dispute, the Russian Natural Resources Ministry accused TNK-BP of developing the field too slowly. TNK-BP countered that it made no sense to develop the field if it could not market the gas, and Gazprom, which has a legal monopoly on exports, had refused to negotiate over sales to China.

Yevgenia M. Dyshlyuk, an oil and gas analyst at UralSib bank in Moscow, estimated the value of Kovykta reserves, not counting the capital investment in the field, at $1.5 billion to $2 billion.

By this estimation, TNK-BP’s share would be worth slightly more than the upper range of Gazprom’s offer of $700 to $900, not counting the gas distribution company.

“But if you look at the alternative of getting nothing,” she said of the price, “its not that bad.”

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