Russia 110314 Basic Political Developments

TNK-BP makes no Rosneft pact

Anglo-Russian oil venture TNK-BP failed again at the weekend to settle a dispute over an alliance between partner BP and Rosneft , sparking new recriminations between its shareholders.

News wires  14 March 2011 00:27 GMT

A Saturday board meeting held in Paris ended with BP and Russian-led management deadlocked over how, if at all, to involve TNK-BP in a pact struck in January by BP and Rosneft to explore the Arctic offshore, Reuters reported.

The partnership, which includes a $16 billion share swap, marks a watershed in the development of Russia's oil sector, with the Kremlin softening its doctrine of resource nationalism and opening the door to global energy majors.

State-controlled Rosneft, chaired by Deputy Prime Minister Igor Sechin, has described as "strategic" its alliance with BP and sees no place for TNK-BP, Russia's third largest oil company, in the deal due to its lack of deepwater expertise.

TNK-BP's shareholder managers, led by tycoon Mikhail Fridman and represented by the Alfa, Access and Renova (AAR) consortium, counter that the Rosneft-BP alliance violates TNK-BP's shareholder agreement and poses an existential threat to the company's business.

AAR chief executive Stan Polovets said having BP, a 50% shareholder in TNK-BP, become the largest private shareholder in one of TNK-BP's main competitors would inevitably lead to conflicts of interest, Reuters reported.

AAR has won a London court injunction to keep the deal on hold pending an arbitration review, which TNK-BP said could be completed within weeks.

Fridman and his partners, Viktor Vekselberg and German Khan, have proposed that TNK-BP supplants BP in the share swap, paying $7.6 billion to buy 5% of BP which would be then exchanged for a 10% stake in Rosneft.

The fallout from Saturday's board meeting centred on whether any talks on bringing TNK-BP into the Rosneft partnership would indeed involve involving it in the share swap.

"A proposal by BP's nominated directors which would have allowed TNK-BP to hold initial discussions with Rosneft about pursuing the Arctic opportunity, was rejected by (AAR)," BP said in a statement.

TNK-BP management responded that BP's comments were "misleading and inaccurate", adding that the BP proposal had ruled out involving TNK-BP in the share swap.

Analysts note that, while the letter of the shareholder agreement forces BP to engage in at least a formal dialogue with TNK-BP management over the Rosneft deal, the power relations in Russia are likely to trump the UK court system.

This was a view supported by Sechin, Reuters reported.

"The issues of mineral resources usage fall into the Russian government's remit. This is not a matter for the London courts," he told Interfax news agency.

TNK-BP's board comprises four BP nominees, four from the AAR consortium and three independents -- Germany's former Chancellor Gerhard Schroeder, Russian industry lobby head Alexander Shokhin and former Corus chief executive James Leng.

The BP nominees rejected TNK-BP's management offer to fully replace BP in the deal with Rosneft, while saying TNK-BP can only start talks on the possibility of joining the Arctic deal.

TNK-BP, which accounts for around 10% of BP's profit, said the AAR-nominated directors and three independent directors voted in favor of management's proposal.

Saturday's meeting ended in stalemate as unanimous agreement was required for either motion to be approved.

Published: 14 March 2011 00:27 GMT  | Last updated: 14 March 2011 00:28 GMT

BP’s Dispute Over a Joint Venture in Russia Intensifies

By BLOOMBERG NEWS

Published: March 14, 2011

The joint venture, TNK-BP, said on Sunday that BP’s deal to set up a strategic alliance with Rosneft, largest oil producer, “would inevitably lead to conflicts of interest and new tensions between the shareholders.”

A group of Russian billionaires who own shares of TNK-BP had proposed to replace BP in the planned partnership with Rosneft, an arrangement that was rejected on Saturday at a meeting in Paris by all of BP’s directors on the TNK-BP board.

In January, BP agreed to swap $7.8 billion in shares as part of a broader alliance with Rosneft, a deal that was given the blessing of Prime Minister Vladimir V. Putin’s Russian government. The Russian group of billionaires, BP’s partners in TNK-BP, opposed the plan and won an injunction to stop the transaction.

The two groups of shareholders had a dispute in 2008, which led to Robert Dudley’s resignation from the top post at TNK-BP, Russia’s third largest oil producer. Mr. Dudley is now BP’s chief executive.

“BP is unwilling to issue BP shares to TNK-BP for cash and has genuine concerns about the finance, strategy and technical risks for TNK-BP in pursuing the BP-Rosneft opportunity,” a BP spokesman, Toby Odone, said in an e-mail. “BP has long been a partner with Rosneft for offshore exploration, off Sakhalin for example.”

BP proposed to allow TNK-BP to start talks with Rosneft about the Arctic exploration, while reserving the right to carry out a share swap with Rosneft. AAR, the entity that represents the billionaires, rejected the offer on Saturday, BP said in a separate e-mailed statement.

