GAZPROM TO BUY OUT TNK-BP IN KOVYKTA; COMPANIES TO

C O N F I D E N T I A L MOSCOW 003054 SIPDIS SIPDIS DEPT FOR EUR/RUS GREENSTEIN DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK DOE FOR HARBERT/HEGBURG/EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR KLECHESKI AND MCKIBBON E.O. 12958: DECL: 06/22/2027 TAGS: EPET ENRG ECON EINV PREL RS SUBJECT: GAZPROM TO BUY OUT TNK-BP IN KOVYKTA; COMPANIES TO WORK TOGETHER IN FUTURE REF: MOSCOW 2975 Classified By: Acting Econ M/C Laura Lochman. Reasons 1.4 (b/d). ¶1. (SBU) TNK-BP and Gazprom announced a deal today on the disposition of the Kovykta gas field in eastern Siberia. Under the agreement, TNK-BP will sell the entirety of its 62.9 percent share to Gazprom for between $700 and $900 million, with the understanding that it may reenter the field as a minority blocking partner (25 percent plus one share) in the future, at an independently audited market price. As part of the deal, BP, TNK-BP, and Gazprom will start negotiations on forming a joint venture to pursue Russian and global energy projects. ¶2. (SBU) TNK-BP sources tell us that the price tag is "fair." Investment analysts have noted for some time that no Kovykta reserves were ever booked by TNK-BP or BP and so the net effect on the companies and share prices should be neutral, or even positive given the cash inflow and the elimination of a problem case for them. AlfaBank analyst Chris Weafer told us on June 19 that the investment community was watching the case closely and would probably view a fair price tag, a reasonable structure for a retained role for TNK-BP, and a deal roping Gazprom into global operating norms as a positive development. Furthermore, given that Ronedra, the GOR's subsoil licensing agency was planning to revoke the license for Kovykta, TNK-BP may have very well ended up with a non-performing field on its hands and the prospect of future "violations" of regulations or laws. Currently the expectation is that this agreement obviates a negative decision on the part of Rosnedra regarding the license, although no such decision had been made public at the time of the announcement of the deal. Comment -------------- ¶3. (C) TNK-BP points out that this is potentially the beginning of a meaningful engagement with Gazprom globally. The resolution of the Kovykta stand-off unlocks a major new source of natural gas for world markets (East Siberia) given its position as anchor for the GOR's recently approved $100 billion plan to develop the gas resources of the region. The media seem to have accepted the focus of the deal's press release on the benefits of future cooperation between Gazprom, TNK-BP, and BP. We would echo investment analysts' observation that the scale of exploration and development upon which Russia is about to embark in the east should offer enormous opportunities for U.S. firms that understand the limits of what they can get here. BURNS