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