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. Last Updated: 07/27/2016

Gazprom Buys TNK-BP's Kovykta Stake

Gazprom on Friday sealed a deal to buy out TNK-BP's stake in the giant Kovykta gas field, ending years of wrangling over BP's flagship project in the country.

The agreement was signed at a Kremlin ceremony overseen by First Deputy Prime Minister and Gazprom chairman Dmitry Medvedev, who is a leading contender to succeed President Vladimir Putin.

Putin has stepped up the drive to bring oil and gas reserves back into the folds of the state as his presidential term nears its end in March 2008.

Gazprom will pay between $700 million and $900 million for TNK-BP's 62.9 percent stake in Rusia Petroleum, which holds the license to develop Kovykta. A Gazprom spokesman said the company was not in talks to buy out Rusia's other two shareholders, Vladimir Potanin's Interros holding and the Irkutsk regional government.

TNK-BP, a 50-50 joint venture between BP and a trio of Russian billionaires, can exercise a call option to buy back a stake of 25 percent plus one share at "an independently verified market price," BP said in a statement.

The option will carry a statute of one year and come into force after the final sale agreement is signed within the next three months, TNK-BP spokeswoman Marina Dracheva said.

As part of the deal, BP, TNK-BP and Gazprom also signed a memorandum of understanding to create a long-term strategic alliance for jointly investing in projects in Russia and abroad.

That part of the agreement could bring down barriers to Gazprom's entry into the British market and would likely involve some sort of deal with liquefied natural gas, analysts said.

"This historic agreement lays the ground for powerful cooperation between BP, TNK-BP and Gazprom," BP chief Tony Hayward said in a statement.

The joint venture will initially involve projects of at least $3 billion, he said, providing no further details.

Robert Wine, a BP spokesman in London, said the joint venture would involve "a probable asset swap somewhere around the world."

"We are happy to be in Russia," Wine said. "An important part of our future strategy is to make the most of what we can in Russia."

TNK-BP, the country's third-largest oil company, accounts for one-quarter of BP's output and one-fifth of its reserves.

Putin has made clear that foreign involvement in the strategic energy sector will be limited to 49 percent. A much-delayed law enshrining the concept is due to be passed by the end of the year.

"Now there are no big projects that are in violation of the new subsoil law and we can expect to see progress" when it is passed, said Chris Weafer, chief strategist at Alfa Bank.

TNK-BP had come under fire from the Natural Resources Ministry for failing to fulfill the terms of the Kovykta license. The company was producing less than 1 billion cubic meters of gas per year, instead of the 9 billion stipulated in the license. Kovykta is currently selling gas to weak local markets as Gazprom has blocked the construction of a pipeline to China. TNK-BP had lobbied for years for the license to be amended.

On Friday, a ministry spokesman said the body was ready to review the terms of the Kovykta license.

"As the ownership of the field has changed, we are ready to consider changing the license," spokesman Rinat Gizatulin said. "We are ready to listen to Gazprom."

The ministry could make a decision by the end of next week, he said.

Last year, Shell ceded its controlling stake in the Sakhalin-2 project to Gazprom after ministry officials threatened to revoke its license over purported environmental violations.

At a Kremlin meeting announcing the sale in December, Putin declared that all environmental problems had been resolved.

The Kovykta field, estimated to hold 1.9 trillion cubic meters of gas, did not fall under TNK-BP's publicly traded holding, but was seen as a bellwether of the company's future activities in Russia.

BP and TNK-BP went to some lengths to put a positive spin on the loss of Kovykta, which is expected to be a key source of gas supply to the lucrative Chinese market.

"This is an important development in the future growth of TNK-BP," Robert Dudley, the CEO of TNK-BP, said in a statement.

"We look forward to broadening our working relationships with Gazprom and BP and to further developing our Russian asset base," he said.

BP had long been seeking to appease the government in a bid to hold on to Kovykta. It sunk $1 billion into state-controlled Rosneft's initial public offering last July and was criticized for agreeing to take part in auctions of Yukos assets earlier this year.

"There is disappointment with the valuation [of Kovykta], but it's been very difficult to be precise as to how much the project is actually worth," Alfa Bank's Weafer said.

TNK-BP has already put $450 million into the field, which is at the earliest stages of development. It is believed to be worth some $20 billion.

"For BP, they will view this as the cost of getting better entry into the game," he said. "It's a good deal for both BP and Gazprom.

"This deal will allow Gazprom to grow its international presence without running into the political slack and negative reaction it has faced in recent years, especially in the U.K."

Earlier this month, outgoing British Prime Minister Tony Blair warned that increasingly frosty relations between Russia and the West would harm foreign investment in the country.

Tim Lambert, vice president at British energy consultancy Wood Mackenzie, said Russia's image would have been harmed more if the Natural Resources Ministry had followed through on threats to revoke TNK-BP's license.

"It's good that it has been resolved without revocation of the license," he said. "That would have been a blow."

Yet the deal leaves the issue of TNK-BP's final ownership unresolved. Gazprom has said it would be eager to buy out the company's three Russian shareholders - Mikhail Fridman's Alfa Group, Viktor Vekselberg's Renova and Len Blavatnik's Access Industries - when their option to sell opens up at the end of this year.

Representing TNK-BP at Friday's meeting were Dudley and Vekselberg, who also heads TNK-BP's gas business. James Dupree, a BP vice president, also attended.

The deal also saw BP sell its 50 percent stake in the East Siberian Gas Company, the company building the Irkutsk regasification project, to Gazprom, the BP statement said.

Staff writer Anatoly Medetsky contributed to this report.