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Time for BP to Rethink its Russia Strategy

BP_art.jpgSome time ago, BP got into big trouble with the Russian authorities – call them a collateral casualty of the lawlessness kicked off by another well known expropriation. But clearly the corporation has been following a strategy to resolve this longstanding problem, dating all the way back to Lord Browne’s tenure as CEO. Stay quiet, deny the existence of the problem, and hope that by placating the aggressive elements within the government (never for a moment assume that everyone in the Kremlin wishes BP such harm) that eventually the problem with resolve itself. One can understand why BP has chosen to tread so carefully – subsidiary TNK-BP is responsible for almost a quarter of the company’s oil production, and represents one of the most critical strategic growth markets for the corporation. However the back channel strategy has not worked, in fact, it is painfully failing, as we see from the recent reports of an oppressive new $256 million back tax claim, rumors that Gazprom will take over the company for $20 billion, and signs of increasing impatience over stalled production at Kovykta (see FT article after the jump). It might be time for Mr Hayward to consider a more public, political approach – before shareholders begin to ask the difficult questions.

From the Financial Times:

TNK-BP comes under renewed Gazprom pressureBy Catherine Belton in MoscowGazprom has upped the pressure on TNK-BP, the Russian oil venture 50 per cent owned by BP, saying Russia could again consider revoking its licence to the Kovykta gas field if talks do not progress on selling control of the project to the state-controlled gas giant.”We cannot wait endlessly,” Alexander Medvedev, deputy chief executive of the state-controlled gas company, said yesterday. “We received a signal from the Natural Resources Ministry that if this continues they could return to the question of annulling the licence. The ball for closing the deal is in TNK-BP’s court.”Mr Medvedev’s comments came as TNK-BP said Russia’s tax service has slapped it with a new $255.6m (£129m) back-tax claim for 2004-05. The company said it received the claim at the end of last year and is co-operating with the authorities. TNK-BP paid $1.4bn in back taxes for 2002 and 2003 in November 2006.TNK-BP, owned 50-50 by BP and a trio of Russian billionaires, has come under mounting pressure in recent months, sparking new speculation that state-controlled Gazprom is seeking to buy out its Russian shareholders as the state tightens its grip over the energy sector.Russia’s environmental agency is extending a probe into the oil company’s biggest field, Samotlor, for another month. Police raided TNK-BP’s Moscow offices last month ostensibly in connection with an industrial espionage case by one of the company’s employees. But a banker familiar with the matter suggested the incident was connected to manoeuvring by one of its Russian shareholders ahead of a possible sale. TNK-BP’s Russian shareholders have denied they want to sell, but a moratorium on share sales by its owners expired at the end of last year.The venture agreed last summer to sell its 62.9 percent stake in its vast east Siberian Kovykta gas field to Gazprom for $700m to $900m.But completion of the sale has been repeatedly delayed amid wrangling over the price and the terms of a broader asset swap deal with BP and TNK-BP that would give TNK-BP an option to buy back a 25 per cent stake in Kovykta.Mr Medvedev said last month he hoped the deal would be closed by the end of April. Yesterday he said Gazprom was “disappointed technical matters are turning out to be so complicated”.He added Gazprom would not enter a project under threat of losing its licence, which he said the Natural Resources Ministry had “every right” to take away.Mr Medvedev also said Gazprom would start exports of liquefied natural gas from its Sakhalin-2 venture at the beginning of 2009.Royal Dutch Shell was forced to sell control in Sakahlin-2 to Gazprom after government allegations of environmental violations.