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Lagniappe
Russia tries to burn BP
By
Dominic
O’Connell
IN the summer of 2003 Vladimir Putin made the first state
visit to Britain by a Russian leader since Tsar Alexander II
came to see Queen Victoria in 1874.
Putin’s trip was as much about business as diplomacy.
One of the highlights was the signing – in the gilded
splendour of Lancaster House, a 19th-century mansion in St
James’s, London – of an $8 billion (£4 billion)
investment by BP in the Russian oil and gas industry. The deal
had been brokered by Lord Browne, then BP’s chief executive,
with extensive help from Tony Blair.
Four
years on, Browne has gone, Blair is about to leave power and
TNK-BP,
the Anglo-Russian group the pair laboured to create,
is under attack from the Kremlin. TNK-BP’s licence to
exploit one of Russia’s largest gas fields is expected
to be revoked – possibly as soon as this week. The move
may, the gloomiest analysts and Russophiles suggest, be the
precursor to the Russian state taking a major and perhaps,
in effect, controlling stake in the group.
For western oil companies, BP’s Russian travails are
a case of déjà vu. The campaign against TNK-BP
has uncanny parallels with what happened earlier this year
to Royal Dutch Shell, BP’s rival.
A few months before Putin, Blair and Brown shook hands on
TNK-BP, Shell had signed a similar deal to develop Sakhalin
2, a huge gas field in Siberia. But earlier this year, after
a prolonged campaign involving threats of censure from environmental
watchdogs and tax authorities, Shell and its fellow foreign
investors decided to sell a stake in the project to Gazprom,
the giant gas group controlled by the Russian government.
The Sakhalin
deal, and the pressure now being exerted on TNK-BP, are viewed
as part of a deliberate plan to bring back under
state control key “strategic” oil and gas assets
that had been sold to private individuals and western groups
during the hurly-burly privatisations of the postYeltsin years.
“Everybody talks about what Hugo Chavez is doing in
Venezuela but nobody makes the comparision with Putin. It is
basi-cally the same thing,” said Fadel Gheit, an analyst
at Oppenheimer in New York. (Chavez, the Venezuelan president,
has renationalised some of the South American state’s
oil and gas fields, much to the chagrin of the companies developing
them.)
TNK-BP
is the only big oil and gas group in Russia that has no state
involvement. It was created after long negotiations
between BP, the Russian and British governments and a group
of three Russian oligarchs: Mikhail Fridman, the boss of Alfa
Group, Viktor Vekselberg, reputedly the ninth-rich-est man
in Russia, who hit the headlines three years ago when he spent
$75m buying the Forbes family collection of Fabergé eggs
for the Russian nation, and Leonard Blavat-nik, who together
with Vekselberg controlled the Sual aluminium empire.
As
The
Sunday Times revealed in 2003 , TNK-BP
was the end-result of BP’s frustration with an
earlier Russian investment that was going wrong. In the 1990s
it had taken a 10% stake in Sidanco, a Russian oil group, but
had then fallen foul of the manoeuvrings of local businessmen,
with assets appearing to be snatched from Sidanco under BP’s
nose.
Rather
than trying to intervene directly with Fridman – whom
BP then accused of being the arch asset-stripper through his
company TNK – Browne instead began a covert operation
to put pressure on the Russian authorities through George Soros,
Al Gore, then American vice-president, the CIA and Blair. This
campaign eventually led toa peace deal between Fridman, his
fellow oligarchs, and BP, and the formation of TNK-BP.
The company
is now the third-biggest player in Russian oil and gas. It
has proven reserves equivalent to 7.8 billion barrels
of oil, and in 2005 was producing 1.6m barrels of oil a day.
It also has five refineries (four in Russia, and one in Ukraine)
and 1,600 petrol stations, which operate under both the TNK
and BP brands. Its operations have been lucrative for shareholders:
10 days ago its board of directors said it would pay out £2.3
billion in dividends to shareholders, almost its entire net
profit for the year. The payments are likely to be approved
at the annual meeting on June 15.
The current spat with the Russian authorities concerns not
the oil operation, but its prospects of becoming a major player
in gas. TNK-BP is the controlling shareholder (with a 63% stake)
in Rusia Petroleum, which owns the rights to a large gas field
called Kovykta, in the Irkutsk region. The field was discovered
in 1987, and is estimated to hold 2,000 billion cubic metres
of gas and 83m tonnes of gas condensate. It is ideally situated
to export gas to China, but it is not expected to be in full
production until 2015.
