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The Wall Street Journal: Breaking Views: BP/Russia

25 June 2007

Tony Hayward, BP’s new chief executive, has just got the Russia treatment: He has “lost” BP’s giant Kkovykta gas field. Well, sort of.

Gazprom is buying out BP’s share in the field for up to $900 million. That is almost twice the value of BP’s investment in a field that has twice Norway’s gas reserves. Much the same happened to Shell last year, when it “lost” its stake in Russia’s giant Sakhalin gas field. Then, Shell retained a residual 27% stake after Gazprom bought out most of its share.

BP has been left with none. So on the face of it, Mr. Hayward has been left out to dry, BP has lost the deft strategic touch that it enjoyed under former boss Lord Browne, and skeptics of Russian Prime Minister Vladimir Putin will take this as further proof of Russia’s rampant resource nationalism. But the reality is more complex.

BP also has an option to buy back a 25% stake in Kovytka — subject to Gazprom and BP agreeing to a major project or asset swap under a global joint venture that these two energy giants also have agreed to set up. The possibilities are almost endless. BP might even swap some of its existing assets — say gas production in Trinidad, or refining in Europe — for Gazprom assets in Russia, including Kovytka. The idea seems to be that BP would provide political cover for Gazprom abroad, while Gazprom does the same for BP in Russia.

“Reciprocity,” as BP’s Mr. Hayward has said, is the key word here. It is also a word that is increasingly likely to shape global oil relations, with international companies parlaying their access to Western markets in return for energy supplies from resource-rich countries.

In this case, whether anything will come of such nostrums is another matter. Gazprom already has a long list of other projects to attend to — not least developing Kovytka — so it may not have capacity to set up more projects with BP. Time will soon tell how strategically astute Mr. Hayward has been. BP’s option to buy a share in Kovykta expires in one year.

–Mike Verdin, Edward Hadas, John Paul Rathbone

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