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Russia tightens hold on strategic oil and gas industry

Section: Daily Dispatches

BP Sells Russian Assets to Gazprom

By Alex Nicholson
Associated Press
via Yahoo News
Friday, June 22, 2007;_ylt=As8JcepuU...

MOSCOW -- BP PLC said Friday it has agreed to sell its stake in a giant Siberian gas field project to state-controlled gas monopoly OAO Gazprom -- a widely expected move that comes as the Kremlin tightens its hold on the world's biggest oil and gas industry.

The agreement effectively marks the end of an era when foreign oil companies could control Russia's largest and most strategic hydrocarbon deposits without a strong state-controlled partner.

It also comes after months of intense pressure from environmental regulators, who said that BP's joint venture, TNK-BP, was not meeting production targets at the Kovykta field and threatened to pull its license.

The Kremlin has ratcheted up pressure on foreign oil companies in recent years as part of its effort to consolidate control over the country's largest and most important hydrocarbon deposits.

Gazprom elbowed Royal Dutch Shell PLC into a minority position in December at a liquefied natural gas project on Sakhalin Island after months of regulatory of pressure.

Under a memorandum of understanding, Gazprom will pay TNK-BP between $700 million and $900 million for its 62.9 percent stake in the company that holds the license for Kovykta, BP said in a statement. Gazprom said the exact price would be decided in 90 days based on current market prices.

Analysts said the deal amounts to a face-saving move that spares BP from losing its investments in Kovykta and allows Gazprom to dodge charges that it essentially evicted the world's third-largest publicly traded oil company from a field that Russian officials estimate has as much gas as all of Canada.

"The very fact that they have agreed and Gazprom have paid something is much better, politically and commercially, than just taking the license," said Valery Nesterov, an analyst with the Troika Dialog investment bank.

Development at Kovykta, located in southern Siberia near Lake Baikal, is at a very early stage and BP has not booked any of the reserves. TNK-BP has invested around $500 million in the field, and its development is expected to cost between $17 billion and $23 billion overall.

The deal stipulates that TNK-BP will have the option of acquiring a 25 percent plus one share stake in the field once the two companies have tied up a "significant joint investment or asset swap."

The agreement includes the sale of TNK-BP's stake in the East Siberian Gas Co., which is developing a gas supply project for the region around Kovykta.

BP Chief Executive Tony Hayward said in a statement that the two companies would also form an alliance with an "aim to establish a venture that is strategic and long term with mutual benefits for the companies both inside and outside Russia."

The companies would be looking at investments "across all geographies," he said.

Natural Resources Ministry spokesman Rinat Sivatulin said the ministry was prepared to "hear out" Kovykta's new owners, the Interfax agency reported. The ministry has led the probe into allegations of TNK-BP's underproduction.

Analysts said full development at the field would have been viable only if Gazprom gave the green light for BP to export the gas to China -- assuming an attractive price was agreed on with Beijing. The state-controlled gas monopoly has exclusive control over all gas exports.

Gazprom Deputy CEO Alexander Medvedev said that China could be a destination for gas from Kovykta in the future, and suggested that BP might return to the project at a later date.

"To remain in a monastery one has to leave it, be purged of sin and return to it," he was quoted as saying by the Interfax news agency.

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