BP’s statement was “misleading” and “the share swap would reduce TNK-BP’s negotiating leverage with Rosneft,” allowing “an alliance between BP and one of TNK-BP’s main competitors,” TNK-BP said in its statement.

№ 2 (February 2011)

Cooperation Between Russia and China in the Energy Sector Interests, Problems and Prospects

   Unlike the U.S.-China axis, where the two sides compete for global energy resources, on the industrial and food markets, and in the future may become rivals on the financial services market, links between the Russian and the Chinese economies structurally complement each other; besides this, huge deposits of Russia’s primary resources are geographically close to the Chinese border.

By Andrei Korzhubaev

Options for Cooperation

   China uses its significant investment reserves to acquire primary resources globally, wherever possible. This strategy targets several issues: access to real assets that will grow in price, unlike the financial assets; ensuring energy security of the own economy; and creating an opportunity to establish a foothold in the host country for studying the political and economic environment.

   Today’s Russian oil and gas business encompasses all four options presented. Which of these will dominate in the development of large-scale energy cooperation with China will depend on the state’s industrial and regional strategy and governmental and business position on the issues of international trade and foreign investment.

   Russia ranks first in the world in oil and gas production. The bulk of its volume is delivered to international markets. In 2010, oil and gas production reached almost 1.1 billion TOE (in terms of oil by energy value), including 505 million tons of oil and 650 billion cubic meters of gas; oil and oil products export topped 370 million tons, gas export – 185 billion cubic meters (Fig. 1-2).

   West Siberia is currently the key hydrocarbons (HC) production area, producing some 70 percent of Russian oil and over 90 percent of the country’s gas. In the future, East Siberia and the Far East will become new major centers for oil and gas industry.

   Russia’s interests, based on its ongoing geopolitical and economic goals, regional developments in the global economy, trends in the international energy supply system, include:

   The Chinese economy is the world’s second largest (after the U.S.) in terms of aggregate GDP and is one of the fastest-growing major economies in the world. China is also the second largest global consumer of energy resources (in 2010 – over 2.3 billion TOE pa). Continued rapid economic advance, growing population, improved living standards, modernization of industry, agriculture and transport require further growth of energy consumption levels. Over the past ten years, oil consumption growth in mainland China is comparable with the growth elsewhere, but the country’s oil consumption continued to grow rapidly even in 2008–2010, against the backdrop of a global recession and then stagnation.

   Development of the China’s economy copies industrial model of Europe and North America with a lag of 25-35 years (depending on the segment). The country continues large-scale introduction of existing industrial, energy, transport technologies with service life of at least 20-30 years. High persistence of technological systems means that in the coming decades China will further boost its energy consumption levels.

   In order to continue economic growth, China is forced to use all opportunities of energy supply: the country is implementing the nuclear power plants program, developing wind, solar and bioenergy segments. Still, in modern economic and technological conditions, only the traditional sources – oil, gas and coal – have the actual capacity to meet the growing energy needs of the country.

   In 2009, China produced some 3.1 billion tons of coal, with forecasted short-term growth rise to over 3.5 billion tons – which is the ceiling for this energy carrier, both resource- and technology-wise (current proven reserves will last for just over 40 years, compared to global average of about 150  years). Also, China is facing increasingly serious constraints on its growing anthropogenic pressures on the environment, which is largely linked to the expansion of coal production and use. Over 80 percent of all freight traffic in China is coal. This forces the leadership of China to encourage the development of oil and gas industry, organizing supply routes from various regions of the world.

   Changes in the energy supply technologies, further motorization of economy and population, transformation of energy balance structure would propel the demand for oil and gas skywards.

   In 2020 China would consume 560-600 million tons of oil, importing 380-420 million tons. In these conditions, oil exports from Russia, particularly pipeline export to the western and northeastern China will face no serious competition from other suppliers.

   In 2020 gas demand in China will reach 300-350 billion cubic meters. Burma deliveries will not exceed 10 billion cubic meters per year, shipments from Central Asia – 30-35 billion cubic meters per year. Considering the possibility of boosting domestic gas production to 115 billion cubic meters per year and the plans for developing LNG infrastructure to 80 billion cubic meters; starting 2020, the Chinese market will be able to accommodate 60 billion cubic meters per year of Russian gas, with a tendency to a further rapid increase. Starting 2018, the largest APR gas supplier – Indonesia and after 2025 – Malaysia will leave the market, becoming net importers of gas; this will open new opportunities for Russia on the China’s market.

   In recent years, Russia has been exporting to China just over 20 million tons of oil and oil products, mainly by railway through Manchuria, as well as via Kazakhstan and own Far Eastern ports. Oil flow via the new Skovorodino – Daqing pipeline started in December 2010.

