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Saturday, May 06, 2006

Viktor Vekselberg: Nothing Will Be for Free

05-05-2006 Kommersant - by Natalia Grib -
He names the price for Gazprom at Kovykta
At a shareholders meeting of the Eastern Siberian Gas Company yesterday, the Irkutsk Regional administration, owner of 50 percent of the stock in the company, voted against an agreement with TNK SH Investment to obtain a loan of 6.5 billion rubles for the construction of a Kovytka-Sayansk-Irkutsk gas pipeline. TNK, the owner of the other half of the company, is confident, however, that that decision will not effect the company's plans for the gasification of the region in competition to Gazprom. Kommersant correspondent Natalia Grib spoke with TNK-BP executive director for the development of natural gas projects Viktor Vekselberg about how ESGC plans to settle its long-time conflict with the state gas monopoly. Gazprom is using aggressive tactics, thinking up new reasons not to allow TNK-BP to begin production at the Kovykta gas fields. Are you sure you will begin production according to plan?
The situations on international gas markets and in the region work out so that there will be a definite demand for Kovykta gas. We are confident that Gazprom will come around to an understanding of the need to develop the field together, although maybe a little later than we had wanted.
As a matter of fact, 2015, which Gazprom has called the deadline for beginning the development of the Kovykta gas field, is not far from our plans. If we begin working to today on implementing the export project with China, then the sequence of steps we have to take, beginning with the agreement between Gazprom and the Chinese on the prices and conditions of the contract and ending with the selection of routes, will, by the most optimistic predictions, allow export supplies to begin no sooner them 2012 or 2013. You have to agree that that Gazprom's deadline is not so far away from out prognosis.
However, deputy chairman of the Gazprom management board Alexander Ananenkov insists that there is no need to develop the gas field earlier than 2015. When will TNK-BP begin to produce gas in industrial volumes – before 2008 or after?
We plan to begin the first supplies of gas in December of this year. For the next few years, the volume will not be large – 1-1.5 billion cubic meters per year. In 2009, we will produce 2.5 cu. m. and in 2011 4 billion cu. m. I will note that demand for gas in Irkutsk region has been measured at just those volumes.
You assume that they will not take the license to develop Kovykta way next year? Are you taking any steps not to lose it?
Last year we presented a full program of events, with volumes and production deadlines, to the Ministry of Natural Resources. There were no particular comments back from the ministry. In the licensing agreement, it is written that TNK-BP should produce 9 billion cu. m. of gas a year to meet the demand of Irkutsk region. We are pointing out that the region does not have that much demand for gas.
How is that contradiction being handled now?
It's not so far. The deadline for the implementation of the licensing parameters is the end of this year, and the state will have formal grounds to make claims against us. We will defend our position and offer buyers that volume of gas, because the filed is ready. All necessary work as part of the licensing agreement on geological exploration, registering it and complex drilling operations has been performed. But formal grounds for withdrawing the license remain.
If there are formal grounds, can't Gazprom take advantage of the situation simply to take Kovykta away?
It can. But, first of all, we will sue in that situation. Second, what is the sense of Gazprom taking away our license? Then it will go into the undistributed fund and be put up in a tender. It seems to me that it would be cheaper to reach an agreement tan take such a complicated path. Although there remains the possible stumbling block of the list of strategic reserves the administration is drawing up. They can, of course, put Kovytka on it and take away our license.
It can be recalled in that connection that, a year ago, Gazprom did not buy the controlling package in Nortgaz, put practically took it for free, and Itera is giving the monopoly control over the Beregovoi field in the near future – the company's main resource base. Doesn't it seem to you that the same scenario may play out at Kovykta?
Let me remind you that Nortgaz had a completely different history. Gazprom controlled it from the beginning. It has no relation to TNK-BP. We do not intend to give anyone gifts and we are not prepared to give Gazprom control over the Kovykta field for free. Nothing will be for free. We have made them an offer for a holding. And they will buy their share in any case.
What procedure are you proposing?
All profit will accumulate on the level of a holding that will pay dividends to shareholders according to their share participation. There will be four centers of expenses in the holding: production, transport, marketing or sales and gas chemical companies. They will be separate legal entities and wholly owned subsidiaries working to fulfill different functions within the holding. We proposed sharing the business in such a way that TNK-BP engaged in production, because we have acquired huge experience with the geology of the reservoirs at Kovykta. Several production wells have been drilled and we understand how to do it at that site. Therefore, upstream, or production, should stay with TNK-BP. The second block, midstream, everything connected with the pipeline system, should go to Gazprom, since it has significantly more experience with transport. We made a proposal to them on the specifics of management. And we concluded a contract for the construction of a Kovykta-Sayansk-Irkutsk pipeline with Stroitransgaz, a long-time partner of Gazprom. On sales questions we agreed that the main negotiator in China should be Gasexport, as the future agent for the sale of the gas, and it would then make an agreement with the holding.
What price formula will China be satisfied with?
The base price will be equal or comparable to the price of liquefied natural gas. That is the result of complex negotiations between Gazprom and the Chinese. That's very important for us, because the price of liquefied natural gas is tied to world petroleum product prices, and the price of the gas will increase.
BASF reached an agreement on the principles of gas sales within the Achimgaz independent enterprise, under which it will sell one cubic meter out of every four at the well at the European price minus transport costs and three out of four at the Federal Tariff Service price for Siberia. At what price will you sell gas to Gazexport?
I am not familiar with the BASF price formula. We don't have a price yet, there is only a proposal for the structure of the holding. 
Are you prepared to give Gazprom control over the project?
In our proposal, Gazprom will receive 51 percent of the holding and TNK-BP 49 percent. TNK-BP will place its share in Rusia Petroleum [which olds the license to develop the Kovykta field; TNK-BP own 62.89 percent of its stock] and other assets connected with Kovykta in the holding. Gazprom should pay money or contribute assets. In particular, we propose that the gas monopoly build a pipe in the eastern direction and contribute it to the holding.
What do you estimate your share at?
It's not easy to calculate. We paid for Rusia Petroleum with a supplementary emission and the investment of certain sums to construction and equipping the field. As of today, we have invested about $500 million in the project. But I emphasize that the cost will be made clear in the course of negotiations, which have yet to begin.
Gazprom, as I understand it, is not refusing your offer of a holding, but simply ignoring it.
A complex negotiation process is underway. It may not be immediately apparent, but that process is continuing. They say, "We are thinking" and ask questions about the Chinese and domestic markets. They asked us to make an offer to attract them. We did that and have yet to receive an answer. The option of exchanging Kovykta for an oil deposit that was discussed by Gazprom with BP head John Brown in December is gone for good? I did not make that proposal. I also am not considering the alienation of our share in Slavneft. I discuss only the structure of this holding and nothing more. Gazprom took a wait-and-see position in relation to one of your other gas assets, Rospan International. Since there are regular problems transporting the gas from the field, will TNK-BP take part in the purchase of Arktikgaz, the YUKOS subsidiary that operates on the same plot as Rospan? Stock in Artikgaz is frozen today as part of the YUKOS bankruptcy procedure. If the outside managing company decides to put that object up for sale, we will take part. That asset interests us and we will participate in its acquisition, but only with understandable and transparent rules.

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