Rosneft Asks BP to Pick Up Sakhalin Development Costs

Rosneft has asked partner BP to cover the development costs at the jointly-held Sakhalin 5 oil and natural gas prospect off Russia's Far East coast, a source familiar with the situation said Tuesday.

It isn't clear how much BP could be asked to spend as the offshore field remains at this stage only a prospect. The first exploration well due to be drilled this year.

A consortium led by BP rival Royal Dutch/Shell Group approved a $10 billion budget last year to develop the Sakhalin 2 gas and condensate project, which one analyst said amounts to $2.50-$3 per barrel of oil equivalent.

BP and the Russian state-owned oil company are currently in talks to determine the final form of a commercial arrangement for the exploration and possible development of Sakhalin 5.

"Rosneft is saying 'if we do exploration this year and it's successful, then we would like (BP) to offer to carry our costs,'" the source said. In such an arrangement, BP would probably recoup these costs, plus interest, once production begins.

BP and Rosneft respectively hold 49% and 51% of the prospect's license, under the terms of a 1998 arrangement, which is due to expire at the end of this year.

"We are in discussions on commercial arrangements for future exploration, and development, if the exploration is successful," a spokesman for BP said. He declined to comment on the substance of the talks or say when discussions might wrap up.

The discovery of oil and/or gas at Sakhalin 5 could lead to substantial new Russian investments for BP, which last year sealed a nearly $8 billion investment to create the TNK-BP joint venture.

The BP spokesman declined to comment on talks with Rosneft regarding the future incorporation of the Sakhalin assets into the TNK-BP joint venture.

BP paid TNK's backers an additional $200 million in cash at the sealing of the TNK-BP deal to compensate for not including the Sakhalin holdings into the new company.