BP cedes Kovykta gas field stake to Gazprom

BP has ceded control of its majority stake in the massive Kovykta gas field in eastern Siberia to Gazprom as the Russian government further tightens its grip on the country's energy sector.

BP, Britain's largest company, put a positive spin on the deal, arguing that it has signed a "historic" strategic alliance with Gazprom, the world's largest gas producer, to jointly invest in projects and swap assets around the world. It has also secured an option to buy a 25 per cent stake, plus one share to get voting rights, in Kovykta within a year. The value of the stake will be independently verified when and if the option is exercised.

Tony Hayward, the recently appointed chief executive of BP, said: "This historic agreement lays the ground for powerful co-operation between BP, TNK-BP and Gazprom."

The state-controlled Gazprom will pay between $700m (£350m) and $900m for TNK-BP's near-63 per cent stake in Rusia Petroleum, the company that holds the licence to mine the Kovykta field, as well as a 50 per cent stake in the company that is constructing the regional gas field. TNK-BP is a joint venture between BP and a group of Russian billionaires, and is the third-largest oil producer in country.

BP has come under increasing pressure from the Russian government over recent years, culminating in a threat to revoke the licence awarded to Rusia Petroleum. Russia's natural resources ministry has repeatedly said that the field has failed to produce enough gas to satisfy the original licence conditions related to the Kovykta field, which is estimated to have as much gas as Canada. The threat has been widely interpreted as the Russian government's latest attempt to regain state control of energy assets. Royal Dutch Shell ceded control of its $22bn Sakhalin-2 project to Gazprom last December after the government raised concerns over environmental damage related to the project.

When TNK-BP originally won the licence 15 years ago, it assumed that demand from the local market would justify its investment in the $20bn project. However that demand has failed to materialise, hampering TNK-BP's plans, because it is prohibited from piping gas to foreign markets as Gazprom has a monopoly on exporting gas out of Russia. BP has held negotiations with Gazprom in the past to explore opportunities to pipe the gas into China and South Korea; however, it is only recently that observers have faced up to the prospect of BP exiting the project completely.

BP's sale of its stake in Kovykta will draw a line under the controversy, allowing the British company to consider ways in which it can exploit its strategic alliance with Gazprom. The option will give the company a chance to retain exposure to the project once the Russian company has further developed the field, although it is unlikely that it will be fully exploited until the middle of the next decade. Mr Hayward said earlier this week when asked about Kovykta: "I consider this issue to be no more than one of those bumps in the road."

Mr Hayward said that BP and Gazprom would initially look for projects of at least $3bn, arguing that the potential for further growth "could be very significant". He said the alliance would be mutually beneficial for both companies, both inside and outside Russia, and that it would look for suitable investment opportunities "across all geographies". Gazprom has recently said it wants to supply gas to the UK market, although BP has no downstream gas operations in the country.

Analysts were not impressed with the price paid for the stake in Kovykta, arguing that the valuation of its controlling stake was unattractive, given the huge potential of the field and the $450m that TNK-BP has already invested in developing the asset.