By Andrew McChesney
TNK-BP chief Robert Dudley said Thursday that he expected to reach a deal with Gazprom around the middle of this year under which his company would keep a "sufficient" stake in the giant Kovykta gas field and be actively involved in its operation. Gazprom in turn would gain a potentially large stake in the $20 billion project in exchange for cash, assets or something else of value that reflected TNK-BP’s investment into the field, Dudley said in an interview at the World Economic Forum in Davos.
Kovykta is caught in a high-profile licensing dispute that investors fear is an attempt to pressure
TNK-BP into handing control of the east Siberian field to Gazprom, and Dudley said he was being deluged with questions from Davos participants wanting to hear his side of the story.
Dudley said government officials had asked him to offer "a very balanced view" of the dispute at the forum.
"We would like to develop the field with Gazprom. We have a good deal of expertise that we can bring to the field, and we are in active discussions with Gazprom to consider various models of cooperation," he said.
But TNK-BP will not bend on two issues in the talks: It wants to operate the field with Gazprom and it wants to maintain "a sufficient share that would allow TNK-BP to help shape the project … and protect [its] rights," Dudley said.
Asked whether TNK-BP would accept cash in exchange for a stake, Dudley said it was one of many options under consideration. The agreement "needs to be commercial, a solution for value that reflects the many years of work that has already been done on the field as well as future prospects," he said.
Dudley said he expected a deal "towards the middle of the year."
A spokesman for Gazprom in Moscow declined to comment on the talks. "We will not comment on any negotiations while they are ongoing," he said.
Valery Nesterov, oil and gas analyst at Troika Dialog, said Dudley’s comments showed that TNK-BP was ready to compromise at Kovykta and was prepared to be "sufficiently flexible to secure a partnership."
"It’s hard to say on what terms Gazprom would agree to join this project," Nesterov said. "Gazprom would like to have it all, but that is impossible. If the two sides agree, it implies that commercial interests will be taken into account."
The Natural Resources Ministry’s environmental agency said last week that it was preparing to begin an investigation into possible TNK-BP violations at Kovykta. A similar investigation at the Sakhalin-2 oil and gas project ended with Shell and its partners selling half of their stakes to Gazprom last month. Projects run by foreign majors Total and ExxonMobil are also facing environmental inspections.
Dudley said he had received a "very technical" letter from the local branch of the environmental agency that identified possible infractions in the construction of temporary housing for workers and the replanting of trees. But the most serious issue in the letter was a claim that TNK-BP might have failed to fulfill its production obligations for the field, he said.
Under TNK-BP’s license, Kovykta has to produce 9 billion cubic meters of gas per year or "up to the amount that the local market can take," Dudley said. He said the surrounding region currently took 1.5 bcm per year and its needs would top out at 2.5 bcm, but that federal authorities were insisting that TNK-BP had to produce the entire 9 bcm anyway. "So we will have to produce and reinject it back into the field or flare it, which is not in anyone’s interests," he said.
TNK-BP would rather ship the excess gas to China, but to do so it first needs approval from Gazprom, which by law has a monopoly on all gas exports.
Dudley indicated that the pipeline was not an issue in the talks with Gazprom. "Our interest is in the development of the field, not the pipeline or gas marketing," he said.
He said TNK-BP had not violated any environmental standards.
Dudley played down the dispute as a small part of TNK-BP’s business and said the company would post glowing results for 2006. While he declined to give figures, he suggested that they would send a powerful message to investors about the attractiveness of doing business in Russia.
That is no doubt what the Kremlin wants investors to hear at Davos, and it has sent a high-level delegation there led by First Deputy Prime Minister Dmitry Medvedev, Economic Development and Trade Minster German Gref and St. Petersburg Governor Valentina Matviyenko.
Alexander Medvedev, the Gazprom deputy chairman who oversees the company’s exports, is also in attendance. His spokesman said Thursday that he had back-to-back meetings and was not immediately available for comment.
Dudley said he was holding back-to-back meetings of his own in which he was trying to paint a "realistic" picture of Russia, not one that was critical or overly positive.
"What I’m basically saying is that if you step back from what are sometimes sensational headlines and you look at the track record of successful companies like TNK-BP, you can do business in Russia," he said. "You need to respect the country. You need to do things the country wants, such as perform well, be open and transparent about your business, develop people and make social investments back into the communities where you operate."
He said TNK-BP promised to follow that advice when it was created with President Vladimir Putin’s blessing. "Those promises were made to the president in 2003," he said.
And as far as Dudley is concerned, TNK-BP is keeping its word.
Staff Writer Miriam Elder contributed to this report from Moscow.
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