BP moves closer to losing license to Siberian oil field

By Andrew E. Kramer

MOSCOW: The Russian government is pressing a bold strategy this spring to secure for Gazprom, the state natural gas company, a monopoly on exports of the fuel to Asia.

In the latest onslaught, Moscow is threatening one of the crown jewels of BP's global investments: the Kovykta gas field. And it is using methods similar to those deployed last fall to force Royal Dutch Shell to sell a controlling stake in another Far Eastern Russian energy development, the Sakhalin-2 project. In that case, too, Gazprom was the beneficiary.

On Monday, BP, which operates through a Russian joint venture, TNK-BP, moved closer to losing its license to the Kovykta field when a Siberian court declined to hear the company's arguments.

Kovykta is BP's largest natural gas project in Russia and valuable because it is within pipeline range of industrial cities in northeastern China.

The field under a forest near Lake Baikal is among the largest gas condensate deposits in the world, holding the equivalent of three times the annual natural gas demand of the United States.

At play, energy analysts say, is a Russian strategy to form a government monopoly on natural gas exports through Gazprom to Asia similar to what exists in Europe, with the scope and range to dictate prices and eliminate competition.

President Vladimir Putin has discussed playing the two markets off against each other in a grand form of haggling - though one that would depend on government control of the export routes.

That did not bode well for private energy companies operating in the country's Far East, like TNK-BP. Shell's ill-fated development, too, was aimed at the Asian market.

In the latest setback for BP, the Irkutsk Region Arbitration Court rejected a company lawsuit against the Ministry of Natural Resources. The ministry has threatened to strip TNK-BP's license, claiming the company has not developed the field quickly enough.

More broadly, TNK-BP is seen as being compelled to sell a controlling stake to Gazprom or accept Gazprom as a partner in the joint venture.

"They will reach an agreement with Gazprom, or the license violations will get the better of them," Caius Rapanu, an oil and gas analyst at UralSib brokerage, said during a telephone interview.

The pressure on TNK-BP comes on the heels of the campaign last fall against Shell, also built around a seemingly capricious enforcement of Russian law on technical matters.

Then, the Ministry of Natural Resources accused Shell of despoiling salmon spawning streams on Sakhalin Island and dumping waste into a bay.

Shell disputed the claims. As it turned out, the pressure ended when Shell sold a controlling stake to Gazprom.

The same ministry now accuses TNK-BP, which owns 65 percent of the Kovykta field, of failing to meet a license requirement to begin supplying natural gas to the region in which the field is situated by the end of 2006.

"There are a lot of parallels with what is going on now and the later stages of Sakhalin-2," Chris Weafer, chief analyst at Alfa Bank, said during a telephone interview about the Kremlin's tactics. "It is a carrot and stick approach to pressing its position."

To hold onto the field, TNK-BP shifted focus to the domestic market. It partially built a pipeline connecting the to the nearest village, a logging outpost with 5,000 inhabitants.

That partly fulfilled the license requirement, though it tapped only a miniscule part of the field's potential.

The license, however, also specified the company must supply nine billion cubic meters, or 317 billion cubic feet, of gas to the region, based on dated estimates of demand in Siberia.

Both government and industry experts now estimate demand in the area - which borders Mongolia and where the population is declining - at no more than 2.5 billion cubic meters a year; the authors of the license, issued in the early 1990s, had overestimated growth.

"Formally, the Russian government is right," Pavel Kushnir, an oil and gas analyst at Deutsche Bank in Moscow, said during an interview by telephone. "They say that since TNK-BP is not able to meet license obligations, the license should be revoked."

In court filings, TNK-BP argued the license requirements contradicted other Russian government documents estimating demand in the Irkutsk region. The judges declined to hear the case.

"We regret the decision of the court," Aleksandr Shadrin, a spokesman for TNK-BP, said. He said TNK-BP would appeal.

The company, however, has seemed to emphasize negotiations rather than pressing its case in Russian court, which is not seen as a winning strategy in disputes with the Russian government because of the courts are not independent.

Alex Turkeltaub, a managing director and political risk adviser with the Frontier Strategy Group, a Cambridge, Massachusetts, consultant, said BP would likely "focus on the broad strokes," of a settlement with the Kremlin, while using the court case to stall a license revocation.

"If they don't violate one agreement, it will be another," he said, recalling Shell's problems with the salmon streams. "Worrying about little details won't help them."