Politics & Markets
Gazprom acquires again (Issue: 5)
Few months ago, Russia?s Gazprom muscled its way to the Sakhalin II project and acquired 50% interest from its original partners Royal Dutch Shell, Mitsui and Mitsubishi halving the latter three?s interest to 27.5 percent, 12.5 percent and 10 percent, respectively. On June 22, 2007, TNK-BP announced the sale of its 62.89% stake in RUSIA Petroleum, which holds the licence for the Kovykta gas field in East Siberia. TNK-BP also plans to sell its 50% interest in East Siberian Gas Company (ESGCo), which is currently constructing a regional regasification project. Gazprom appears to be an unavoidable guest in Russian energy parties.
Located some 450 kilometres from the city of Irkutsk in Eastern Siberia, Kovykta is a large gas field with estimated resources of approximately 2 trillion cubic metres of gas in place. TNK-BP is the result of a historic merger of BP?s (British Petroleum) Russian oil and gas assets and Alfa Access Renova group (AAR). BP and AAR each own 50% of TNK-BP which owned the Kovykta gas field (62.89%). Gazprom is expected to pay TNK-BP between US$700 million and US$900 million for the stakes, which most consider to be lower than its real value.
 Dmitry Medvedev, Chairman of the Gazprom Board of Directors, First Deputy Prime Minister of the Russian Federation |
Both Kovykta and Sakhalin II episodes share a similar script. Both were originally owned largely by foreign oil majors. Both fell foul with Russian authorities that followed a series of threats from Russia?s Natural Resources Ministry and a series of closed door discussions. Sakhalin II allegedly had environmental issues and unreasonable Production Sharing Agreement (PSA) terms. TNK-BP has apparently violated licence performance terms. Following the entry of Gazprom in both cases, Russian authorities essentially dropped charges and threats of licence revocation in view of new ownership structures and potential improvements.
Unlike Sakhalin II however, Kovykta acquisition has an aura of diplomacy particularly from BP. In fact, BP?s chief executive officer (CEO) Tony Hayward has called Kovykta acquisition "a historic agreement lays the ground for powerful cooperation between BP, TNK-BP, and Gazprom, with Gazprom?s deputy CEO calling the acquisition "a good basis for long-term cooperation between Gazprom, BP and TNK-BP". Parties even appear to be pleased with the new arrangement in which BP has actually lost its stake in a large gas field!
 Welding of the first joint at the Russian onshore section of North European Gas Pipeline (Nord Stream) ? December 9, 2005 |
As part of the deal, BP, TNK-BP, and Gazprom agreed to form a strategic alliance that will look to invest jointly in major energy projects, both in Russia and around the world, as well as engage in assets swaps. In addition, TNK-BP retains a call option to buy back a 25%-plus-one stake in Kovykta at an "independently verified market price" that the company can exercise subject to a potential significant joint investment or an asset swap with Gazprom.
What is more important however is that Kovykta episode further confirms Gazprom?s and Russia?s intent to control its hydrocarbon resources. It also indicates that Russia is prepared to use heavy handed tactics if they wish to in order to achieve that objective. More interestingly however, foreign companies are prepared to accept such manoeuvres as a part of doing business in Russia. Despite this more than a hiccup, BP has confirmed its further commitments to Russia and is planning to have joint ventures with Gazprom in the future. Both Kovykta and Sakhalin II show Gazprom will be a definite guest in future oil and gas parties of reasonable size in Russia.
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