BP VP TELLS AMBASSADOR COMPANY IS IN RUSSIA FOR LONG-TERM, GETTING OUT OF CPC

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003394



SIPDIS



DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT

EUR/CARC, SCA (GALLAGHER, SUMAR)

DOE FOR HEGBURG, EKIMOFF



E.O. 12958: DECL: 11/18/2018

TAGS: EPET, ENRG, ECON, PREL, RS

SUBJECT: BP VP TELLS AMBASSADOR COMPANY IS IN RUSSIA FOR

LONG-TERM, GETTING OUT OF CPC



REF: A. MOSCOW 3297

B. MOSCOW 2855

C. ASTANA 2144



Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)



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SUMMARY

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1. (C) At a November 20 meeting, BP's new Group VP for Russia

and Kazakhstan, David Peattie, told the Ambassador that BP is

in Russia for the long-term. The troubled partnership in

TNK-BP (ref A) is only a part of their involvement and he

said BP would not be surprised to see the company split up

and taken over by Gazprom and Rosneft within 2 years. BP is

actively pursuing options with both companies for the future.

In the interval, Peattie confirmed that BP has agreed to

Denis Morozov, formerly with Norilsk Nickel, as the new CEO

and said he expects Morozov may prove more independent than

the AAR partners will like. He predicted Russian oil

production will drop by between three and five percent as

companies contract capital spending in light of oil prices

and credit constraints. With regard to CPC (refs B and C),

Peattie said BP is holding up the expansion as a negotiating

tactic but plans to exit CPC (and Kazakhstan) by selling its

stake in two parts to KazMunaiGaz (KMG) and Lukoil. End

summary.



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TNK-BP AND BP'S FUTURE IN RUSSIA

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2. (C) Peattie told the Ambassador that BP plans to be in

Russia "for the next 50 years" and is thinking of the

long-run in terms of its investments. He said TNK-BP is a

large and important part of BP's presence but might not be

the main vehicle for BP going forward. In that regard, he

noted that BP had invested $8 billion in TNK-BP but had

already realized $9 billion in profits. Instead, he cited

BP's growing ties with Rosneft, in which it has a one percent

stake, as the potential long-term foundation of BP's

involvement in Russia. Peattie said to that end, BP was

increasing its direct presence in Russia.



3. (C) Peattie said TNK-BP would still be important to BP in

the near term and he thought that for the next 18 months or

so, BP's interests would align with those of AAR, its

partners in TNK-BP. "We both want to see dividends and a

more efficient company," he said. He believes AAR, despite

its short-term thinking, will be cooperative because the AAR

partners are "desperate for cash." Peattie said BP had erred

in not developing better ties with AAR and the Russian

Government, and its new Russia team would make that a

priority.



4. (C) Peattie confirmed that BP has agreed to the choice of

Denis Morozov, the former head of Norilsk Nickel, as the new

CEO of TNK-BP, saying BP was "content" with the choice. He

explained that BP is "not naive" about Morozov, but thinks

that he may prove more independent than the AAR partners

believe. For one thing, AAR would not be able "to buy"

Morozov, as he is already worth an estimated $500 million.

In addition, Peattie noted that Morozov has ties of his own

to the Kremlin. Finally, he said BP is also counting on a

dozen new boards of TNK-BP subsidiaries to prevent further

damage to company operations from decisions of the board of

the parent company.



5. (C) Peattie said that over the medium-term, in two to

three years, BP expects TNK-BP will be taken over by the

Russian Government and split into separate oil and gas

components that Rosneft and Gazprom will control

respectively. BP expects to continue to play a role in

developing the underlying assets and is in continuous

negotiations with both Russian companies on long-term

partnerships.



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OIL PRICES

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6. (C) Peattie said that even at today's lower oil prices,

TNK-BP is "making money," though not on current exports, due



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to fluctuating export taxes. He predicted that Russian oil

production would decline between 3 and 5 percent in 2009,

given the disincentives for upstream production, falling

prices, and the credit crunch. He said BP foresees about a

year and a half of relatively weak oil prices -- in the range

of $50 to $70 per barrel -- followed by a return to $90-$100

per barrel oil as the world economy strengthens and the

underlying supply and demand patterns reemerge. He explained

that prices are likely to stabilize at $90 because that is

the marginal cost of producing Canadian "heavy oil" or oil

sands, which would alleviate supply constraints.



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CPC

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7. (C) On pending expansion of the Caspian Pipeline

Consortium (CPC) pipeline, in which BP is a partner, Peattie

said BP is withholding its approval of the most recent

expansion agreement (refs B and C) as a "negotiating tactic"

in its talks to sell out its share to KMG and Lukoil. He

explained that BP plans to be out of CPC and the sale to KMG

of the share BP inherited from Amoco is almost complete. BP

is trying to sell the share it inherited from Arco to Lukoil.

Once complete, according to Peattie, BP will be out of

Kazakhstan altogether, and will focus on its investments in

Russia and the BTC oil pipeline (from Azerbaijan to Turkey).

BP is also interested in Turkmen gas, but that is a longer

term prospect.

BEYRLE