Russia 110328 Basic Political Developments

Stalled Oil Deal Hits Income, Image

http://www.themoscowtimes.com/business/article/stalled-oil-deal-hits-income-image/433830.html
28 March 2011

By Howard Amos

Cracks have begun to appear in a $16 billion tie-up between Rosneft and BP following a tribunal decision blocking the deal.

Deputy Prime Minister Igor Sechin on Friday reconfirmed Rosneft’s com¬mitment to BP as a partner for Arctic exploration, even as competitors lurk in the background, collateral damage becomes visible on the horizon, and alternative scenarios emerge.

“BP suits us as a partner,” said Sechin, who is also Rosneft’s board chairman. “We are working from the premise that this deal is really useful for the Russian oil and gas sector and for the company.”

A London-based arbitration tribunal blocked the Rosneft-BP deal on Thursday following a legal challenge by the Alfa, Access and Renova Group, or AAR, the Russian partners of BP in TNK-BP, the country’s third-largest oil company. 

AAR maintains that the terms of the deal violated the TNK-BP shareholder agreement.

In a statement the group said that “according to the tribunal, BP cannot proceed with any part of its proposed Rosneft transaction.”

Stan Polovets, AAR chief executive, said that “willfully ignoring the provisions of the shareholder agreement was a serious misjudgment by BP.”

“We expect [BP chief] Bob Dudley to make every effort to rectify the situation and rebuild the trust that has been lost between BP, AAR and the management of TNK-BP,” he added. 

BP said it was “disappointed that these agreements, which are important for Russia, for Rosneft and BP, cannot now go ahead in the form intended.”

BP added that it has asked the tribunal whether a share swap between the two companies can proceed on its own — without the joint venture in the Arctic. 

Sechin said Thursday’s ruling was not definitive but “an extension for further consideration.” The final decision is expected by April 7, he said.

Doran Doeh, a partner at SNR Denton (CIS), said “the question will be whether a share swap of that kind actually comes within the meaning of the provisions of the [TNK-BP shareholder]  agreement for doing business in Russia.

“BP would argue that … it’s just a share swap, a corporate level thing and nothing to do with TNK-BP or AAR.”

RIA-Novosti quoted an AAR source on Friday as saying the tribunal’s decision was unambiguous and AAR views BP’s prolongation of the process as a PR stunt.

“It’s difficult to see the rational for such a pure share swap deal,” a source close to AAR told The Moscow Times on Sunday. “AAR will oppose any such attempt,” arguing that it is also strategic and therefore covered by the same clause.

The Financial Times reported Friday that BP shareholders are reluctant to support a share swap without confirmed participation in Rosneft’s Arctic exploration.

Legal challenges and delays to the deal have raised the prospect that Rosneft may seek financial compensation from BP.

“The company will consider who is responsible for frustrating the agreement’s implementation,” Sechin said. “Definite losses are already being felt.”

“Rosneft could try and seek compensation from BP for loss of prospects and revenue,” Doeh said. “But they would need to convince the tribunal that there is an actual quantifiable loss — which could be difficult.”

“A more likely scenario,” he said, “was that Rosneft would seek to recoup its legal costs — which may be substantial — from BP. There also may be other things they could claim.”

This is not the first time the billionaire Russian shareholders of TNK-BP — Mikhail Fridman, Viktor Vekselberg and Leonard Blavatnik — have caused BP’s Dudley acute problems.

During a bitter shareholder dispute in 2008, Dudley, then-head of TNK-BP, was forced to leave Russia and his post at the company after the government failed to renew his visa.

A proposal on March 13 would have resulted in TNK-BP’s replacing BP in the deal with Rosneft, but it was rejected by the TNK-BP board.

Rosneft has repeatedly stated that it would not accept such a substitution.

“Shares in TNK-BP are not traded in New York, London or Frankfurt and were not considered from the point of view of an asset swap,” Sechin said, adding that TNK-BP’s only contribution to the development of the Arctic shelf could be an offer to outsource. 

“Rosneft had already considered various factors when looking for a potential partner,” he said.

Predicting the outcome of the impasse is complicated by the secrecy of the TNK-BP shareholder agreement and the exact terms of the BP-Rosneft deal.

If there is no resolution by April 7, and Rosneft and BP remain committed to working together, said Ildar Davletshin, an oil and gas analyst at Renaissance Capital, “they will have to somehow over-come the existing [TNK-BP] shareholder agreement.”

One possible scenario is a buyout of AAR’s share in TNK-BP. Vedomosti re¬ported Friday that a source close to AAR had put a $30 billion price tag on such a buyout.

Davletshin said such a price was “at the high end of the range” for a valuation of AAR’s share in TNK-BP, and $27 billion would be a fairer price. Assuming a 50-50 cash-equity price split, he said, either BP or Rosneft have enough financial leverage to “digest this amount.”

