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. Last Updated: 07/27/2016

BP Confirms Gas Talks With Sidanko

British Petroleum executives confirmed Monday that the company is in talks with a consortium led by Russian oil company Sidanko to develop a massive natural gas field near Irkutsk, a partnership analysts said could lead to a broader alliance between BP and Sidanko.


Reports of a pending partnership between a Western oil major and Sidanko, Russia's sixth largest oil company by production, have been heating up in recent weeks, with some analysts speculating that the Western partner will secure a stake in Sidanko.


A spokesman for Russia's Uneximbank, which owns a controlling stake in Sidanko, said the company is in talks "with one big foreign company" that could bring "serious finances to the realization of big projects."


The spokesman would not comment on whether BP is a likely candidate, but did deny earlier press reports that the potential strategic partner is Shell.


British Petroleum executives attending a ribbon-cutting ceremony at a new BP gas station in Moscow confirmed that the company is considering participating in the development of the Kovykta gas deposit near Irkutsk.


Production of the deposit, due to begin in 2000, would send gas to promising Asian markets through one of the first Russian pipelines to enter China.


"We've made a couple of trips out there [to Irkutsk]," said Gess Laving, associate president of BP Oil in Russia. "We're still interested."


A Moscow oil analyst and former Sidanko executive familiar with the talks said BP sent a team of 20 executives to Irkutsk last week and expressed "very, very serious intentions" to join the Kovykta project.


"I think it's more than an acquaintance," said Mikhail Surtsukov, a senior oil and gas analyst with United Financial Group who served as the head of Sidanko's securities department until April.


The Kovykta deal would mark BP's first major production project in Russia. Although the company has stakes in two Caspian oil projects, its Russian business has been largely focused on gas retailing and sales of motor oil through a European alliance with U.S. oil major Mobil.


The Kovykta field contains an estimated 870 billion cubic meters of gas. The pipeline is expected to ship about 30 billion cubic meters a year.


The extent of BP's potential relationship with Sidanko beyond the possible Kovykta deal is unclear. One of BP's top officials in Europe said Monday an alliance with Sidanko is "a possibility."


"Sidanko are clearly one of the companies we have thought about and looked at, but at the moment, we have no firm plans," said Peter Backhouse, director of BP Oil Europe. "We are looking at a number of opportunities in Russia for exploration and production."


Uneximbank clearly would benefit from the expertise a Western investor would bring to Sidanko.


"If you are a bank like Uneximbank and you buy an oil company, what can you do with it?" said one Moscow oil analyst. "You can try to run it sufficiently and make some money, but that requires some expertise."


The license to mine the Kovykta field belongs to an Irkutsk-based consortium called RUSIA Petroleum Co.. Sidanko owns 38 percent of the project; a subsidiary of South Korea's Hanbo Group, called East Asia Gas Co., owns 28 percent; and the Irkutsk regional administration and utility Irkutskenergo own 19 and 14 percent, respectively.


Hanbo is one of numerous South Korean conglomerates to be rocked recently by serious financial troubles.


Surtsukov estimated the cost of the project to be $8 billion to $10 billion, the bulk of which will go to construct a pipeline from the Lake Baikal region to Beijing and possibly on to Korea and Japan. Officials at RUSIA Petroleum could not be reached for comment.


The Kovykta project is seen as a promising step toward an inevitable link between Russia's vast oil and gas resources and Asia's growing energy needs. Prime Minister Viktor Chernomyrdin and Chinese officials signed an accord in June paving the way for construction of the pipeline.


"Certainly China is a very energy-hungry country," said Julian Lee, senior energy analyst with the Center for Global Energy Studies in London. "And China is a closer market for Siberia than Europe is, and also a less competitive one."


Joining the consortium would not mark BP's first involvement with the Kovykta field. In the early 1990s, BP and Norway's Statoil eyed the field for potential production. They determined, however, that Russia's investment conditions were unstable and doubted China's ability to pay for the gas, Surtsukov said.