The charge
against TNK-BP over Kovykta is being led by Oleg Mitvol,
the deputy head of Russia’s environmental watchdog
Rospri-rodnadzor. Mitvol, who also led the campaign against
Shell on Sakhalin 2, claims TNK-BP has failed to meet the production
targets set in its original licence. He said it should be producing
9 billion cubic metres of gas a year, when it is producing
only a fraction of that. He has asked Rosnedra, the licensing
agency, to strip the group of its right to operate the field.
TNK-BP said it has been unable to develop Kovykta because
of the lack of an export licence, and that in any event the
licence says only that it should meet local demand for gas,
which has come nowhere near the 9 billion cubic metre mark.
On Monday Rusia Petroleum will begin a legal challenge to the
inspection in a court in Irkutsk.
A three-month
inspection of TNK-BP’s operations concluded
in January that the company was in breach of its licence. A
final inspection began last week, with Mitvol telling reporters
in Russia that TNK-BP could lose its licence for the field
before next month. Most commentators agree. “The expectation
here is that the licence will be revoked,” said a Moscow-based
executive at one of BP’s rivals.
Revocation
of the licence may trigger the sale of a stake in the field
to Gazprom, but whether this will come at the
expense of the oligarchs or BP – or both – is not
clear. Gazprom’s entry could, paradoxically, be good
news for BP.
“We would view such an outcome as positive as it should
pave the way for the full-scale development of Kovykta, with
potential to export gas eastwards to China through a new pipeline,” said
James Neale, an analyst at Citigroup.
Gheit agrees: “If you are going to be dealing with Russian
partners, then from BP’s point of view you may as well
be dealing with ones that really hold the power.”
But BP
executives – in particular new chief executive
Tony Hayward, who took over from Browne at the start of the
month and who sits on the board of TNK-BP – will be worried
about what the Kovykta spat means for BP’s other Russian
assets.
The suspicion
is that the three oligarchs will eventually be pressed into
selling their stake to a government-controlled
company. “My impression is that these guys will sell– and
at the moment they are just waiting to be told who to sell
to,” said the Moscow oilman.
GOVERNMENT SHOWS LITTLE URGENCY IN TACKLING LOOMING ENERGY
GAP
THE TIMING
could not have been worse. Within hours of the publication
of the energy white paper last Wednesday, BP dealt
the government’s plans a blow by scrapping a pioneering
carbon capture and storage project. The oil giant pulled the
plug because the government had delayed plans to fund such
projects.
Some observers
believe BP’s decision has highlighted
the key flaw of the white paper. The government has rightly
identified the two great challenges – fighting climate
change and securing energy supplies – but it is showing
little urgency to tackle a looming energy crisis.
Britain faces a serious energy gap by 2015. Up to a third
of its generating capacity could be cut as ageing coal and
nuclear power stations are closed. At the same time the decline
in North Sea oil and gas production will make Britain ever
more reliant on imported gas.
The
government’s
response was a package of measures, including support for
new nuclear power stations, proposals
to encourage investment in renewable power and energy efficiency,
and a mandatory carbon-trading scheme for large organisations
such as banks and supermarkets.
The power
industry welcomed the plans, but time is not on the government’s
side. The new targets will be hard to meet. The aim of tripling
to 15% the amount of electricity
coming from renewable sources by 2015 looks incredibly ambitious.
Reducing greenhouse-gas emissions by 20% from 1990 levels by
2010 could also be a stretch. New nuclear stations will not
be operational for 10 years even with a reformed planning system.
The government’s laudable aim is to secure a diverse
mix of energy supply. But given the long development timescales,
the white paper is likely to increase Britain’s dependency
on gas.
Read
how The Sunday Times reported the inside story of the creation
of TNK-BP by clicking the link : Don’t
let Russia turn gas into a new weapon
Dominic
O’Connell is a well known journalist and The Times
business writer. Petroleumworld
not necessarily share these views.
Editor's
Note:This article was published byThe Times, May
27, 2007. Petroleumworld
reprint
this article in the interest of our readers.
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