Interview with Mark Smedley

Mark Smedley from Energy Intelligence commented on the latest development in the dispute over Kovykta oil and gas field. The row seems to have come to an end with Gazprom buying BP’s stake in the project.

Russia Today: Gazprom will pay BP from $US 700 MLN to $US 900 MLN for the stake in Kovykta field. Do you think it’s a fair price?
M.S.: First of all, they are still haggling over that price. Gazprom says it could be as little as $US 600 MLN. BP is hoping it will be up to $US 900 MLN. But I think it’s worth taking a step back. If this field had been taken back and no licence given, the value of the field would be nil to BP. It has invested, I recon, $US 800 MLN so far, so it could basically be getting back what it’s put in – in other words a no-gain. Taken from the stance of if Gazprom does go ahead and develop it for the Chinese market by a pipeline, the value of this field could be several billions of US dollars, bearing in mind the 2 trillion cubic meters – that’s the reserves in place, equivalent the proven gas reserves of Canada.
RT: How do you think BP investors will react? What do you think the implications are for its operation in Russia?
M.S.: Even though I think it’s not a great deal, BP investors seem to have been prepared accepting this, prepared for a nasty surprise, if you like. They’ll be hoping that there’s some sort gain out of this. I’m not so sure because the option for TNK-BP to buy 25% at a later stage into Kovykta will be at market prices, and I’m sure that once that option is exercised, a decision will be made to pipe the gas to China, and the value of that field will go up. So we can expect TNK-BP will be paying a correspondingly higher price for that 25% stake.
RT: What signals do you think today’s announcement sends to international companies about doing business in Russia?
M.S.: It’s a long tough road. We’ve just had in the pas year Shell, which had invested billions of dollars in the Sakhalin-2 energy project. That project was threatened, it [Shell] agreed to bring in as a 51% partner and was remunerated for the corresponding decrease in its stake. Now Shell says it’s turned its corner and it’s got fantastic working relations with Gazprom, and it should be earning money from the next decade. Near the Sakhalin we’ve got the Sakhalin-1 project, where Exxon is the operator, and an agreement on how that would be exported and how that field will be monetised – people think Korea might be a good option – that pipeline project hasn’t been fully decided, and Gazprom could be itching to get into that deal as well.
As well as that, we have projects further west – there are two German groups that are in talks to finalise an agreement for developing Gazprom’s Yuzhnorusskoye field. Final decisions on that should have been taken by the end of June – this month, but there seems to be some kind of last minute delays on that, and no one is fully clear on why.
RT: Do you think there will be end to disputes over production sharing agreements of the 1990s?
M.S.: As far as the end of PSA wrangling, we’ve already had the Sakhalin-2 deal that seems to be settled. And there’s another project that will carry on where Total – a French oil company – is involved. That seems to go very quiet. But we also have, as I said, the Sakhalin-1 out there. There are still a number of projects involving western oil companies that don’t seem to have come to a definitive conclusion where Gazprom does seem to be wanting a bigger slice of the economic rent. I guess western investors that haven’t yet moved into Russia will look at this and say: “It’s a long-term game, really, can we stand such a long-term negotiation?”