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Russia: Gazprom, BP and the Short End of the Stick

4 MINS READJun 22, 2007 | 21:24 GMT
Summary
Gazprom purchased BP's 63 percent share in the Kovykta natural gas field on June 22. The agreement is a major blow to BP; the company gets only a fraction of the cost of the field and has lost out on a major investment in a country where it has invested millions. The deal with Gazprom gave BP one consolation prize: It is allowed to stay in Russia through its TNK-BP venture — at least for now.
BP came to an agreement with Russian energy firm Gazprom on June 22 to sell TNK-BP's 63 percent stake in Rusia Petroleum, the company that holds the license for the Kovykta natural gas field. Gazprom will pay $700 million to $900 million, although the stake is worth between $2 billion and $3.6 billion. In exchange, TNK-BP has been given the option to purchase a 25 percent stake in the field. The deal is a major setback for BP — but if it wants to stay in Russia, it will probably have to accept the minority role. Rusia Petroleum's stakeholders are TNK-BP (with a 63 percent share), Interros (with 26 percent) and the Irkutsk regional government (with 11 percent). Rusia Petroleum has run into trouble with the Kremlin for "underproduction" at the Kovykta natural gas field. However, the biggest obstacle to production at the field is Gazprom's refusal to allow construction of an export pipeline. Essentially, Gazprom has ensured that Rusia Petroleum is incapable of fulfilling its development requirements. Gazprom has been eyeing the Kovykta field as the solution to all of its production woes, as it faces a shortage of natural gas and declining production. The Kremlin, meanwhile, has been threatening to take the field for some time now and proved willing to throw its regulatory weight around, threatening to revoke TNK-BP's license to make sure Gazprom gained control of Kovykta. Now that Gazprom has its hands on the field, it has offered to allow BP to purchase a stake in the field instead of having the firm's license revoked. BP has voiced its desire to remain in Russia in spite of the troubles it has faced. However, the company is well aware of the Kremlin's moves to consolidate Russia's energy industry and also knows it will be unable to operate in the country without the Kremlin's approval. BP likely viewed the Kovykta offer as the one way to stay in the country. Despite the difficulties Gazprom is giving BP, the Russian firm (and the Russian government) actually needs BP to continue operations in the country. Gazprom would certainly like to develop the Kovykta natural gas field alone, but it lacks the technology required to fully exploit Kovykta or many of its other reserves — a shortcoming that is leading Gazprom's natural gas supplies to decrease. Gazprom has never let its need for technological help stop its political ambitions; it has earned plenty of natural gas reserves, but not necessarily a means to exploit them. BP's interest in Kovykta, along with its technological know-how, will increase Gazprom's chances of actually exploiting the estimated 2 trillion cubic meters of natural gas reserves at the field. However, in order to bring BP in, Gazprom will have to boot Interros from Rusia Petroleum. Interros' share in the company is almost the exact amount BP is allowed to purchase. Gazprom probably will not want to give up 25 percent of its stake — particularly if it would mean ending up with a minority share. Interros still has its share in the company, but Interros is backed by Russian oligarch Vladimir Potanin, who has become increasingly chummy with Russian President Vladimir Putin and thus would likely sign off Interros' Rusia Petroleum stake at the Kremlin's behest. BP's quarter-share will not give it much real control in Kovykta — especially in Russia, where minority shareholders are barely background noise. However, it does indicate that BP will be allowed to stay in the country through its TNK-BP venture — though it has still lost its giant natural gas jewel. Regardless of the Kremlin's latest "consolation prize," BP knows the trend in Russia and the strong likelihood of eventually having further assets stripped. BP has demonstrated — by the billions of dollars of investment in Russia — that it wants to stay in the country. However, the Kremlin has made it extraordinarily difficult for further investment to be worthwhile for BP.

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