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Derek Brower: Kovykta isn’t Sakhalin

For TNK-BP, it’s much worse By Derek Brower, journalist IT SEEMS TNK-BP will have to wait another few days, possibly until after the St Petersburg Economic Forum this weekend, to learn the fate of its Kovykta gasfield in Siberia.

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TNK-BP is losing some of its lustre

Last week, BP’s chief executive, Tony Hayward, was in Moscow to meet with Gazprom chief Alexei Miller. Ostensibly, Hayward was there to discuss a range of issues and to attend a TNK-BP board meeting, according to BP. But he was also there to try to save TNK-BP from disaster at Kovykta. BP knows that its joint-venture in Russia, TNK-BP, won’t be able to keep control of Kovykta. Strategically, the field is too important for Russia’s plans to export gas to China and meet the supply requirements of its own domestic market to allow its development to be undertaken by TNK-BP. And, in any case, the pre-text for the Russian state’s desire to revoke the licence that TNK-BP controls at Kovykta, through its majority stake in the Rusiya Petroleum consortium developing it, is sound. Rusiya has not met the terms of its contract to produce 9bn cubic metres a year from the field. The fact that local demand in Irkutsk is not sufficient to justify production of such volumes makes the contractual stipulation absurd. But TNK-BP was aware of the clause when it took control of Rusiya in 2003, a period under President Putin’s rule when foreign companies in Russia’s oil and gas sector were welcome. That was then. Now, however, TNK-BP has been doing its best to save a bad situation from becoming much worse. Losing the Kovykta licence would cost the company $400m it has already spent developing it, TNK-BP said earlier this week. That figure hides much more value that the company would lose if the contract is shredded. At peak output, Kovykta would have amounted to around 20% of TNK-BP’s total production. The response from TNK-BP and its supporters – BP itself and the UK government chief among them – has been to seek the kind of deal that Shell secured on Sakhalin. Assuming that the pressure being applied over the licence has been orchestrated to manoeuvre Gazprom into control over the project, TNK-BP has sought to play clever. Its chief executive, Robert Dudley, has been saying since last summer that Gazprom would be a welcome participant in the project. Most recently, TNK-BP offered Gazprom the chance to buy a 51% controlling stake in Rusiya. Hayward’s chat with Miller in Moscow last week was another effort to cut a deal. Gazprom, knowing TNK-BP is in a tight spot, has turned down the joint-venture’s kind offer. Amid a war of words with the UK over the Litvinenko affair and the pointing of missiles in Europe, Moscow is in no mood to be generous to BP or its Russian joint venture. And why should Gazprom want to pay market rates for a stake in Rusiya when it will be able to buy the Kovykta licence more cheaply at auction next year? Oleg Mitvol, the deputy-head of the environmental watchdog Rosprirodnadzor – and the man who brought Shell to heel on Sakhalin at the end of 2006 – says he is now “99% certain” that TNK-BP will lose its licence. When it does, it will be designated a “strategic” field, ensuring no-one but Gazprom can expect to buy the new licence when the Russian government re-sells it cheaply. Valery Nesterov, an analyst at Troika Dialog, says the auction might not happen for a couple years. The involvement of Mitvol – who himself dodged a bullet when colleagues tried to have him sacked earlier this year – in the Kovykta affair has reminded many commentators of the Shell’s Sakhalin humiliation. In fact, BP-TNK’s Kovykta problems are even more severe than Sakhalin Energy’s were. Without the involvement of Shell on Sakhalin, Gazprom would not have been able to execute what will be one of the world’s largest LNG projects. Putting control of Sakhalin Energy in Russian hands was the goal of the campaign against Shell on the island in Russia’s Far East. But Gazprom still needs Shell to do the donkey work to get the project on stream. Kovykta is different. Gazprom knows it can develop the project on its own. It has no need for TNK-BP to be involved. President Putin knows that too, which is why his statements about the field have focused on the output clause in the contract. This time, the Kremlin wants to stick to the letter of the law. Moscow has the legal grounds to revoke the licence and it will. Probably next week after the foreigners have gone home from St Petersburg. In normal circumstances, the Kremlin would have allowed TNK-BP to develop an export option for Kovykta’s gas and would have welcomed more foreign capital being invested in its upstream. In fairly normal circumstances, it would have insisted that Gazprom pay market value for an asset it will soon acquire. But in the context of Russia’s ever deteriorating relations with the West, TNK-BP’s total defeat on Kovykta shouldn’t surprise anyone.