The Cable Directory

BP has agreed to sell its interests in a giant Siberian gas field development to Russia’s state-owned natural gas monopoly, Gazprom, further strengthening the oil-rich nation’s grip on its own vast energy resources.

Analysts said Exxon Mobil Corp.’s plan to sell natural gas to China from its Russian oil and gas operation could be Gazprom’s next target as high oil prices increasingly prompt Russia to regain control of resources given to foreign companies more than a decade ago.

“The Russian government through Gazprom has been looking to try to re-establish ownership of key strategic energy assets,” said Wood Mackenzie analyst Derek Butter.

With BP’s announcement Friday, the natural gas portion of Exxon Mobil’s massive $2 billion oil and gas project at Sakhalin Island north of Japan “is the last big remaining strategic gas project in the Far East of Russia that Gazprom doesn’t have control of,” Butter said.

Last December, Gazprom wrested majority control of Shell’s Sakhalin natural gas project — the largest foreign investment in Russia — for $7.45 billion. Shell’s project is known as Sakhalin-2, while Exxon Mobil’s is Sakhalin-1.

BP announced Friday that TNK-BP, its Russian joint venture, will sell Gazprom its 63 percent stake in Rusia Petroleum, a company that holds the license to develop the Kovykta field in East Siberia. TNK-BP also will sell its half-interest in East Siberian Gas Company, which also is helping develop the project.

Gazprom will pay $700 million to $900 million to BP, or what BP had poured into the project, Butter said. The field’s total estimated reserves reach 40 trillion to 65 trillion cubic feet of gas.

As part of the deal, BP agreed to create an alliance with Gazprom to invest jointly in energy projects or swap assets in Russia and elsewhere in the world.

BP CEO Tony Hayward said in a statement that the companies will initially seek projects worth at least $3 billion, but “potential for further growth could be very significant.”

BP also retained the right to buy a 25 percent-plus-one share stake in Kovykta at an independently verified market price once a joint investment or asset swap has occurred, the company said.

Deal resolves dispute

The expected sale ended a dispute over whether Russia would yank the license to develop the field, of which TNK-BP had a majority stake.

Russian authorities said the field operators failed to meet production targets last year as required by its license to supply the sparse eastern Siberia market. BP said that was true, but said demand lagged far behind the target.

Also, Gazprom, which controls gas exports, had refused to construct a pipeline to transport Kovykta gas to China, which would have provided a robust market to encourage further development, Butter said.

“With Gazprom blocking development of a pipeline, they couldn’t comply with terms of the license,” Butter said.

He said the market price for the field would have been higher than what Gazprom agreed to pay. But otherwise, BP could have lost the license with no compensation.

“Russia is keen to have BP invest in the country,” Butter said. “What it has clearly signaled to investors is that these are strategic assets (that foreign companies) controlled for a period of time. Now they want them back.”

The Kovykta field was only part of TNK-BP’s portfolio. Last year the company produced 1.9 million barrels of oil equivalent a day.

’A little bump in the road’

In an interview with the Chronicle last week, Hayward called TNK-BP “stunningly successful” in terms of oil production, which grew 30 percent in three years. He called the Kovykta field issue “a little bump in the road” and “not by any means the main event.”

Hayward took BP’s helm just seven weeks ago, but has met with Russian President Vladimir Putin and other officials regarding BP’s Russian energy agenda.

Simmons & Co. International said in a note to investors Friday that the BP/Gazprom partnership will be interesting to watch under Hayward’s leadership. “So far, he appears to be doing a reasonable job in a difficult situation,” the note said.

Exxon Mobil spokeswoman Jeanne Miller said Friday talks were ongoing between Exxon Mobil’s Russian affiliate, Exxon Neftegas Ltd., and Russian officials. Until an actual purchase agreement is finalized, Exxon Mobil would decline further comment, she said.

Butter noted that foreign companies moved in to develop Russia’s resources in the mid-1990s and later when oil prices were low.

High oil prices have increased the value of those operations, so a stronger Russia wants control, Butter said. Russian leaders point to ConocoPhillips’ 20 percent stake in Lukoil, the country’s largest private oil company, as a preferred way to invest.

“They’re saying, ’We’re happy for you to invest, but we are going to be in control,’ ” Butter said.

Iraq’s central government and the Kurdistan regional authority have resolved disputes holding up a draft oil law. The law is aimed at equitably sharing the world’s third largest oil reserves, officials said. The spokesman for the Oil Ministry in Baghdad, Asim Jihad, said the draft had been submitted to parliament, adding he expected lawmakers to begin debating it in the next few days.

Jihad declined to give details on the deal. An official in the Kurdish regional government confirmed an agreement had been reached, but did not elaborate.

The deal will be greeted with relief in Washington, which has been pressing Iraq’s leaders to speed up passage of key laws designed to spur national reconciliation and end sectarian violence between majority Shi’ites and minority Sunni Arabs.

