Publication: Eurasia Daily Monitor Volume: 5 Issue: 65

As Russia’s gas giant Gazprom moved closer to acquisition of the giant Kovykta gas field in Eastern Siberia’s Irkutsk region, the deal was seen as yet another sign of the government’s drive towards further boosting the state grip on the energy assets.

Russia’s TNK-BP indicated plans to finalize a transaction to sell a controlling stake in the Kovykta venture to Gazprom. TNK-BP head Robert Dudley announced on April 3 that he was “optimistic” the deal would be signed by the end of April. He would not reveal the price of the stake, once estimated at about $600-$900 million, but said that TNK-BP put the price at $1 billion (Interfax, RIA-Novosti, April 3).

BP’s Russian subsidiary TNK-BP is the main shareholder in Rusia Petroleum, which still holds the license to operate Kovykta. TNK-BP owns 63 percent of Rusia Petroleum, while Russia’s Interros controls 26 percent and the Irkutsk regional government holds 11 percent.

In 2007, Russian authorities targeted the Kovykta project, officially for failing to fulfill production quotas. The regulatory pressures were understood to be aimed at putting the giant Kovykta gas field, which is estimated to hold between 2 and 3 trillion cubic meters (some 71 to 106 trillion cubic feet [tcf]) of gas, under state control.

Russia refrained, however, from stripping TNK-BP of its Kovykta license last year, but administrative pressures apparently helped a state-run energy giant to clinch a deal. In June 2007 Gazprom, Britain’s BP and TNK-BP agreed that Gazprom was to acquire a 63 percent stake in Kovykta. TNK-BP, which is Russia’s third-largest crude producer, also pledged that its natural gas producing subsidiary, Rospan International, would form a joint venture with Gazprom.

Prior to the June 2007 deal, Gazprom repeatedly had denied that it had any interest in Kovykta and insisted that any demand for Kovykta was not expected before 2015. The companies initially planned to finalize the Kovykta deal in the third quarter of 2007, but the deadline was repeatedly postponed.

Yet negotiations between Gazprom and BP appeared to hit a bumpy road as talks took nine months instead of 90 days, as suggested by the June 2007 agreement announcement. On April 3 BP CEO Tony Hayward held talks in Moscow with Gazprom CEO Alexei Miller. Gazprom said in a statement that both sides had discussed cooperation between the two companies, but he did not mention any discussion, let alone a final deal, on Kovykta (Interfax, April 3).

The latest stage of the Kovykta and TNK-BP saga was similar to recent developments around the Sakhalin-2 oil and gas project. Last year, Shell and its Japanese partners sold a majority stake to Gazprom after months of pressure by the Russian authorities.

In the meantime, BP was seen as trying to negotiate with both Russian state-run energy giants. On April 3 BP’s Hayward also held talks in Moscow with Rosneft CEO Sergei Bogdanchikov and the company’s chairman Igor Sechin. Rosneft said in a statement that both sides had discussed joint projects, notably Sakhalin-4 and Sakhalin-5 ventures (Interfax, April 4).

Recent the raids by law enforcement agencies and the arrest of an employee of TNK-BP on industrial espionage charges were seen as pressure on TNK-BP owners. Meanwhile, Gazprom was understood to top the list of potential buyers of TNK-BP assets.

At the same time, Gazprom happened to announce a significant increase of its production plans. Now Gazprom plans to produce 620 to 640 bcm (22 to 22.5 tcf) by 2020, up from its earlier plan of 580 to 600 bcm (20.5 to 21.2 tcf), Valery Minlikayev, head of Gazprom gas and oil production department, announced on April 2. Russia’s total production could reach 940 bcm (33.2 tcf) by 2020, Minlikayev said, thus raising the government’s projections of 880 bcm (31.1 tcf) (Interfax, April 2).

Last year, Gazprom produced 548 billion cubic meters (bcm) (19.3 tcf) in 2007, down from its earlier plan of 557 bcm (19.66 tcf). This year, Gazprom still plans to produce 561 bcm (19.8 tcf) and export 157 bcm (5.5 tcf).

In other words, despite its falling gas production levels, Gazprom still aims to raise its gas output by nearly 20 percent by 2020. This increase would be difficult to achieve without the acquisition of new assets.

In an apparent bid to find new oil and gas deposits for state-run energy giants, the Russian government moved to increase state funding of exploration projects. At a cabinet meeting on March 27, Prime Minister Viktor Zubkov expressed tentative approval of the Natural Resources Ministry’s blueprint on geological research (Interfax, March 27).

The ministry suggested doubling government funding of all geological research projects, up to 40 billion rubles ($1.7 billion) a year from 2011 to 2020, or up from about 20 billion rubles ($851 million) in 2007. Natural Resources Minister Yuriy Trutnev told the meeting that the state funding of geological research aimed at finding new oil and gas deposits was up from 3.3 billion rubles ($140 million) in 2004 up to 9.3 billion rubles ($396 million) in 2007. As a result, a total of 194 oil and gas deposits were discovered from 2005 to 2007, he said (Interfax, March 27).

Therefore, in addition to taking over existing energy assets, Gazprom may now hope to acquire more new gas and oil deposits due to increased government funding.