In a press release Thursday, AAR emphasized the business successes and financial value of TNK-BP. 

Sechin, however, denied on Friday that Rosneft was in negotiations with AAR. “We have received no proposals from AAR in the framework of these proceedings,” he said. 

Davletshin said another option was for AAR to exit via an initial public offering of TNK-BP. AAR could divest itself of half of its holding through the IPO, Davletshin said, and then sell the rest for shares and cash to BP, which would have the option of then selling it to Rosneft. Or, Davletshin added, “AAR could be involved in this joint venture in the Arctic — maybe as a private investor through equities.”

Shamil Yenikeyeff, an oil and gas research fellow at the Oxford Institute for Energy Studies, said the onus was on BP. “BP needs to find a solution,” he said. “If they don’t resolve the situation … other companies will step in, and that would mean huge reputation damage for BP.”

Norway’s Statoil and Norsk Hydro have extensive experience developing offshore resources, as do British-American oil majors Exxon Mobil and Shell. 

Rosneft is already collaborating with Exxon Mobil on the Black Sea shelf, while Shell has expressed its interest a similar joint venture project.

Rosneft chief executive, Eduard Khudainatov, said last week that the company was also considering partnerships in the Arctic with Chinese and Indian companies. “I should tell you that the whole world is interested in the Arctic,” he said. 

Rosneft may not have any difficulty finding partners for joint exploration and drilling work in the Arctic — but finding another company willing to replicate the scale of the share swap with BP would be much harder.

The share swap with BP occurred against the background of the company’s weaknesses following the Deepwater Horizon disaster in April 2010. 

The unanswered question, however, is why BP failed to foresee the legal challenge from AAR — particularly in light of Dudley’s personal experience with the tenacity and connections of TNK-BP’s Russian shareholders. 

British newspaper The Daily Telegraph reported Saturday that Prime Minister Vladimir Putin had warned BP management about possible trouble from TNK-BP prior to the deal’s signing, without citing any sources.

“It was a major fault of BP’s legal department,” said Alexander Eremin, an analyst at Finam. “BP just messed up.”

Yenikeyeff said it was an error of judgment. “BP miscalculated when they signed the deal with Rosneft,” he said. “They thought that because Rosneft is a state company the political resources would be adequate to push the deal through. Obviously the Russian state does not want to muscle them [AAR] out.” Yenikeyeff said this might be because of a desire not to harm the business climate by putting state pressure on investors.

Other analysts speculated that the situation may be a reflection of pre-election maneuvering within the government — or that government officials and oligarchs, whose objectives remain opaque, might be playing a longer-term game. Sechin said March 11 that “whatever the decision of the London court, towards which we have the greatest respect, Rosneft will choose itself with whom it will work.”

Transneft to Spend $5.7 Billion on Links in 2011, Vedomosti Says

http://www.bloomberg.com/news/2011-03-28/transneft-to-spend-5-7-billion-on-links-in-2011-vedomosti-says.html
By Yuliya Fedorinova - Mar 28, 2011 7:04 AM GMT+0200

OAO Transneft plans to spend 161.2 billion rubles ($5.7 billion) this year building new pipelines, Vedomosti reported today. The Russian oil pipeline operator had classified annual capital expenditure forecasts as secret until the end of last year when the government forced it to disclose the numbers, as well as some information on tariffs and oil quality, the newspaper said.

To contact the reporter on this story: Yuliya Fedorinova at [e-mail]

To contact the editor responsible for this story: Torrey Clark at [e-mail]

Russia's Transneft to invest 161.59 bln rbls in new facilities in '11

http://en.rian.ru/business/20110328/163242015.html
10:35 28/03/2011

Russia's state-controlled oil pipeline monopoly Transneft will invest 161.59 billion rubles ($5.69 billion) in the construction of new facilities in 2011, Transneft said on Monday.

The investment will help Transneft build 6,266 kilometers of new pipelines in 2011, the company said in a statement.

Transneft head Nikolai Tokarev earlier said the oil pipeline operator would cut its 2011 investment program to 170 billion rubles from 187 billion rubles in 2010.

The company will invest 83.937 billion rubles in the construction of the second stretch of the East Siberia-Pacific Ocean (ESPO) oil pipeline, about 19 billion rubles in the expansion of the existing ESPO pipeline, while 20.652 billion rubles will be channeled to continue the construction of the second trunk line of the Baltic Pipeline System, which will run from Unecha, a city in the Bryansk region in western Russia, to the Baltic Sea port of Ust-Luga in the country's northwest, bypassing Belarus.

