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The Moscow Times: A Power Lunch With the State

Tuesday, June 26, 2007. Issue 3685. Page 10.

The problems created for the country’s investment climate by the Kovykta gas field have now been resolved. The delay in rendering a decision on the revocation of the TNK-BP license to exploit the field had provided cause for hope that some kind of unexpected resolution to the conflict between the state and the energy company could be found, but the result was in line with what had long been expected by most analysts. Control over Rusia Petroleum, which holds the license to operate the field, was transferred to Gazprom.

TNK-BP representatives are trying to present the deal in a positive light, and they maintain that the development of the field would have been impossible without the participation of Gazprom. For TNK-BP, the result of the deal can doubtless be considered a success: Bringing Gazprom on board is better than losing its license and the money it has already sunk into the project. The company had already invested more than $400 million. TNK-BP maintains an option to buy a 25 percent, plus one share, blocking stake in Rusia Petroleum, and there is talk of plans for the creation of a joint global venture between BP and Gazprom.

One interesting question is the discount on the value of the assets that Gazprom is enjoying when buying into the project. The controlling stake the company bought in Sakhalin Energy at the end of last year cost $7.45 billion, a price that various analysts said represented a 20 percent to 34 percent discount over the likely market price for the assets. The value of the Kovykta deal is still not clear. What is clear is that the price of strategic deals of this type has very little to do with market factors. Any field that is having problems with environmental regulators, as the experience with the Sakhalin project demonstrated, is going to end up changing hands for a much lower price than one not facing prospect of environmental charges.
The Kovykta deal underlines yet another important tendency. On June 15, without bothering to wait for a decision about the fate of the field’s license, the Industry and Energy Ministry went ahead and issued a statement outlining its ideas for the future of field. Deputy Industry and Energy Minister Andrei Dementiyev said the field would go into production at some point after 2017. That date also occupies an important place in Gazprom’s preliminary plans for the future. In fact, a number of state officials have acknowledged that there is no need to develop the field quickly. All of this comes, of course, after one of the main complaints against Rusia Petroleum’s work at Kovykta was that the development of the field was coming along too slowly.

In another interesting announcement, after the new agreement had been reached, Gazprom deputy head Alexander Medvedev said gas from the Kovykta field could ultimately be destined for China. This was the very same strategy that TNK-BP had proposed to follow, but the company was unable to turn this into a reality — Gazprom holds a monopoly on the right to export gas. Characteristically, the Natural Resources Ministry has also expressed its willingness to work for compromise: After the discussions on the agreement between TNK-BP and Gazprom, the ministry’s press service announced it was expecting an offer from the new owner within the next two weeks. It said it would decide whether to revoke the license for the development of the field after receiving the new proposal.

It was the same case with Sakhalin-2. The international shareholder and operator of the project, Sakhalin Energy, had to step aside and hand a controlling stake to Gazprom as a result of environmental charges that were serious enough to threaten the suspension of the project. The deputy head of the Natural Resource Ministry’s environmental watchdog estimated that the cost of repairing the environmental damage caused by the project was $50 billion. Japan’s Ministry of Economy, Trade and Industry then announced that, as a result of the inspections, the shareholders in Sakhalin Energy would have to spend an additional $20 billion on environmental protection measures. After Gazprom bought its way into the project, the state approved an environmental protection plan that it said would eliminate all of the environmental risks. No one, of course, is talking about multibillion-dollar payments anymore. The sharp criticism over environmental concerns leveled at Yuganskneftegaz, formerly the main production unit at now-bankrupt Yukos, also disappeared immediately after it was bought by state-owned Rosneft.

The manipulation of prices for oil and gas assets by way of pressure from state regulatory agencies has become part of the standard mechanism for the transfer of property and ownership in Russia.

This appeared as an editorial in Vedomosti and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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