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Russia: British Oil Investment Meets Odd Response

  • Michael Lelyveld

Britain's BP oil company seems to be coming under pressure in Russia's uncertain market, one week after it committed itself to the biggest investment in the country's history. While the gas monopoly Gazprom seeks a stake in one of BP's key holdings, the government is threatening to cancel its license for an east Siberian gas field that was planned to supply China.

Boston, 20 February 2003 (RFE/RL) -- A threat to revoke a license for one of Russia's biggest gas fields has raised concerns about pressure on Britain's BP oil company, only a week after it announced the largest investment in the country's history.

This week, the business daily "Vedomosti" reported that Natural Resources Minister Vitalii Artyukhov had ordered proceedings to cancel a license for developing the giant Kovykta gas field in the Irkutsk region. The license is held by the Rusia Petroleum consortium, which is led by BP.

The reported move, on the grounds that Kovykta has not been developed as promised, follows on the heels of BP's preliminary agreement last week to invest $6.75 billion in Russia. BP plans to create a venture that combines its Russian holdings with those of Tyumen Oil Company (TNK), and its partner, Access-Renova, to form the country's third-ranked oil firm.

Normally such a blockbuster deal would be expected to open doors for BP in Russia. But the story suggests that it may only open the company up to new industry intrigues. The trouble may also chill some of last week's enthusiasm over the BP investment, which was hailed as the start of a "new era" for Russian business.

The "Vedomosti" report raised immediate suspicions of manipulation by the gas monopoly Gazprom, which has long sought a role in the Rusia consortium. The Kovykta field is seen as the most likely resource for supplying gas to the growing Chinese market to the south.

"The Moscow Times" quotes Rusia board member Sergei Aleksashenko, vice chairman of the Interros holding company, as saying, "Gazprom doesn't have any money. But it wants to get Rusia Petroleum for nothing. It wants to use its administrative resources. One way of doing this is by orchestrating the Natural Resources Ministry check."

A Gazprom spokesman dismissed the charge with a single word, calling it "rubbish." But "Vedomosti" is quoting Gazprom officials as confirming that it did want an interest in Rusia, even though it could not afford to buy it.

The Moscow-based investment bank Troika Dialog said of the threatened license action, "We do not see this as a serious threat, nor do we suspect any link with discussions over Gazprom." But it also noted that the Rusia partners would hold an extraordinary meeting this week to reconsider Gazprom's membership bid. The brokerage said that Gazprom wants at least 25 percent, adding that "it is unclear exactly who would suffer the resulting dilution."

Last year, Gazprom reportedly set aside $30 million with the intention of securing an 8 percent interest. The sum is considered a pittance for a piece of Kovykta, which contains 1.9 trillion cubic meters of gas reserves, equal to more than 50 years of China's gas output at current rates. Estimates of the project, including a pipeline to China, have ranged from $12 billion to $14 billion.

Last year, Rusia partners were also reportedly approached by Gazprom with the idea of a joint venture in which the monopoly would have held 75 percent. Rusia rejected the proposal.

But Interros may be sufficiently convinced of the danger to bail out of Rusia. This week, Interros General Director Andrei Klishas said the group may sell its 25.7-percent stake in Rusia "in the medium term," the Prime-TASS news agency reports. Last October, the industry newsletter Nefte Compass said the company had no plans to sell out.

BP may be more vulnerable to a defection and a dilution of its holdings, now that it has committed to the joint venture with TNK. The new company would own a majority of Rusia, combining BP's 33 percent with TNK's 29 percent share. In addition to Interros, the Irkutsk regional property fund holds nearly 12 percent.

Rusia's license for the Verkhne-Chonskoye oil field, with an estimated 200 million tons of reserves, is also said to be under challenge. Reuters quotes a BP spokesman in Moscow as saying, "This is an operational issue, which lies within the responsibility of Rusia."

Despite the Natural Resource Ministry's reaction, the Russian government cannot be surprised at the reasons for delay at Kovykta. Last year, Energy Minister Igor Yusufov said the project was stalled because China had offered to buy gas at the rate of only $30 per thousand cubic meters compared with Russia's demand for $70. Analysts have said the project would be profitable only if China pays $78.

Last August, Russian President Vladimir Putin said, "We have to defend our interests.... This is just a requested price. They could have requested an even lower one." In response to China's low bid, officials raised the possibility of piping the gas west to join the Russian network or east for possible export to Japan.

Although Gazprom lacks the finances, its push for a place in Rusia has been backed by the government's stand that the monopoly should represent Russia in all export projects. Last year, BP officials said they would not object to a Gazprom role in Rusia, as long as the company pays for it. But BP's huge investment may have tipped its hand about how much it is willing to risk in Russia and how much it could lose.

Last December, the Bloomberg news service quoted a Rusia official as saying that the PetroChina oil company had also shown interest in buying a stake either in the consortium or the Kovykta field. But the two sides have remained far apart on the gas price. Since the original Kovykta plan, China has focused on developing its own resources and buying liquid natural gas from Australia and Indonesia instead.

In the long term, Russian gas in eastern Siberia is still seen as a natural match for China's energy market. But the threat to the license for Kovykta may mean that the project will not have a long term without a piece for Gazprom.