Investment in the 430-km (270-mile) Purpe-Samotlor pipeline, intended to supply oil from west Siberia to the ESPO pipeline, will amount to 16.231 billion rubles, while 8.391 billion rubles will be invested in the Zapolyarye-Purpe oil pipeline in the country's northeast. Transneft estimates its overall investment in the Purpe-Samotlor pipeline at 53.048 billion rubles.

Moreover, this year the company will invest 11.024 billion rubles in the expansion of the pipeline system for oil supplies to the Tuapse Oil Refinery in south Russia with an annual capacity of 12 million tons.

The company also plans to channel 2.365 billion rubles in the construction of the Syzran-Saratov-Volgograd-Novorossiysk oil product pipeline in south Russia, part of the Yug (South) project, whose launch has been delayed several times due to the absence of a government resolution.

MOSCOW, March 28 (RIA Novosti)

28.03.2011

Russia-China Oil Payment Spat Escalates

http://www.oilandgaseurasia.com/news/p/0/news/10944
An oil row between Russia and China has escalated this week, industry sources said on Friday, as Moscow believes Beijing has underpaid it $100 million for oil in 2011 under a landmark 20-year supply deal.

Kommersant newspaper reported last week Russia's state oil major Rosneft and China's National Petroleum Corp disagreed over $38 million in payment for January.

Industry sources told Reuters on Friday Moscow believes the sum has now risen to $100 million for January and February.

CNPC was not available for comment. Russia's pipeline monopoly Transneft said the two sides had some disagreements but declined specific comment while Rosneft said it was delivering supplies according to the contract.

"We have certain disagreements (with China), but we expect that we will sort them out," said Transneft's spokesman Igor Dyomin. "We assume that we have contracts and both sides should adhere to them. We have fully met our obligations so far."

Copyright 2011, Reuters. All rights reserved.

Russia-China Oil Price Dispute Valued at $100M

http://www.themoscowtimes.com/business/article/russia-china-oil-price-dispute-valued-at-100m/433814.html
28 March 2011

Reuters

An oil dispute between Russia and China has escalated, industry sources said Friday, as Moscow believes Beijing has underpaid it $100 million for oil in 2011 under a landmark 20-year supply deal.

Analysts said the dispute around the deal, which was blessed by the countries' leadership, could jeopardize cooperation between the world's No. 1 energy producer and consumer.

"Russia and China don't have a long history of trade, and these [price] disagreements could influence the discussions on gas supplies in the future, and maybe even lead to a delay," said Valery Nesterov from the Troika Dialog brokerage, referring to Russia's plans to sign a major gas deal with China this year.

Kommersant newspaper reported earlier this month that oil major Rosneft and China's National Petroleum Corp. disagreed over $38 million in payment for January.

Industry sources told Reuters on Friday that Moscow believed the sum had now risen to $100 million for January and February.

CNPC was not available for comment.

Pipeline monopoly Transneft said the two sides had some disagreements but declined specific comment, while Rosneft said it was delivering supplies according to the contract.

"We have certain disagreements [with China], but we expect that we will sort them out," Transneft spokesman Igor Dyomin said. "We assume that we have contracts and both sides should adhere to them. We have fully met our obligations so far."

Rosneft and Transneft borrowed an unprecedented $25 billion from China in 2009 to finish building Russia's first pipeline link to China as part of a broader deal to supply Beijing with 300 million tons of crude over 30 years.

The deal is worth $220 billion under current prices.

Industry sources said the current dispute centers around the pricing formula, with China saying Russia should give it a discount because it is cheaper to send crude to China than to the Pacific port of Kozmino, while Moscow insists it applies similar tariffs to both routes.

"On an annual basis the difference could amount to a few billions of dollars," one industry source said.

Denis Borisov, oil analyst at Bank of Moscow, said he believed Russia would ultimately agree to a compromise because it badly needed to clinch a gas deal to China to diversify its exports away from saturated European gas markets.

"Talks may last long but the gas deal won't be sacrificed. … I think gas cooperation is a top priority for Russia," he said.

Transneft is appealing a court ruling in favor of Alexei Navalny, the social activist who filed a suit against the company over information disclosure on the basis of his small stake in the oil pipeline monopoly, Interfax reported. Transneft filed the appeal on March 21, court documents show. The Moscow Arbitration Court ruled in favor of Navalny on Feb. 14. The court had suggested that the two sides reach an amicable settlement. Navalny had indicated his willingness to settle even if it involved a confidentiality clause prohibiting him from disclosing to third parties the information contained in the minutes of the Transneft board meetings the company might share with him.

Gazprom

TNK BP Gazprom and SeverEnergia to form unified development chain

http://www.steelguru.com/russian_news/TNK_BP_Gazprom_and_SeverEnergia_to_form_unified_development_chain/197689.html

Monday, 28 Mar 2011
Interfax citing Mr Mikhail Slobodin TNK-BP Executive Vice President as saying that, Gazprom and SeverEnergia plan to form a unified technological chain for developing gas horizons at their properties in Yamalo-Nenets autonomous district.

