Page 2 of 2 The Third way to win
big - or
lose By John Helmer in Moscow
with their crimes. The Bandar Bang
was enough for ex-president Boris Yeltsin and his
family. The Russian Third is enough to pay for the
transition.
Not to understand all this
disqualifies a serious person from conducting
business in Russia. Putin has been doing his best
to educate those willing to learn. Last year, he
taught Royal Dutch Shell, Mitsui, Mitsubishi and
the Japanese government that the Bandar Bang
payments they had made, a decade ago, for their
concession to produce gas in
the Sakhalin-2 field, in the Russian Far East,
weren't a one-time transaction for profit-taking
in perpetuity. They resisted at first, telling the
world's media that their budget overruns,
environmental losses and tax savings were legal,
because Yeltsin and his gang had signed their
agreement, and been paid for it. In time, they
understood that resistance risked the loss of
their entire stake. They therefore sold part down,
to preserve the profitability of what was left.
Shell's chief executive officer, Jeroen
van der Veer, was still not sure what lessons he
had learned, so early this week, at a closed
session of the economic summit in St Petersburg,
he asked Putin to tell him again. Putin replied:
"The rules of the game are very simple - honesty."
It is surprising that the management of
British Petroleum, and the Russian shareholders of
their highly lucrative production venture, TNK-BP,
failed to realize that the lesson of Shell at
Sakhalin would apply to them. However, just weeks
after Gazprom acquired the control stake of
Sakhalin-2, BP was prompting The Daily Telegraph
to defend its Kovykta gas field development
license from "Putin's land grab", and outgoing
Prime Minister Tony Blair warned British investors
in Russia that their positions weren't secure.
Kovykta, in the southeastern Siberian
region of Irkutsk, has proven reserves of almost 2
trillion cubic meters, a volume so sizable that
Putin has described it as equal to the entire gas
stocks of Canada. But the reserves weren't always
so large. The license for the Kovykta deposit was
first issued in 1993, when reserves were about 600
billion cubic meters. Rusia Petroleum was the
entity that acquired the license. At the time it
was controlled almost equally by BP Amoco (31%
stake) and Interros, the holding of Vladimir
Potanin (26%). The Tyumen Oil Co (TNK) controlled
by Mikhail Fridman, Victor Vekselberg and Len
Blavatnik bought 6% in 2000, and a shareholder
fight ensued, with each accusing the other of
stealing. Those allegations were largely true, and
have come back to haunt the successor company,
TNK-BP, as well as BP and Potanin. The current
shareholding in Rusia Petroleum is 63% for TNK-BP,
26% for Interros, and 11% for the Irkutsk regional
government.
If BP's charges against the
Russian stakeholders were to be believed, when BP
was lobbying in Washington against US government
credit guarantees for TNK, it is hardly surprising
that Rusia Petroleum has broken a few Russian laws
as well. But when Oleg Mitvol, enforcer of
licensing regulations for Rosprirodnadzor,
recently announced that Rusia Petroleum's license
for Kovykta might be revoked, and then re-awarded,
BP pressed the London lobbying button to cry foul.
No one can deny, however, that the
stakeholders have been very reluctant to invest
the money required to bring Kovykta up to the
license requirement of 9 billion cubic meters of
gas in 2006. Output was a paltry 34 million cubic
meters instead. Mitvol spokesman Anna Hitrova told
Asia Times Online: "We have not issued any press
releases on Kovykta in recent time. Also, nothing
is available on the list of violations [by Rusia
Petroleum] from our agency. I can comment on only
one, which is obvious and well known -
non-fulfillment of production level to the
targeted numbers."
The reality for the
stakeholders is that they can hardly be expected
to invest in the required output level until they
are sure they can pipe the gas to China for export
sale. They cannot do that, however, because
Gazprom holds the export rights for gas in Russia.
Thus BP, Fridman, Vekselberg and Potanin have all
understood that the price they paid for the
concession in 1993 is not a binding one. Kovykta,
like all the other assets they lifted from the
Yeltsin state, is a Putin franchise. The
difference is that unless they accept the
franchisor's terms, he will take it back. The
stakeholders have spent about $500 million, and as
a result, the franchise is now double its previous
value. Are they plain lucky? Should they share?
Putin has made it clear that he isn't
going to revoke the license. That would delay
investment and production even longer. But he is
insisting that Gazprom receive a stake in the
project. The resistance to that suggested for a
time that Kovykta might become Gazprom's entirely,
and that TNK-BP and Interros would be ousted. That
isn't in Gazprom's interest, because it would be
obliged to come up with the financing to meet the
same production and pipeline requirements.
And so the Kovykta negotiations have been
about the Russian Third - how much TMK-BP and
Interros should give up, how much Gazprom should
acquire, and what investment obligations the
existing and new shareholders will accept.
This is regular business in Russia. The
only people who think it should be otherwise are
those who think - like BAE and Bandar - that those
who have been hugely disadvantaged by an asset
deal almost 15 years ago should continue accepting
the disadvantage forever. One thing no one seems
to dispute: if you are foolish enough to think the
Bandar Bang can last forever, you are stupid
enough to deserve losing the lot.
John Helmer is the
longest-serving foreign correspondent in Russia.
(Copyright 2007 Asia Times Online Ltd.
All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
