03:45 GMT +327 April 2018
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    Gazprom takes over another gas deposit

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    MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - The Russian government is making efforts to regain control of its energy resources. Last week, BP's Russian subsidiary, TNK-BP, sold the rich Kovykta gas deposit in the Irkutsk Region in Eastern Siberia, one of the largest in the world, to Russia's Gazprom.

    Foreign investors are taking the news with reserved optimism, because the Kovykta license could have been revoked without any compensation and the Russian officials had grounds for doing so. However, the package eventually signed between Russia's gas monopoly and the British oil and gas giant shows that the Russian government still wants to retain foreign investors in this country, and is even offering them stakes in large joint projects outside Russia.

    On June 22, TNK-BP agreed to sell its 63% controlling stake in the Kovykta gas condensate deposit to Gazprom. The deal was reached at a meeting in the Kremlin attended by First Deputy Prime Minister Dmitry Medvedev, who is also chairman of Gazprom's board.

    The amount of the deal has not been disclosed, but preliminary estimates suggest it was somewhere in the range of $600 million-$900 million. As is well known, the Russian-British joint venture had invested $405 million in the project, so it even got a good deal by selling it.

    TNK-BP must certainly have expected much higher revenues when it took control of Kovykta in 2003. The deposit's reserves are estimated at 2 trillion cubic meters of natural gas, 2.3 billion cubic meters of helium and 115 million metric tons of gas condensate. But the joint venture was denied access to the Russian pipeline system, wholly owned by Gazprom, and therefore could not market the gas in Russia or abroad. All it could do was sell negligible amounts of gas locally, in the Irkutsk Region.

    TNK-BP was perfectly aware that the project would never work properly without Gazprom's participation and invited the gas giant to come on board on multiple occasions. It even offered the gas giant a controlling stake in Kovykta earlier this year. Gazprom kept silent.

    In June, TNK-BP's troubles reached a critical point. Russian officials could have revoked the Kovykta license any day because the joint venture had failed to observe the conditions of the license agreement, that is, to boost production to 9 billion cubic meters a year.

    It was only then that Gazprom came to the "rescue" by buying TNK-BP's whole stake in Kovykta on its own terms. The government lifted the license violation charges in no time, even though it was due to make the final decision on June 22. Russia's Natural Resources Ministry even said it could adjust the conditions of the license agreement and expected Gazprom to submit development proposals.

    All this is reminiscent of another Gazprom story, the one involving Royal Dutch Shell and Sakhalin II. The British-Dutch company had long been inviting Gazprom to cooperate in the Sakhalin II liquefied natural gas project until it was forced to sell its controlling stake to the gas giant on the latter's terms. Otherwise, it could have lost the license because of charges of environmental violations brought by Russia's Nature Ministry. In the end, Shell remained a major shareholder in Sakhalin II, while the environmental charges were shelved soon afterwards.

    In the Kovykta case, foreign investors found this similarity comforting in a way, because the rules of the game were clear. Moreover, Russian officials must have been making efforts to preserve good relations with BP, which owns 50% of its Russian subsidiary, all along. The agreement reached in the Kremlin on June 22 offered BP or TNK-BP a chance to buy into the project again, acquiring a blocking stake of 25% plus one share. This clause must have pleased foreign investors the most.

    It is also evidence of the Kremlin's awareness that Russia will be unable to preserve its high economic growth rate without large transnational investments.

    On the other hand, the option to buy a stake in Kovykta comes with a major proviso. It will only come into effect after BP, TNK-BP and Gazprom set up a strategic alliance to implement $3 billion worth of projects and exchange assets in Russia and abroad. No specific projects have been mentioned.

    Gazprom obviously wants to use its foreign partners and the Russian government's support to gain access to badly needed new resources and to new foreign markets. The Russian gas monopoly is interested in energy assets in Europe and Asia. It long ago entered the British gas market and wants to boost its share. It has been eyeing British gas distribution networks for a while now.

    This clause of the agreement has been approved by the West. The European Commission commended the Gazprom-BP strategic alliance, which would contribute to the EU's "energy security," EU officials said. This response is especially welcome at Gazprom, because Europe is generally wary of Russian investments.

    The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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