Kovykta cheque is in the post for BP
It will take time to tell exactly how significant the BP deal with Gazprom over the Kovykta field is, but it is certainly a better outcome than many had feared.
The UK supermajor has come away with a potential cash pile of up to $900 million for its 62.85% stake in Kovykta licence-holder Rusia Petroleum, plus a memorandum of understanding that gives it an option to buy a 25%-plusone- share stake in the East Siberian gas field at a later date.
The two companies have also promised to form a “strategic alliance” that will invest in assets and swap stakes in projects both in Russia and abroad — BP is talking about $3 billion worth of schemes.
On the surface, this is a significant development, especially as BP’s new chief executive Tony Hayward was staring at the possibility of being hounded out of Kovykta empty-handed on the grounds of alleged breaches in licence obligations.
He chose to play a different game from Shell which, willingly or not, turned a similar punch-up with the Kremlin over Sakhalin 2 in Russia s far east into a major international political issue.
BP chose a quieter route on Kovykta. There was little brinkmanship by Hayward, just a quiet resolve to ensure that BP came out of the situation with something useful.
Some would say that Shell had far more to lose given the enormous scale of Sakhalin 2 — one of the largest liquefied natural gas schemes in the world with the latest price tag put at more than $20 billion.
By contrast, Kovykta is an undeveloped gas field project with huge potential but with many obstacles still to be overcome.
Another factor is that BP has potentially more to lose in Russia generally, given that much of its global production now comes from there.
Many believe the Kovykta tangle is just a skirmish before the real battle over the Kremlin’s desire to seize the half share in TNK-BP that is currently held by Russian oligarchs — and perhaps more.
A lock-in period under which Access-Renova and the other Russian owners must hold on to their shares in TNKBP comes to an end in December. It seems inevitable that the Kremlin might use that period to put pressure on them to sell out, paving the way for a state-owned operator such as Gazprom or Rosneft to take control.
The real worry is that the Kremlin believes that BP should also sell down its own stake in TNK-BP to a much lower level. BP will hope to have headed this off by being flexible over Kovykta but, if not, this could be the next big political row.
The Kremlin is no doubt determined to win back a much larger measure of control over Russian oil and gas resources at a time of high commodity prices. Resource nationalism is the name of the game and Putin makes no secret of his scorn for his predecessors who sold the country’s crown jewels on the cheap, as he sees it.
One of the interesting issues of the Kovykta deal is whether there really is a meaningful “alliance” between BP and Gazprom. BP has formed similar alliances with companies such as Statoil that came to nothing, but could the latest pact be more significant?
Gazprom has, for instance, long held a desire to cement its position inside the UK gas retail market with a takeover of a company such as Centrica. That has already raised political hackles, but some involvement from BP might pave the way for an acceptable solution, as well as project a friendlier face to politicians and investors. BP is lighter on the gas reserves front than, say, Shell so easier access to Gazprom production will be welcome.
Otherwise it is difficult to see what the Russians bring to the party compared with the managerial, financial and technical expertise that BP can muster, even at a time when its reputation has taken a battering over the Texas City refinery explosion. We will have to wait and see.