Bloomberg News

Russia May Revoke Some TNK-BP Licenses for Idle Wells

July 19, 2006

Russia threatened to revoke OAO TNK- BP Holding's oil drilling licenses, alleging BP Plc (BP/)'s Russian venture has shut down more production from wells than is legally permitted.

About 30 percent of wells operated by TNK-BP are inactive and may lead to the loss of operating licenses, said Nikolai Gudkov, a spokesman for the Natural Resources Ministry. Under Russian law, no more than 10 percent of wells should be idle, he said in a telephone interview.

BP, which set up TNK-BP in 2003 at a cost of $7.7 billion, relied on the Russian venture's output to boost its production in 2004 and 2005. The venture faces about $2.18 billion in tax claims and must negotiate with state-run OAO Gazprom to revive the stalled $18 billion Kovykta natural-gas project in Siberia.

``This is just horse trading in the game around Kovykta,'' said Dmitry Lukashov, an analyst at Aton Capital Group in Moscow. ``I don't think these claims will be fulfilled, and for the situation to evolve into real licenses being revoked.''

TNK-BP is seeking to restore output at some wells, company spokeswoman Marina Dracheva said today.

Kovykta License

TNK-BP's natural gas unit, OAO Rusia Petroleum, owns the license to Kovykta, which holds 2 trillion cubic meters of gas, enough to power Asia for six years. Gazprom, which controls Russia's gas pipelines, opposed TNK-BP plans to break its monopoly by supplying fuel from Kovykta directly to China or South Korea.

``If it is part of a more serious run on TNK-BP, it is of course concerning,'' said Anders Ronnebaek, who manages Russian and eastern European assets at Sydbank A/S in Aabenraa, Denmark. ``For now, I don't think it is a big issue.''

Shares of TNK-BP fell 1.7 percent compared with a 1.8 percent gain for the benchmark Russian Trading System Index. Other Russian oil producers gained, including OAO Lukoil and OAO Surgutneftegaz. About 7 percent of TNK-BP shares trade on the open market.

BP shares in London fell 3.5 pence, or 0.6 percent, to 631 pence and have risen 1.9 percent this year.

``It's a legacy issue, but we acknowledge it and are dealing with it,'' Dracheva said. ``It's not a secret that TNK-BP inherited the most mature asset base in Russia. As such, we inherited a large idle-well stock. We adopted a well-reactivation program within the first days after the founding of the company.''

Idle Oil

The Natural Resources Ministry estimates Russian oil output would rise 30 million tons a year (600,000 barrels a day) if all companies complied with the 10 percent rule. Russia, the world's biggest oil exporter after Saudi Arabia, increased output last month to 9.69 million barrels a day of oil and gas condensate.

About 37,200 wells are idle across Russia, or 15 percent of all wells, the ministry said.

Gudkov said that TNK-BP will have three months after it is notified to improve the situation.

BP, the world's second-largest publicly traded oil company, last week bought $1 billion in shares of OAO Rosneft, Russia's state-controlled oil company. Some investors and analysts saw the purchase as an overture to the Russian state, as part of BP's effort to get access to reserves.

``BP's support of the Rosneft IPO did not have the intended affect,'' said John Davies, the managing director at Diamond Age Capital Advisors Ltd. in Moscow. ``The Kremlin will develop Rosneft into the national energy champion, and any other quasi- independent Russian oil companies may be marginalized.''

To contact the reporter on this story: Lyubov Pronina in Moscow at lpronina@bloomberg.net

To contact the editor responsible for this story: Lars Klemming at at lklemming@bloomberg.net


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