KOVYKTA UPDATE: ENDGAME NEAR BUT DEAL LESS

C O N F I D E N T I A L MOSCOW 002975 SIPDIS SIPDIS DEPT FOR EUR/RUS DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK DOE FOR HARBERT/HEGBURG/EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR KLECHESKI E.O. 12958: DECL: 06/19/2027 TAGS: EPET ENRG ECON PREL PGOV RS SUBJECT: KOVYKTA UPDATE: ENDGAME NEAR BUT DEAL LESS FAVORABLE REF: A. MOSCOW 2601 ¶B. MOSCOW 2563 Classified By: Econ M/C Quanrud. Reasons 1.4 (b/d). ¶1. (C) TNK-BP Vice President for International Affairs Shawn McCormick (please protect) tells us that the deal being negotiated between TNK-BP partners and Gazprom regarding the Kovykta gas field (reftels) could be announced as early as June 20. The final details are not yet worked out, but according to the deal currently on the table TNK-BP would retain 25 percent plus one share (i.e., a blocking minority) and full operatorship might not fall to TNK-BP. As part of the deal, Gazprom will also reportedly gain a significant stake in BP assets elsewhere in the world. ¶2. (C) According to McCormick, the previous version of the deal, which would have given TNK-BP 49 percent of Kovykta and operatorship, fell apart over the weekend after being "90 percent done." Gazprom walked away from the table as talks had gotten down to the final details of price and valuation of other assets. When Gazprom later returned it laid down these new terms, which TNK-BP appear to be ready to accept, at least in part because BP CEO Tony Hayward is determined to get the Kovykta deal behind him and move on to his more global responsibilities. ¶3. (C) Comment. If true, and a Kovykta deal along the lines described here is announced as early as tomorrow, it is hard to predict how the investment community will react. At 25 plus one percent, TNK-BP would be settling for considerably less than the 49 percent break point the current "rules" of the energy game would dictate. At 25 percent, the price will be very important -- the market will no doubt expect a premium for that kind of sell-off. Much will also depend on how BP's Hayward decides to sell the deal to his shareholders and the public. At present, Kovykta is essentially a non-performing asset, sidelined for more than a decade over one controversy after another. Moving the field into the active column will no doubt provoke a sigh of relief from investors, as AlfaBank Chief Strategist Chris Weafer pointed out it at an Amcham energy event on June 19. They may, in the end, agree that 25 percent of something is better than 60 percent of nothing. BURNS