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. Last Updated: 07/27/2016

Not Only Kovykta is at Stake for BP

URNENSKOYE, Tyumen Region -- As TNK-BP inches ever closer to ceding control of its flagship Kovykta project, the company is eager to show that life for the country's third-largest oil company will go on.

The Natural Resources Ministry's licensing agency is due to review TNK-BP's right to develop the giant gas field on Friday. And BP chief Tony Hayward hinted at a Moscow conference on Monday that a deal on Gazprom's entry into the field, which could involve some kind of international asset swap, might be close.

While Kovykta does not fall into TNK-BP's publicly traded holding, and as a gas asset does not comprise its main focus, the firm's hold on the field is seen as a sign of its ability to continue working in a country where energy resources are coming under increasing state control.

"In the soul of every oil man is the desire to head a project that opens an entirely new field," Viktor Blagoveshensky, head of TNK-BP's Tyumen branch, told reporters on a TNK-BP sponsored trip to Tyumen earlier this month.

Blagoveshensky is leading TNK-BP's activities in Uvat, a sprawling region in the southernmost reaches of western Siberia that the company estimates holds up to 250 million tons of oil. With two new fields nearing the production stage, the company is opening its first new ground-up project in the country.

While TNK-BP currently holds licenses for 16 fields in the region, it is producing at just one, called Kalchinskoye, which pumps 1.4 million tons annually. Two more fields, Urnenskoye and Ust-Tegusskoye, are due to come online in early 2009.

"This opens a new oil region in Russia, it's a new oil province now," said Blagoveshensky, referring to southern Tyumen.

TNK-BP plans to invest $2.5 billion in the fields over the next three years, and expects fields in the region to begin yielding about 10 million tons per year by 2018.

With investors and analysts eagerly watching developments at the company's flagship Kovykta project, it often gets lost that TNK-BP remains the country's largest oil producer after Rosneft and LUKoil, producing about 1.5 million barrels per day.

"Of course we talk about it here," said Eduard Vazanov, an IT technician at the company's oil analysis center in Tyumen, referring to the Kovykta dispute. "We hope it will hold on to the license."

Environmental authorities at the Natural Resources Ministry have been threatening to revoke TNK-BP's license for failing to produce the amount of gas stipulated in its terms. Analysts say the pressure is aimed at getting the company to hand over Kovykta to Gazprom.

On Tuesday, Natural Resources Minister Yury Trutnev said the license could be revised if TNK-BP managed to reach a deal with Gazprom on access to pipelines, Prime-Tass reported.

The renewed campaign also comes as the clause obliging TNK-BP's three Russian shareholders -- Mikhail Fridman's Alfa Group, Viktor Vekselberg's Renova and Len Blavatnik's Access Industries -- to remain part of the company nears its expiration. Gazprom has said it would be interested in buying out the shareholders when the clause runs out at the end of this year.

Any such sale would also give Gazprom a controlling stake in mid-sized oil producer Slavneft. Gazprom gained 50 percent of shares in the company when it bought Sibneft from Roman Abramovich in 2005. TNK-BP owns the other half.

No Western oil major has entered Russia since BP teamed up with the Tyumen Oil Company to form TNK-BP in 2003.

Industry insiders say the pressure on TNK-BP at Kovykta is aimed at ensuring that Gazprom enters the company on favorable terms. "[The state] wants to know what will happen to the ownership structure down the road," said one source familiar with the matter who requested anonymity because of the political sensitivity of the issue.

Gazprom continues to insist it is not interested in Kovykta, an expensive project still at an early development stage.

"Kovykta will be useful in the second half of the coming decade," Gazprom spokesman Sergei Kupriyanov said in a recent telephone interview. "To put tens of billions of dollars into it now makes no sense."

As long as the issue remains unsolved, TNK-BP looks likely to continue feeling the pain. Even though it owns a majority of Kovykta through its 63 percent stake in license holder Rusia Petroleum, which is held outside publicly traded TNK-BP Holding, the company's shares have fallen nearly 35 percent since the start of the year.

The Uvat project "is important because it's a first -- our first big greenfield project, which is being built from the ground up," said Peter Henshaw, TNK-BP vice president for communications.

And on Tuesday, Sergei Brezitsky, TNK-BP's executive vice president for exploration and production, said expected production growth next year would rest on new projects. "Next year we are planning to grow production by one to 1.5 percent. Everything will depend on the success of our new projects," he told reporters in Moscow.

The land near Uvat's Urnenskoye field is inhospitable, a swamp land that is infested with mosquitoes in summer and frozen in winter. The fields are unreachable by road or rail, but a three-hour helicopter ride from Tyumen takes visitors to the project over lush fields that boast endless rows of trees and meandering rivulets.

"It's like working on an offshore project," said Thomas Bendzko, operations manager for KCA Deutag, the project's drilling contractor.

The contractors at Urnenskoye and Ust-Tegusskoye, which include Deutag and Halliburton, mobilized in February, aiming to get the fields ready to begin production in 2009 with a starting output of around 1.5 million tons per year.

The key to getting production started will be the construction of a 300 kilometer pipeline that will link the fields to the Kalchinskoye field in the west, which is already connected to the Transneft pipeline system, said Sergei Ivanov, the general director of TNK-Uvat, a local TNK-BP subsidiary that owns the licenses for the two fields.

In addition to the 16 fields it owns in Uvat, TNK-BP acquired 12 exploration licenses for neighboring blocks earlier this year. Those fields will add a further estimated 64 million tons of oil to the 250 million tons thought to lie in Uvat, a significant figure when compared to the 1 billion tons (7.8 billion barrels) TNK-BP already has booked.

TNK-BP's Henshaw said the company did not expect to fall foul of a proposed subsoil bill that would limit the amount of foreign investment in so-called strategic resources to 49 percent.

"We would argue that this is not just one field, but a group of fields," Henshaw said.

And it could yet be hit at Uvat with the same problems as those faced at Kovykta, where environmental officials accuse the company of failing to produce the 9 billion cubic meters stipulated in the field's license. TNK-BP has been producing less than 1 bcm at the site to feed weak local demand in the absence of an export pipeline to China.

The projects at Uvat are still technically in a pilot program phase, said Blagoveshensky, meaning that no production obligations have yet been spelled out.

The project has the backing of the regional administration. "Only a major company could develop fields of such a huge scale," said Alexander Moor, deputy governor of the Tyumen region.

Moor said he was unfazed by TNK-BP's dispute with federal environmental authorities. "[The company] has tensions with the federal government, not our regional government," he said.

So meanwhile the 200 workers at Urnenskoye toil away in the harsh Siberian environs, hoping to harness the energy of the traditional capital of the country's oil industry.

"All of Russia lives on our Tyumen hydrocarbons," said Viktor Parfyonov, a worker at the TNK-BP oil analysis site.