TNK-BP Unit to Be Bankrupted

TNK-BP is pushing its unit that controls the huge Kovykta gas field into bankruptcy, TNK-BP said Thursday, as it has failed to sell the field to the government.

Rusia Petroleum, which controls Kovykta and whose management is loyal to TNK-BP, said it could not repay its loans and filed a petition to the local arbitration court of the Irkutsk region to initiate bankruptcy.

"TNK-BP announced its original decision to withdraw from the Kovykta project back in 2007," it said.

"As the major shareholder and creditor of Rusia Petroleum, TNK-BP is determined to recover its investments and minimize its financial losses," TNK-BP said.

Kovykta, which TNK-BP has controlled for about 15 years, had been meant to supply China before Moscow started asserting control over natural resources and made its gas behemoth Gazprom a gas export monopoly.

Officials have repeatedly threatened to withdraw the Kovykta license from TNK-BP for low production volumes.

BP and its partners have argued that output targets for Kovykta set by the Russian government became too onerous after it was unable to supply China, because Russian demand didn't make up the shortfall.

TNK-BP agreed to sell Kovykta, which holds more than 2 trillion cubic meters of gas, to Gazprom for about $1 billion to cover its investment costs, but the deal has never been finalized and talks have been suspended, as Gazprom's finances became stretched because of the financial crisis and unclear prospects of gas exports to China.

While Gazprom said earlier this year that it won’t need the field for exports, TNK-BP has said the local market in Irkutsk can’t absorb the volumes that the company is required to produce.

Without access to export markets, TNK-BP pumped just 41.7 million cubic meters of gas at the field last year, far less than the 9 billion cubic meters a year required by the license agreement. The company has been operating the field at minimum levels and estimated its “capitalized costs” from Kovykta at $664 million.

"What I understood from this statement is that sale talks [with Gazprom] are at an impasse and thereby Kovykta as an asset is useless for TNK-BP for the time being," said Valery Nesterov, an analyst at brokerage Troika Dialog.

"But maybe they have also found another buyer which could buy the asset following bankruptcy proceedings. If there is such a buyer, it is obviously a Russian firm — no one will ever allow foreigners to buy Kovykta," he added.

Vladimir Pletnyov, a partner at legal firm Yustina, said if the arbitration court ruled to bankrupt Rusia and put it under external management, all of its assets, including the Kovykta license, could be sold at auction.

"Money raised via the sale would be then distributed pro rata among creditors," he said. Kovykta is classified as a strategic field, and under the current legislation only companies majority-owned by Russian capital can develop it.

Russia is keen to diversify its gas exports away from Europe where demand for its pipeline gas delivered under long-term contracts has plunged amid increased competition from liquefied and spot gas.

But Moscow's attempts to speed up its decade-long talks with China have been unsuccessful so far because of pricing differences.

Deputy Prime Minister Igor Sechin said last month that he expected a gas pricing deal with China by September.

(Reuters, Bloomberg)