’A deal has been reached and the draft has been delivered to parliament to be discussed … in the coming days. An agreement has been reached covering all disputes,’ Jihad said.

The draft, crucial to regulating how wealth from Iraq’s huge reserves will be shared by its sectarian and ethnic groups, was approved by the cabinet in February but faced stiff opposition from Kurds.

They had objected to some annexes in the draft that would wrest oilfields from regional governments and place them under a new state oil company. There was also a row over how revenue would be distributed.

Jihad declined to say when the agreement had been reached, adding parliament could make changes to the draft.

Most of Iraq’s proven oil reserves are located in the Shi’ite south and the Kurdish north.

Iraq sits on the world’s third-largest oil reserves and officials have been struggling since last year to finalise the draft law, which is vital for Iraq to attract investment from foreign firms to boost its oil output and rebuild its economy.

The latest disputes broke out not long after the oil ministry in Baghdad warned regions in late April against signing contracts until the law was passed. The Kurdistan regional government has signed several agreements with foreign companies.

Washington has dispatched a succession of officials to press Prime Minister Nuri Al Maliki’s government to speed up passage of laws aimed at drawing disaffected Sunni Arabs more firmly into the political process.

Besides the oil draft, these include changes to a law banning former Baath party members from public life and constitutional reforms.

Thousands of extra US and Iraqi troops have been deployed in Baghdad in recent months in an operation whose success will be crucial to the US debate on how long to stay in Iraq. But US military commanders say improved security will not be enough, and that this has to be matched by political progress.

TNK-BP is going to invest approximately $1 billion every year into drilling and participate in tenders for new licenses, said Sergey Brezitsky, Executive Vice President, Upstream, TNK-BP, at a briefing on Tuesday.

According to him, TNK-BP will leave its oil production in 2007 at the same level and may increase it by 1-2% in 2008.

Mr. Brezitsky said that the investments of the Company into drilling in 2007 will amount to $1.1 billion and the Company will not decrease its investments into drilling and the volume of drilling operations in the nearest 5 years.

The Vice President noted that approximately 10% of production volume in 2009 will be provided by new projects, among which he pointed to the projects of development of the Kamennoe field, the Uvat Group of fields, the Verkhnechonsk field, and new areas of the Samotlor field.

In particular, he added, some 1.5 million tons of oil will be produced in each of the Verkhnechonsk field and the Uvat Group of fields by 2009.

Making comments on the recent decision of TNK-BP to allocate 100 billion rubles to its subsidiary SP Varyeganneft LLC for participation in tenders, Mr. Brezitsky expressed his opinion that the company will seriously take part in tenders but did not specify in which regions.

According to him, the Company has interest in all gas-bearing provinces, such as the Timan-Pechora province, the Caspian province, East Siberia, and West Siberia.

Mr. Brezitsky refused to disclose the plans of TNK-BP in Turkmenistan and only noted that the Company is considering possibilities of participating in projects in different countries, such as Kazakhstan, China, and Ukraine. Mr. Brezitsky added in this relation that TNK-BP is now developing a concept of Company development till 2020, which implies its entrance into new regions for ensuring stability and prosperity.

According to Mr. Brezitsky, in the period till 2020, the Company is going to push forward the activities of Rospan and Vanyeganneft and operation of Tyumenneftegaz in the Russkoe field.

Mr. Brezitsky noted that in winter 2008 the Company will begin industrial development for fields in the Bolshekhetskoe depression and start production there after 2010.

Fluor Corporation’s subsidiary, Fluor Daniel South America Limited, will lead a consortium with J. Ray McDermott, a subsidiary of McDermott International, Inc., to provide program management, engineering, procurement, construction and installation (EPCI) of the 4,000-ton topsides for an offshore drilling and gas production platform for BG Trinidad & Tobago Limited. The Poinsettia project will be located off the northwest coast of Trinidad in 530 feet of water.

A minor portion of the award was booked in the fourth quarter of 2006 and the balance of the award was booked in first quarter 2007.

“Two major companies have teamed on this EPCI project to provide our client with a one-stop solution that meet its goals of a faster schedule with significant Trinidadian content, without compromising on the safety or quality in the project,” said David Seaton, president of Fluor’s Energy & Chemicals Group.

TOFCO of Trinidad, a key subcontractor on the project, will be fabricating the topsides at its fabrication yard in Trinidad. It is the first time that topsides of this size will be fabricated in Trinidad by a local fabricator.

Fluor’s project scope includes overall project management as well as the design and fabrication of the platform topsides by TOFCO and J.Ray McDermott’s scope is the design and fabrication of the platform jacket, as well as transportation and installation of both the jacket and the topsides. Fluor will also provide the final hook-up and commissioning assistance.

Project construction is slated to begin in fall 2007, with fourth quarter 2008 mechanical completion and first gas at the end of 2008.