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BUSINESS WEEK: Week of woes for BP: "Taken with a revival by arch rival Shell and a new law that may restrict development, Russia is proving more of a headache for BP than the company hoped.: Royal Dutch/Shell's Russia strategy, built on mega-projects such as its $12bn Sakhalin liquefied natural gas (LNG) scheme, may yet trump BP's bold $7.5bn joint venture with TNK in 2003.": "Shell also seems to be having a better time from state gas monopoly Gazprom, which is in effect pitting BP against its Anglo-Dutch rival." (ShellNews.net) 17/18 April 05

 

By Richard Orange

 

$1bn bill for back tax comes soon after key oil auctions were cancelled

 

SOMETIMES, news comes at the worst moment. No sooner had Viktor Vekselberg, BP's Russian partner taken to the podium at Monday's Russian Economic Forum in London, than delegates' Blackberrys began buzzing with news of a near-$lbn (530m, 770m) bill for back taxes that could hit his TNK-BP joint venture.

 

Taken with a revival by arch rival Shell and a new law that may restrict development, Russia is proving more of a headache for BP than the company hoped. Enough of a headache for Lord John Browne to hold his first meeting this week with President Vladimir Putin since the $7.5bn TNK deal was signed in 2003. Only the extent of the potential damage was surprising, reminiscent of the $3.4bn claims that began last year's assault on Yukos.

 

The figure - an audit result more than a demand for payment - may yet amount to nothing. But TNK-BP's relationship with the authorities looks rocky. Royal Dutch/Shell's Russia strategy, built on mega-projects such as its $12bn Sakhalin liquefied natural gas (LNG) scheme, may yet trump BP's bold $7.5bn joint venture with TNK in 2003.

 

TNK-BP has been crucial in propping up BP's declining oil production. But key auctions for new developments were cancelled this year. A draft law on oil and gas extraction may bar any companies with foreign affiliations from developing strategic oil fields without a majority Russian partner. TNK-BP is a 50:50 venture; the law would deny BP much of the advantage it had over Shell of operating in Russia through a Russian-registered joint venture.

 

Shell also seems to be having a better time from state gas monopoly Gazprom, which is in effect pitting BP against its Anglo-Dutch rival.

 

Gazprom export head Alexander Medvedev dropped the news on Tuesday that he didn't think there was a place for gas exports from TNK-BP's key Kovykta field until after 2010, at least at first sight. Vekselberg, who is leading negotiations on the $17bn development, cannot have been pleased. Kovykta is the most important development for TNK-BP's medium-term future.

 

At the same time Medvedev said Shell had agreed to give Gazprom a 25% stake in Sakhalin in exchange for up to 50% of the Zapolyarnoye field, which Shell has been trying to enter for years. It is Shell's Sakhalin LNG project, alongside an Exxon scheme to pipe Sakhalin gas to China, that Medvedev argues beats Kovykta's economics.

 

TNK-BP chief executive Bob Dudley said at the conference that the timing of getting Kovykta gas to markets was critical if it was not to be displaced by other suppliers. Vekselberg said TNK-BP aimed to get the field running by 2006. But it may be more what Shell has to offer than the quality of its diplomacy that has brought Gazprom on side. Gazprom aims to match its dominance of European gas imports in Asia and the US. And LNG is set to be a growing source of global gas supply. Shell, for now, is the global leader in the technology. Gazprom was desperate for a stake in Sakhalin.

 

All may not be lost for BP on Kovykta. Many analysts argue that Gazprom is ratcheting up the pressure to force TNK-BP into giving it a more generous slice of the field as part of the two companies' planned joint development of east Siberia. A study carried out last year with potential Asian buyers painted a rosy picture of Kovykta's economics. Analysts have lauded Vekselberg's calm diplomacy on Kovykta.

 

Even so, BP's partners in TNK-, BP could be more a liability than a help. TNK was as dedicated a tax-avoider as Yukos between 2000 and 2003. And the $154m bill the Alfa Group received at its telecoms arm Vimpelcom shows the tax ministry has not forgotten this. The Alfa Group is one of TNK-BP's three main owners' groups.

 

Analysts fear the Russian government will need to hit other tax avoiders with similar tax claims to lend weight to its claim to have treated Yukos fairly. This claim forms the basis of its position in the arbitration it entered into last week with Yukos's main shareholder Menatep.

 

In the end, the authorities I reduced the Vimpelcom charge. The same could happen to TNK-BP. That either charge was levied in the first place shows elements of the Russian govemment have TNK-BP's Russian owners in their sights. That  cannot be good for the UK's biggest oil firm.

 

RICHARD ORANGE

 

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