An Irritated President Steps Into Kovykta Fray

The Natural Resources Ministry’s subsoil agency on Friday postponed a decision on the Kovykta license for two weeks, but it is thought likely to revoke it then. Delaying a decision until after both the Group of Eight summit and the high-profile St. Petersburg International Economic Forum this weekend could allow the Kremlin to sidestep the issue with foreign governments and investors.

License holder Rusia Petroleum, which is majority-owned by TNK-BP, produced just a fraction of the gas it was supposed to last year, under the terms of the license. The field’s operator is required to produce at least 9 billion cubic meters of gas per year, even though the local market is too small for the gas and Gazprom has refused to allow the building of a pipeline to the neighboring Chinese and South Korean markets.

The only alternative would be to flare the gas, adding to greenhouse gas emissions and contributing to global warming.

TNK-BP is a 50-50 venture between BP and Viktor Vekselberg’s Renova Group, Mikhail Fridman’s Alfa Group and Leonid Blavatnik’s Access Industries.

Potanin’s Interros holding and the Irkutsk regional government hold minority stakes in Rusia Petroleum.

While TNK-BP’s shareholders are believed to be in talks over ceding control of Kovykta, Gazprom has said it is not interested in buying into the project.

The question to Putin came from a Times of London reporter, who asked whether British companies should invest in Russia considering the experiences of BP and Shell, which last year ceded control of Sakhalin-2 to Gazprom after government pressure over purported environmental violations.

The Natural Resources Ministry Industry and Rusia Petroleum shareholders are negotiating over the field, Putin said, adding that he did not know what solution they would reach.

BP’s new chief, Tony Hayward, flew to Moscow last week for a meeting with Gazprom CEO Alexei Miller. Hayward is due to speak Saturday at the St. Petersburg International Economic Forum.

Putin said Kovykta project shareholders could complain about a lack of access to Gazprom’s pipeline system and many other problems that have hampered development, but that they were fully aware of the potential difficulties when they bid for the license in the early 1990s.

However, when Rusia Petroleum acquired the Kovykta license and BP later took a stake in the company, the current law that gives Gazprom the status of a gas export monopoly was not on the books. That law was passed two years ago.

In what appeared to be a mistake, Putin said Kovykta held “about 3 trillion cubic meters” of gas, rivaling “almost all the reserves of Canada.”

According to Rusia Petroleum’s web site, the field’s total reserves are 2.13 trillion cubic meters. TNK-BP spokesman Alexander Shadrin said he was unaware of the 3 trillion cubic meters figure, declining further comment.

Putin hinted that the license was sold in a shady deal characteristic of the controversial privatizations that followed the Soviet collapse. “I won’t even talk now about how the license was purchased,” Putin said. “Let’s leave this up to the conscience of those who did it a while ago, also in the early 1990s.”

Coming back to foreign investments, Putin said BP otherwise was doing well in Russia, where it has a large reserves and production base. “We welcome its involvement in the Russian economy and will further support and assist the company, but we proceed from the fact that all of its activity will be within the current law,” he said.

“For BP, Russia is an important part of the global asset portfolio,” said BP’s Moscow spokesman Vladimir Buyanov. “This position remains so.”

A spokeswoman for Interros declined to comment on Putin’s remarks. A Renova spokesman did not answer a request for comment.

Putin was signaling that Rusia Petroleum would lose the license if its shareholders did not offer good terms for Gazprom to enter the project, said Andrei Gromadin, an analyst at MDM Bank.

Pavel Kushnir of Deutsche UFG said Putin was trying to convince a Western audience that there were solid legal grounds for withdrawing the Kovykta license. “It is correct to anticipate much negative reaction when the license is withdrawn,” he said. “Putin is trying to soften future criticism in advance.”

Gazprom has no interest in entering the project now, he said. It would rather try to buy full control of the field cheaply from the state at a possible future auction than pay a hefty price for a stake now, Kushnir said. “The license may stay with the government for five to 10 years,” he said.

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