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BP’s Russian alliance with Gazprom put on ice

BP’s Russian alliance with Gazprom put on ice

By Russell Hotten, Industry Editor

Last Updated: 10:29pm BST 04/09/2008

Plans by energy giants BP and Gazprom to exchange assets in Russia and create an international alliance for investments around the world have been shelved. 

Despite the British and Russian companies signing a memorandum of understanding (MoU) last year, the deadline for doing a deal has passed and no further negotiations are planned.

Under the MoU, BP would have relinquished assets in oil-rich Russia but gained a powerful ally in state-controlled Gazprom to expand in other parts of the world. But Tony Hayward, BP’s chief executive, said yesterday that the plans had “no traction… We had an outline agreement, but I don’t think they [Gazprom] want to do it”. 

There had been no serious talks for some time, and none were planned, he said.

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  • The outline agreement, signed on June 22 last year, involved TNK-BP, 50pc-owned by the British company, selling its 62.8pc stake in Rusia Petroleum to Gazprom. TNK-BP would also sell 50pc of the East Siberia Gas Company.

    Rusia Petroleum holds the operating licence to the giant Kovykta gas field in Russia’s Irkutsk region, which is one of the world’s biggest discoveries and contains an estimated 1.9?trillion cubic metres of gas.

    Although Gazprom had in recent weeks appeared to go cold on taking over Kovykta, it was unclear why other projects with BP are not being pursued. The MoU stipulated formation of a strategic alliance covering joint investment in major long-term energy projects or asset swaps across the globe. The minimal size of a project for the joint venture would have been $3bn (£1.7bn).

    In an echo of what happened to Royal Dutch Shell’s Sakhalin 2 field, BP had come under pressure from Russian regulators over allegedly breaching its operating license at Kovykta.

    Gazprom eventually took control of Sakhalin 2, part of the Kremlin’s strategy of taking back lucrative energy assets that it believed were sold off too cheaply in the 1990s. The pressure over Kovykta was interpreted as part of the same strategy.

    However, Andrew Neff, energy analyst at Global Insight, warned that Kovykta was one of BP’s “lingering issues” in Russia that would eventually have to be resolved. The fear is that Gazprom’s attention has been diverted to other projects, but that eventually the Russian company’s interest in Kovykta will return.

    Mr Hayward, speaking yesterday after BP announced a breakthrough deal to resolve differences with its shareholders in TNK-BP, said he was convinced that Russia remained a land of opportunity for his company.

    But he warned that investing in Russia was not for the faint hearted. “If you want to do business in Russia you have to be tough and hard-nosed,” he said.

    Gazprom could not be reached for comment last night.

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