The three companies will agree drilling volumes, although each will continue to develop its reserves according to its own plans.

(Sourced from Interfax)

Russia expands gas pipeline network

http://pipelinesinternational.com/news/russia_expands_gas_pipeline_network/055348/
Pipelines International — March 2011

Russian energy giant Gazprom is expanding its gas pipeline network to service the country’s northwestern regions and supply the Nord Stream Pipeline. Pipelines International brings you construction updates on the Gryazovets – Vyborg, Pochinki – Gryazovets, and Ukhta – Torzhok gas pipelines.

Gryazovets – Vyborg Pipeline

Construction on the 900 km section of the Gryazovets – Vyborg gas pipeline was completed in late 2010 and looping expansion of the pipeline is now currently underway.

Designed to supply 55 Bcm/a of gas to the Nord Stream Pipeline and consumers in the northwestern region of Russia, the pipeline passes through the Vologda and Leningrad regions.

The main pipeline has a diameter of 56 inches while the X70 pipe used for the looping lines are 56 inches and 48 inches in diameter.

Seven compressor stations will be constructed along the pipeline, which will have an operating pressure of 9.8 MPa once the expansion is complete. In particular, the Portovaya Compressor Station, which will be located in Portovaya Bay near the city of Vyborg, will be a unique gas transmission system facility with a capacity of 366 MW, the first of its kind in Russia.

A total of six compressors with a capacity of 52 MW, and two compressors with a capacity of 27 MW will be built at the Portovaya Compressor Station. A 52 MW compressor will be used for the first time in the history of operating the Unified Gas Supply System of Russia.

The pipeline will be put into operation in stages throughout 2011 and is scheduled to operate at full capacity by the end of 2012.

Pochinki – Gryazovets Pipeline

Currently, over 300 km of the 56 inch diameter, 650 km Pochinki – Gryazovets Pipeline and an associated compressor station have been put into service.

Considered as an interconnection link between Russia’s northern and central gas transport corridors, the X60 steel grade Pochinki – Gryazovets gas pipeline has been designed to increase reliability and flexibility of Russia’s Unified Gas Supply System.

Prior to the commissioning of the Yamal fields, the pipeline will transport gas to the northwestern regions of Russia and supply the Nord Stream Pipeline. After the Yamal fields have been commissioned, the pipeline will provide transportation in the reverse direction to Russia’s central region.

A total of six compressor stations will be constructed along the pipeline, which will have an operating pressure of 7.4 MPa and the capacity to transport up to 36 Bcm/a of gas.

Construction of the linear part of the gas pipeline and installation of two more compressor stations will be completed by the end of 2011. The remaining three compressor stations will be installed as required.

Ukhta – Torzhok Pipeline

Construction of the 1,300 km Ukhta – Torzhok gas pipeline will commence in 2011.

The Ukhta – Torzhok Pipeline was conceived during the development programme for the Yamal fields. It will become part of a new system for transporting Yamal gas, particularly from the Bovanenkovskoye Field, to Russia’s Unified Gas Supply System starting from the third quarter of 2012.

The 56 inch diameter pipeline will pass through the Republic of Komi, Arkhangelsk, Vologda and Tver regions and have an operating pressure of 9.8 MPa.

Three lines have been proposed to be constructed from Ukhta to Gryazovets with a single line is to be constructed between Gryazovets and Torzhok, and there are plans to build nine compressor stations.

Under the first stage of the project, one line will be constructed from Ukhta to Gryazovets, stretching 970 km and with a design capacity of 45 Bcm/a.

Stroygazconsulting and Stroygazmontazh were selected as prime contractors for the first stage of the Ukhta – Torzhok Pipeline and have scheduled phased commissioning of the first line for 2012–13.

A Gazprom spokesperson has said that the decision on construction for the second stage of the project will be made in line with development of production at the Yamal Peninsula.

Microtunnelling through challenges

According to Gazprom, the conditions under which the construction of the Gryazovets – Vyborg, Pochinki – Gryazovets and Ukhta – Torzhok gas pipelines are being conducted are quite typical for Russian gas pipeline routes in that they must cross watercourses, rivers and wetlands.

During the construction of the Gryazovets– Vyborg Pipeline, microtunneling was used to cross large water obstacles including the Neva River and the Saimaa Canal. Microtunneling was carried out by Metrostroy subsidiary Tonnelny Otryad-44.

This represents the first time a major gas pipeline has crossed a river using microtunneling technology in Russia.

Image caption: Construction underway on a Gazprom pipeline project.; and Map of the Gryazovets – Vyborg Pipeline.

Appeared in issue: Pipelines International — March 2011