The Times: BP surrenders Russian gasfield to Gazprom

June 23, 2007
Carl Mortished, International Business Editor

The Kremlin strengthened its grip over Russia’s energy resources yesterday when BP gave up Kovykta, one of the world’s largest undeveloped gasfields, in a forced sale to Gazprom.

The Russian state gas utility is to pay TNK-BP between $700 million and $900 million (£351 million to £452 million) for the controlling stake in Kovykta held by TNK-BP, the British multinational’s Russian joint venture.

BP’s eviction from the giant Siberian gasfield is the second forced removal by the Kremlin of a foreign investor from a major gas resource. In December, Royal Dutch Shell was forced to cede control of Sakhalin-2 to Gazprom in a $7 billion transaction.

The deal with Gazprom, which follows a lengthy legal campaign by the Government to strip TNK-BP of its Kovykta licence, includes a side agreement under which Gazprom and TNK-BP would work on unspecified joint projects.

Alexander Medvedev, Gazprom’s deputy chief executive, said that the final price for Kovykta would be settled in 90 days: “We have differences over the sum. We are continuing negotiations.” The estimated price range means that BP will recover its investment of about $450 million in the Eastern Siberian gasfield and a small premium.

Tony Hayward, BP’s chief executive, said that the memorandum of understanding would enable TNK-BP and Gazprom to invest jointly in long-term projects and swap assets. “We will initially be looking for projects of at least $3 billion, but the potential for further growth could be significant.”

BP acquired its interest in the Kovykta licence in 1997 when it first ventured into Russia with the purchase of part of Sidanco, a company then controlled by Vladimir Potanin. With two trillion cubic metres of gas, enough to supply Britain for 20 years at current rates of demand, Kovykta was quickly hailed as the jewel in BP’s Russian crown.

However, efforts to develop the field near Lake Baikal with a pipeline to China, the nearest substantial market, have been frustrated by Gazprom’s monopoly over gas exports.

Russia analysts said yesterday that BP had got the best deal it could have secured in the circumstances. “Although on paper it doesn’t amount to very much, they have got something for the future. BP is more deeply integrated than any other foreign company in the Russian domestic oil and gas industry,” Christopher Granville, of Trusted Sources said. The deal with Gazprom gives TNK-BP a call option to buy a quarter-share of Kovykta in the future at a market price. Mr Medvedev said that BP might return to the project. “To remain in a monastery one has to leave it, be purged of sin and return to it,” he said.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article1975140.ece

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