   Implementation of intergovernmental agreement (signed in April 2009) will allow Russia to boost its share in oil export to China in 2011 to 15-16 percent (35-40 million tons). Further consolidation of Russian presence on the Chinese market requires boosting Skovorodino-Daqing pipeline capacity to 30 million tons per year, expanding shipments from the Khabarovsk, Primorye and Sakhalin seaports, increasing transit flow through Kazakhstan to Xinjiang using Omsk – Atasu – Alashankou pipeline. Total export of Russia’s oil and oil products to China may reach 70-80 million tons by 2020.

   In the gas segment, Russia would be advised to set up shipments of standard gas and LNG, as well as gas supplies with the participation of Russian companies (primarily Gazprom) from other regions of the world. Being a global energy company, Gazprom has an opportunity to enter the swap projects on LNG supply to China (now being organized by international and multinational companies from various regions of the globe), exchanging such entry for access to production projects in Western and Eastern Siberia. Creating gas and LNG transportation infrastructure will allow Russia to dominate the Chinese gas market supplying 80-100 billion cubic meters per year starting 2020–2025.

   The Altai gas pipeline is the nearest workable option for organizing large-scale gas exports from Russia to China. This trunk gas pipeline route was initially proposed in 1998 by Alexei Kontorovich, member of the Academy of Sciences, in a RAS study commissioned by Gazprom, as an alternative to the difficult northern route offered by the company’s top management at the time (SRTO – Podkamennaya Tunguska – Far East – China).

   The construction of another trunk gas pipeline within the transport corridor Yamal-Nenets Autonomy (PS Purpeyskaya) – Surgut – Kuzbass – Altai – China is also in the cards. To implement shipments from West Siberia, Russia is planning a new pipeline system in the existing transport corridor, with a subsequent extension to China via the Canas mountain crossing and the Ukok plateau which will link to the existing trans-China pipelines West – East, West – East-2 and West – South.

   Pipeline gas shipments to the Xinjiang-Uygur Autonomous District could begin as early as 2015–2016. The length of the pipeline to China’s border is about 2,670 km, and the pipeline has a diameter of 1,420 millimeters. The projected annual export is at least 30 billion cubic meters of natural gas.

   Gazprom and CNPC are already closing in on a mutually acceptable price for gas shipments. Currently state-regulated prices for natural gas in the Shanghai area are close to $230 per 1,000 cubic meters, which is higher than the price paid for Russian gas by some CIS countries. Yet growing competition from LNG, including on the traditional markets, is putting extra pressure on Gazprom. The growing flexibility of the Chinese is due to the steady rise in domestic prices (in contrast to the global trend), on the background of high economic growth, yuan revaluation and exacerbation of environmental and energy problems.

   CNPC participation in financing the Altai pipeline project on Russian territory is also  reccommended. This might be followed by the establishment of a joint venture for geological and geophysical work and gas production in the Yamal-Nenets Autonomous District. Both solutions will provide acceptable for Gazprom and CNPC price formula, also attracting Chinese investment in long-term capital-intensive projects and opening a huge new terrain for Russian gas exports.

http://www.rigzone.com/news/article.asp?a_id=105036

Friday, March 11, 2011

KazMunaiGas has reached an agreement with Exploration Venture Limited (EVL) to acquire 50% of Ural Group Limited (UGL), which owns the exploration license for the block Fedorovskiy through 100% stake in LLP "Ural Oil and Gas" (UOG). The block is located in Western Kazakhstan near Uralsk city in close proximity to a number of large producing fields.

KMG EP will pay US $149.1MM for the 50% stake in UGL, including US $61.3MM for shares and US $87.8MM of shareholder loans (as of January 1, 2010) to be repaid to KMG EP after commercial production starts. The final price of shareholder loans is subject to adjustment due EVL's work program financing obligations until the deal close. The deal will be financed with the KMG EP's own funds.

UOG operates under a Subsoil Exploration Contract that expires in May 2014 with the right to extend the contract for production of hydrocarbons. In 2008 Rozhkovskoye oil and gas field was discovered at the Fedorovskiy block. Currently UOG is in the process of evaluating the hydrocarbons deposit. According to the estimates approved by the RK State Commission, the block's total recoverable gas and condensate reserves of category C1+C2 are 203.4 million barrels of oil equivalent. Gazprom's Orenburg-Western Europe gas pipeline lies through the territory of Fedorovskiy block and the main export oil pipeline Atyrau-Samara lies within close proximity of the block as well as the Karachaganak-Atyrau oil pipeline which provides access to world markets via Caspian Pipeline Consortium.

Kenzhebek Ibrashev, the CEO of KMG EP, said, "We assess the Fedorovskiy block as a very promising and attractive asset. Acquisition of a stake in the block gives us access to a new region, where we intend to develop actively. This transaction is a good addition to our portfolio of exploration assets. This is another step in implementation of KMG EP's strategy which puts a strong emphasis on organic growth through exploration."

The acquisition was approved by the KMG EP Board of Directors and the seller's Board of Directors and is subject to regulatory approvals. Some of the necessary approvals are already obtained. The deal will be closed upon receiving the remaining approvals.