Putin turns up heat on BP over gas field

BP's new chief executive, Tony Hayward, is facing his biggest challenge since taking over from Lord Browne as he attempts to prevent a Russian hijack of one of the world's biggest gas fields.

President Vladimir Putin cranked up the tension yesterday when he warned BP and its partners in the $20bn (£10bn) Kovykta gas field that he was running out of patience over their refusal to meet production targets - with the implied threat that they would lose their licence to operate the fields.

Mr Putin said that if BP and its partners "are doing nothing to meet licence obligations, how much longer do we have to tolerate this?"

Last Friday, Russia's resources ministry put off by two weeks a decision on whether to remove the licence from BP's Russian venture, TNK-BP. However, the delay was considered no more than a tactical move so as not to elevate the issue to an international incident ahead of the G8 Summit, which starts in Germany tomorrow.

But this has not prevented Mr Putin from continuing to turn the screw on BP.

At stake is a field with reserves of three trillion cubic metres - enough gas to supply the entire world for nearly a year.

Mr Hayward and his directors have been tip-toeing through the diplomatic minefield created by the dispute which comes at a time of heightened tension between Russia and the West.

Most industry observers believe the Russian authorities are engaged in a naked attempt to bully BP and its partners into handing over control of world-class energy assets. There is ample evidence that similar tactics have been used with great success before. Royal Dutch Shell was forced to sell a major stake in its 55 per cent owned $22bn Sakhalin Island oil and gas project to Gazprom, the state-controlled gas monopoly earlier this year. This followed threats by the Russian environmental regulatory agency to freeze work on the project by revoking the company's permits.

TNK-BP planned to export about 9 billion cubic metres of gas a year from the Kovykta field in eastern Siberia to China.

But production has been running at the equivalent of a trickle, no more than one billion metres, after Gazprom blocked the construction of a pipeline to China. Gazprom, with a monopoly on the pipeline network, apparently has its own plans to supply China.

Mr Putin, who has become actively embroiled in the dispute, insists the lack of pipeline access is an unacceptable excuse for failure to meet production targets.

"They [TNK-BP] knew about it when they bid for the licence," he said yesterday. "They knew about these problems and possible restrictions and they nevertheless bought the licence."

Analysts are unsurprised at events, having anticipated that TNK-BP - a joint venture between BP and three Russian oligarchs - would become the next target after Shell for a Kremlin bid to bring all major oil and gas projects under state control.

The most likely outcome, say analysts, is that BP's partners will be forced out of the project completely or have their holdings severely diluted. BP would then be forced to work alongside Gazprom with its own 50 per cent stake reduced to 49 per cent.

Gazprom is the world's largest producer and exporter of gas with 16 per cent of the world's proven reserves and 96,000 miles of pipeline.

However, industry observers say it has become no more than a cash cow for the government, is poorly run, and desperate to acquire new assets as its three main fields - Medvezhye, Urengoy and Yamburg - are in decline.

President Putin, observers point out, has close ties with a number of Gazprom executives stretching back to his early days in St Petersburg and his career in the KGB.