TNK-BP COO SAYS COMPANY'S FUTURE IS BRIGHT; MODERNIZING RUSSIA'S OIL SECTOR WILL TAKE TIME

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DE RUEHMO #2353/01 2571352
ZNY CCCCC ZZH
P 141352Z SEP 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 4794
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002353 
 
SIPDIS 
 
DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN, 
S/EEE MORNINGSTAR 
DOE FOR HEGBURG, EKIMOFF 
DOC FOR JBROUGHER 
NSC FOR MMCFAUL, JELLISON 
 
E.O. 12958: DECL: 09/14/2019 
TAGS: EPET, ENRG, ECON, PREL, RS 
SUBJECT: TNK-BP COO SAYS COMPANY'S FUTURE IS BRIGHT; 
MODERNIZING RUSSIA'S OIL SECTOR WILL TAKE TIME 
 
Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d) 
 
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Summary 
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AAR partners will give up equity in the company anytime soon,

as had previously been expected.



4. (SBU) Summers said he was concerned, however, that at some

point BP's role in TNK-BP will be questioned by the political

leadership because BP has "put in $8 billion" into the

company and has "already taken out $12 billion." He

explained that since BP reinvests its dividends largely in

projects outside of Russia, he expects the company to receive

more political scrutiny.



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OPERATIONS

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5. (SBU) Summers told us TNK-BP will spend about $7 billion

in the coming years moving from exploration to production in

major fields in the Yamal region. According to Summers, the

company's Ruskoe field should yield "at least" 1 billion

barrels of oil, even if TNK-BP exploits it very

inefficiently. He said the Yamal fields should tie into

Rosneft's pipeline infrastructure for its Vankor field, but

that given the difficulties of negotiating these arrangements

in Russia, it is entirely possible that TNK-BP would have "to

waste $2 billion" building its own pipeline to move oil out.

TNK-BP is also planning to invest $1.5 billion over the next

five years in refining, an area in which Schrader has spent

much of his career. In all, Summers said, TNK-BP is likely

to invest up to $3-4 billion per year over the next ten

years. Expat experts who had left the company during the

dispute between the shareholders are returning, but Summers

believed the company could use another 50 such employees.



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INEFFICIENCIES ABOUND

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6. (SBU) Summers was less sanguine about the oil and gas



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sector as a whole. He indicated that built-in inefficiencies

and government influence hamper the rational development of

the, many parts of which are facing tough times. Summers

said he believes both Gazprom and Lukoil have put many

employees on unpaid leave. He said Gazprom will continue to

face pressure from increased and cheaper global LNG supplies

-- "If you're a European buyer, the last molecule of gas you

will want is from Gazprom." He noted that due to the

recession, subcontractors were having difficulty maintaining

quality and delivering services on time.



7. (SBU) The inefficiencies in the system "are so huge,"

according to Summers, that it would take a very long time to

modernize the Russian oil and gas sector. For example,

Summers pointed out that a well that would take 10 days to

drill in Canada would take 20 days to drill in Russia. He

said moving a drilling rig from one site to another, a

process that might take 7 or 8 hours in Canada, takes 28 DAYS

in Russia -- "multiply that by hundreds or thousands and you

can start to imagine the costs to the economy."



8. (SBU) One way to get around the operational inefficiencies

would be to have American oil-field service companies license

and manufacture their products in Russia. According to

Summers, that would make life politically easier for

companies like TNK-BP and it would improve the efficiency of

Russian industry. However, he lamented, Russia continues to

be seen as too risky by many service companies, which have

concerns about intellectual property protection of licensed

products and are scared off by the negative headlines about

Russia. He explained that many of these companies are not

large enough to absorb the potential losses from a major

investment gone bad. Furthermore, he added there were

simply better opportunities for these companies elsewhere

over the past few years during the oil price boom.



9. (SBU) In discussing the various difficulties facing the

sector, Summers complained about the perennial problem of a

lack of adequate access to Gazprom's pipelines. He said that

while Gazprom plans to invest tens of billions in new

production, TNK-BP and other oil companies have large amounts

of gas available that they cannot sell. The gas cannot even

be booked as a part of these companies' reserves until it has

access to a market, he said. Summers suggested that such an

inefficient situation is simply not sustainable and that

common sense should ultimately prevail to force change.



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CRISIS HAS NOT SOBERED GOR

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10. (C) That transition, however, doesn't seem imminent.

Responding to the Ambassador's inquiry about the GOR's

posture toward foreign investment in the wake of the economic

crisis, Summers said he has seen "no evidence" of a change.

He said oil company Slavneft (on whose board Summers sits),

had been ordered to cancel an order for foreign equipment in

favor of a domestic supplier, even though the foreign

equipment was clearly superior. He said that Deputy Prime

Minister Igor Sechin (who is in charge of the energy sector)

told Summers directly that he should be using Russian gas

turbines instead of the preferable GE models TNK-BP was

buying. Summers also expressed some concern about TNK-BP's

involuntary involvement in a Russian oil company consortium

in Venezuela, but deemed it would "not be terminal."



11. (SBU) Summers said he believed "the moment had passed"

for reform. He explained that the financial and economic

pressures favoring reform lasted for too short a period --

"it would have been better from a long-term perspective to

have had several quarters of losses in row." Given economic

stabilization and a rebound in oil prices, reform will now

wait.



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COMMENT

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12. (SBU) Summers appears to be leaving behind a company in

good shape, but in an industry that badly needs the



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modernizing influence of western companies and executives.

Unfortunately, as Summers pointed out, the GOR, despite

welcome words by some of its leaders, has not taken actions

to attract more of this influence. End comment.

Beyrle