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. Last Updated: 07/27/2016

BP Chief Turns on the Charm

MTFinance Minister Alexei Kudrin talking to journalists on the sidelines of an investment conference on Monday.
BP's new chief, Tony Hayward, issued an impassioned appeal on Monday for Western markets to open up to Russian investment, backing a cause espoused by President Vladimir Putin as state officials issued a new threat to revoke the company's production license for its flagship Russia project.

"When Russian companies want to make foreign investments, they should be encouraged to do so on a level playing field," Hayward told an investment conference organized by Renaissance Capital.

Hayward's latest trip to Russia -- his third in as many weeks -- came as state environmental officials threatened to revoke a key production license for the company's Russia unit, TNK-BP, on Friday.

Natural Resources Minister Yury Trutnev said that his ministry's licensing agency would decide this week whether to withdraw TNK-BP's right to develop the giant Kovykta gas field in east Siberia.

"I do not think this issue will drag on for long. I think it will be over during this week," Trutnev said, RIA-Novosti reported. "It's a technical question. All the work has been done."

The ministry's licensing agency is due to meet June 22, ministry spokesman Rinat Gizatulin said.

TNK-BP stands accused of failing to fulfill production quotas at the field. The company, half owned by BP and half by a trio of Russian oligarchs, has been producing less than 1 billion cubic meters rather than the 9 bcm required by the license, feeding small local markets in the absence of an export pipeline to China.

Critics say the pressure on TNK-BP is part of a Kremlin-driven campaign to ensure that major oil and gas projects include a state-controlled partner.

Gazprom has said it is interested in buying out TNK-BP's Russian partners -- Mikhail Fridman, Viktor Vekselberg and Leonard Blavatnik -- when a clause allowing them to sell opens at the end of this year. The wrangling over Kovykta -- a massive, yet largely undeveloped field -- is seen as part of those negotiations.

Hayward said talks with Gazprom on entering the Kovykta project were "ongoing, detailed and robust."

He declined to provide details on what the deal with Gazprom could look like, but his repeated appeals for "reciprocity" prompted speculation that BP could offer the state-run gas giant equity in some of its international projects.

Gazprom spokesman Sergei Kupriyanov said there was "no change" in the status of negotiations. Both Kupriyanov and BP spokesman Vladimir Buyanov said Hayward did not meet anyone from Gazprom during his two-day trip to Moscow. And Hayward denied that BP was in talks to replace the three Russian shareholders in TNK-BP. "There is no reason to believe it won't persist other than in its current form," he said in response to a question.

He defended the company as being "a truly Russian enterprise."

"Uniquely, it is a joint venture," he said. "There is no 50 plus one here, where one party effectively has control."

Deputy Prime Minister Sergei Naryshkin told Monday's conference that a much-delayed new subsoil law limiting foreign investment to 49 percent in so-called "strategic sectors" would soon be debated in the State Duma. Yet analysts say the rules of the game were spelled out late last year, after Shell and its Japanese partners sold a majority stake in Sakhalin-2 to Gazprom after months of pressure from environmental authorities.

TNK-BP runs Kovykta through its 63 percent share in Rusia Petroleum. Interros, currently controlled by billionaires Vladimir Potanin and Mikhail Prokhorov, holds 26 percent and the Irkutsk regional government holds the rest. No Western oil major has entered Russia since BP teamed up with the shareholders of Tyumen Oil to form TNK-BP in 2003. "We put $8 billion of cash and assets into TNK-BP," Hayward told the conference. "This has been a profitable investment for us, for our Russian co-investors and, I would submit, for the Russian Federation."

Any blow to TNK-BP would hit the company hard. The Russian-British venture accounts for one-fifth of BP's reserves and a quarter of its production, Hayward said. At the same time, it brings in less than one-tenth of BP's profits.

Hayward devoted a large part of his speech to urging Western markets to open up to Russian investment. The BP chief was the day's final speaker, taking the podium at the end of a discussion on oil and gas. Other speakers included LUKoil vice president Leonid Fedun, Rosneft vice president Peter O'Brien and Transneft chief Seymon Vainshtok.

Hayward urged foreign markets to adopt "fair rules of the game."

"That means ... Europe, Asia and America being open to investment by Russian companies, just as Russia has opened up its borders," he said.

"Like all Western oil companies who are investing in Russia, BP is trying very desperately to create feel-good factors and let the Russians know they understand they're here as minority partners and that they don't own the place," said Eric Kraus, manager of the Nikitsky Fund.

Hayward and his predecessor, Lord Browne, who stepped down last month, have made numerous appeals in a bid to save their share in Kovykta.

Hayward last met Putin at the St. Petersburg International Economic Forum earlier this month. BP faced criticism from some of its shareholders after the two executives met Putin in March on the same day that TNK-BP announced it would bid for Yukos assets at a bankruptcy auction that former Yukos managers likened to theft.