Global Insight Perspective | |
Significance | Russian prosecutors have launched the latest attack against a foreign-led energy project in Russia with yesterday's assertion that RUSIA Petroleum, the TNK-BP-led consortium developing the Kovykta field, has failed to adhere to the terms of its licensing agreement. |
Implications | The Prosecutor-General's Office threatened to revoke RUSIA Petroleum's licence to Kovykta in line with the recent pattern of administrative pressure by the Russian bureaucracy against key projects in the country that are being operated by foreign firms. |
Outlook | TNK-BP has routinely faced threats to its operation of the Kovykta field, but the latest assault appears geared to coincide with separate attacks on the foreign-led Sakhalin Island energy projects as the Kremlin (Russia's presidential administration) seeks to bring Asian-export projects under greater state control. |
Following an Established Pattern
By now, the drill is becoming all too familiar—first, some element of the Russian bureaucracy fires a salvo at a foreign-led energy project, accusing the IOC that controls said project of violating licence terms or failing to comply with Russia's environmental regulations. The IOC in question protests its innocence, asserting that it is operating within the law and in full compliance. Then, a senior member of the Kremlin (Russia's presidential administration) comes in to rescue the day, tempering the zealous bureaucrat and reassuring the IOC about commitment to foreign investment but reiterating the government's concerns and ensuring that the IOC remains wary of the Kremlin's intentions.
So it was that Russia's Prosecutor-General's Office yesterday issued a threat to RUSIA Petroleum, the TNK-BP-led consortium that is operating the Kovykta gas field in Eastern Siberia. The prosecutor's office duly accused the consortium of having "systematically allowed ecological and industrial safety regulations to be violated" at the field, as well as failing to carry out the terms of the licensing agreement. TNK-BP, of course, refuted the accusation, leaving only Alexei Kudrin or German Gref—Russia's finance and economic ministers, respectively, needing to make their requisite appearance to make this latest episode of Russian-style kabuki theatre complete.
After a week in which Shell, ExxonMobil, and Total all came under fire from the authorities for their conduct in carrying out the terms of their production-sharing agreements (PSAs) in Russia, it was only a matter of time before BP's joint venture there found its way into the crosshairs (see "Related Articles" below). After all, RUSIA Petroleum, in which TNK-BP has a 62.5% stake, has a licence for the development of the Kovykta gas field in Eastern Siberia, a mammoth 1.9-Tcm field that could be exploited to allow Russian gas to be delivered to Asia. With Gazprom seeking to build two gas pipelines to China in the next decade, the Russian gas giant is keen to secure the gas supplies to deliver along these routes—and Kovykta is perfectly situated to fulfil Gazprom's plan.
The problem, of course, is Gazprom has no stake in Kovykta—Russian financial conglomerate Interros has a 25.8% stake, while the Irkutsk regional administration has the remaining 11.7%. Although Gazprom could easily buy into the project and replace Irkutsk and/or Interros, as the government's regional co-ordinator for the development of Eastern Siberia's gas reserves, Gazprom wants more than a minority stake in the development of Kovykta. Thus, TNK-BP's goal of exporting gas from the project to Asian markets—South Korea as well as China—has long been thwarted by Gazprom, which has argued, unconvincingly, that gas from Kovykta is needed for the Russian domestic market.
Despite numerous concession offers from TNK-BP to allow Gazprom into the project, the Russian gas giant has continued to block RUSIA Petroleum in its export ambitions. In the interim, the consortium is supplying its initial gas output to the local market in Irkutsk, but now the prosecutor's office said that RUSIA Petroleum was even failing to meet its commitment to supply 9 Bcm of gas to the region. The prosecutor's office said that because production at Kovykta is still in its test phase, it has failed to supply the full gas volume to the local region, thereby harming state interests.
In an effort to defend itself, TNK-BP said that the original terms of the licence, which was agreed 14 years ago, are outdated, noting that the demographics of the region have changed substantially. Forecasts of local gas demand have shown that consumption requirements for the region will amount to just 2.5 Bcm at the end of 2008, a figure that TNK-BP said it will easily satisfy when production from Kovykta gets under way at the start of the year.
Outlook and Implications
With the government already waging a campaign with the other supermajors, it appears BP can now officially be added to the list. The U.K. supermajor only recently sought to safeguard its Russian operations by participating in Rosneft's initial public offering (IPO), purchasing US$1-billion-worth of the majority state-owned company's shares in an effort to curry favour with the Kremlin. Two months on, the premium on BP's "insurance policy" in Russia appears to have increased as the Kremlin steps up administrative pressure on IOCs across the board.
The common denominator in the attacks on IOCs is a desire for a greater say in foreign-led energy projects in Russia. While there are surely some minor violations by the IOCs of operating terms—from licence agreements signed a decade ago (or longer) in a completely different investment climate in Russia—the recent threats to projects led by Total, ExxonMobil, Shell, and now TNK-BP are geared not to rectify violations of environmental regulations or to ensure compliance to the letter of the law with licence agreements. Rather, the focus is on using this administrative pressure to force the IOCs to concede a greater role—if not outright control—in their projects to a Russian state-run company (Gazprom or Rosneft) that will carry out the project in line with state objectives, both political and economic.
The IOC-led projects that are geared to supply Asia are under particular scrutiny and pressure as the Russian government plans to emphasise energy exports to Asia over the next 15 years. Thus, the Kovykta gas field's location, as well as the fact that it is controlled by TNK-BP, has left it especially vulnerable to attacks by the Russian government and Gazprom. Press reports last week suggested that the gas giant was in negotiations to acquire the 50% Russian stake in TNK-BP; the threat to Kovykta's licence could be intended to increase Gazprom's leverage in those talks. Considering the Kremlin's Asian export focus, Gazprom is likely to hold out either for control of the Kovykta gas field (via a majority stake in RUSIA Petroleum) or a 50% stake in TNK-BP, as the Kremlin seeks a greater role in the development of Russia's oil and gas reserves that are currently controlled by IOCs.
Related Articles
Russia: 22 September 2006: Is There a Path Out of Russia's Sakhalin Mess?
Russia: 21 September 2006: ExxonMobil Acknowledges Higher Costs at Sakhalin-1; Loadings Halted for Technical Checks
Russia: 21 September 2006: Total's Russian PSA Under Review for Potential Cancellation
Russia: 20 September 2006: Gazprom-Shell Asset Swap Talks Suspended Amid Sakhalin-2 Controversy
Russia: 19 September 2006: Shell-Led Russian Project In Jeopardy Following Cancellation of Environmental Permit
Russia: 19 September 2006: Gazprom Reportedly in Talks to Acquire Russian Half of TNK-BP
Russia: 6 July 2006: Gazprom Export Monopoly, Rosneft IPO Highlight BP's Russian Conundrum
Russia: 10 April 2006: Gazprom Puts the Brakes—Again—On TNK-BP's Kovykta Gas Development Plans
Russia: 15 March 2006: TNK-BP Offers Gazprom Controlling Stake in Kovykta Holding Company
Russia: 20 April 2004: TNK-BP Promotes Kovykta as Cornerstone of Russia's East Siberia Gas Development Plans