Derek Brower: Kovykta’s actors take to the stage

Now fight! By Derek Brower, Journalist NO-ONE is surprised. Everyone knows what the outcome will be. But the motions must still be gone through. So, having dealt with Royal Dutch Shell on Sakhalin during December, the Kremlin was this week gearing up for a fight to win control of Kovykta, TNK-BP’s gas project in eastern Siberia. dudley_2.jpg Robert Dudley of TNK-BP, smiling. Just. Once again, Oleg Mitvol, the deputy head of Russia’s environmental watchdog Rosprirodnadzor, is fronting the campaign. Mitvol will be especially eager to prove his worth to the Kremlin. Immediately after Shell’s humiliation on Sakhalin, his job came under pressure, with many speculating that having served the purposes of those above him Mitvol’s raison d’être had expired. It seems there is life left in the old (eco-watch) dog yet. But this won’t be so much another round of an energy war as it will be Act 2, scene 1 of the great Russian play that we all get to watch. It will have its elements of Chekhovian longing (by Western executives for Yeltsin’s Russia), but the genre is farce. At least the actors all know their lines. In the coming months, Mitvol will steadily increase his threatening language. He is already talking of TNK-BP’s “violations” on the 2.1-trillion-cubic-metre Kovykta, chiefly the fact that the company has not yet produced the 9bn cubic metres of natural gas to supply local markets as stipulated in the original production-sharing contract. No market yet exists to take those volumes, so the alternative would have been to flare the gas. But those two salient facts have been conveniently ignored. That doesn’t mean the grounds haven’t been found to strip Rusia Petroleum, the operating company developing Kovykta, of its licence. The chances of that happening are small, of course, because the dispute won’t get that far. TNK-BP, which holds a controlling 62.4% in Rusia (the other shareholders are Interros and the Irkutsk Oblast), will agree to the cede control of the company to Gazprom. In the meantime, TNK-BP isn’t stumbling over the script, either. On the Davos stage, Robert Dudley, the company’s chief executive, claimed that Kovykta is a project in which his company has long been hoping to involve Gazprom. “We have even said that we can see a Gazprom majority role in the project and it might be part of a greater East Siberian cooperation rather than just the Kovykta field,” he added in words designed to ruffle no Moscow feathers. The company will stick to that line. There won’t be any ad lib, as there was in Shell’s Sakhalin debacle. Much better to pretend now that things are going as directed than to wait until the handshakes in Moscow and repeat Jeroen van der Veer’s hammy words of thanks to President Putin for resolving the conflict. Shell’s chief executive was also in Davos last week, repeating his words of joy about Gazprom’s involvement in Sakhalin. Shareholders who think Shell got short-changed in the deal by up to $5bn can’t have enjoyed the show. Behind the scenes, though, TNK-BP still thinks some of the script is unwritten. Publicly the company says that it wants Gazprom involved “on commercial terms”. That means either a suitable pay-off in assets or cash; or, even less likely, TNK-BP retaining a majority of Rusia. But what those words mean to Gazprom remains to be seen. According to sources in Moscow, Gazprom is keen buy up to 75% of Rusia, which would leave TNK-BP with a negligible stake. Whatever the details, Gazprom will have control of Kovykta by the middle of the year. The Russian monopoly will seek to merge Kovykta with other large natural gasfields nearby, such as the Angarsk-Lensk project. And, at last, the Kremlin will have full control again of the fields that could supply Chinese consumers. China’s own needs for imported Russian gas are, however, much weaker than Gazprom believes – or pretends to believe when it warns other importers of its gas (like troublesome Europeans) that it has other options up its sleeve (to read more about this, go here). That being the case, whether Gazprom’s great dream of exporting to China is worth yet another damaging row with a large foreign investor is questionable. But this drama has many other acts to come. The next will probably put France’s Total on stage when the Kremlin’s spotlight falls on its production sharing agreement at the Kharyaga oilfield, in northern Russia. That plotline will follow the same as the ones on Sakhalin and at Kovykta. Total will lose. Its executives will express their gratitude. Meanwhile, for the audience in the West, the only real question is what happens after the curtain falls in 2008 and Vladimir Putin leaves the theatre.