Financial Woes Hinder Gazprom, TNK-BP Gas Field Deal

Kovykta Field and Pipeline
(Click to Enlarge)

LONDON (Dow Jones Newswires), November 21, 2008

OAO Gazprom's plan to buy TNK-BP Holdings' controlling stake in a strategically important Russian gas field called Kovykta is being hindered by the financial crisis as the Russian giant is struggling to come up with the necessary cash up front, people familiar with the situation told Dow Jones Newswires Friday.

However, a person close to TNK-BP said it still expects to sign the deal, which is valued at $800 million.

"They are not ready to pay that amount upfront. Considering the difficulty to raise money on the market and the drop in gas prices, the time is not right to finalize the deal," a person familiar with Gazprom said.

Gazprom has reached an agreement in principle to buy TNK-BP's 63% stake in Rusia Petroleum, which holds the Kovykta license, but a final accord has been held up by a disagreement over payment, said another person familiar with the matter.

"All the documents are sent to Gazprom, but Gazprom uses all the excuses not to sign them. The price and capex are no longer the issue. The issue is payment, as Gazprom want to pay as late as possible in as many tranches as possible, while TNK-BP obviously want it all now," said the person.

Gazprom and TNK-BP declined to comment. But the person close to TNK-BP said the chief negotiator in the deal on behalf of TNK-BP, Victor Vekselberg, "has indicated to the company and to shareholders that the finalization of the deal is very close."

Another person said Kovykta is no longer Gazprom's priority and in today's capital-constrained world it will have to change its spending plans and focus on developments that serve its core European export market like the Yamal Peninsula or Shtokman gas fields. Both developments are expected to cost billions of dollars and continue well into the next decade.

Kovykta, which contains gas reserves equivalent to five billion barrels of oil, is in a remote part of Russia's far east. It could be well placed to supply gas to China, but no export infrastructure exists and Gazprom has so far been unable to reach an agreement with China on the terms of any gas supply deal. Gazprom has an official monopoly on gas exports from Russia, so would have to be involved in Kovykta exports.

TNK-BP originally agreed in June 2007 to sell Kovykta to Gazprom, but the agreement lapsed last summer amid a bitter dispute between BP and its Russian partners in TNK-BP over strategy and corporate governance. That conflict was resolved in September after the two sides agreed to the departure of TNK-BP's Chief Executive Robert Dudley and changes to the board.

Russia's Natural Resources Ministry has previously threatened to not renew Rusia Petroleum's license for Kovykta, accusing it of failing to meet gas production targets. The final decision over whether to revoke the license has yet to be made.

A second part of last year's Kovykta deal, a $3 billion international alliance between BP and Gazprom that could have seen the Russian giant take stakes in liquefied natural gas production facilities on the Caribbean island of Trinidad has also been shelved.

Copyright (c) 2008 Dow Jones & Company, Inc.

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