BP mulls Sidanko exit in new Russia push

BP Amoco may sever links with its troubled Russian affiliate Sidanko as part of a multi-billion dollar thrust for more quality exposure in this key producing country, industry sources said yesterday.

The British oil giant wants a new focus on two strategic areas; the Sakhalin Basin, a massive offshore southeast Siberia field, and a giant gas-for-China project slated for 2007-2010. It wants to open a new BP era in Russia, producer of nine percent of the world's oil and holder of one third of global gas reserves.

One source said the British oil giant will exit Sidanko, also spelt Sidanco, if it can, but wants to do so "with style and panache". BP bought 10 percent of the privatised oil holding group three years ago. Within a year the investment had descended into a legal morass as Russia's emerging capitalist economy hit an economic crisis. Some subsidiaries were declared bankrupt, and creditors took valuable assets in exchange for debts.

A BP spokesman said the company had done much to restore the group to health since it installed managers there. "We have 10 per cent of Sidanko," he said. "We also have two places on the board. We have no current plans to change that."

Arguments and court battles continue between Sidanko shareholders and Russia's Tyumen Oil over the assets of one subsidiary, Chernogorneft. BP has already written off most of its initial $500 million Sindanko investment and feels that other shareholders, mainly private western financiers and Russian funds, do not expect to get much back and have stopped trying.

Financially, the investment is insignificant for BP, which makes enough profit in a week to cancel out the remaining $200 million investment. But Chief Executive John Browne remembers going to UK Prime Minister Tony Blair's 10 Downing Street residence in November 1997 to sign the ill-fated deal with Russia's Uneximbank. He is determined to see a tidy end in sight before committing to the new strategic push.

BP led an industry mergers-for-cost-savings boom through 1998-99, but investors now want growth. "BP's strategy - and investment case - rest in its ability to grow," said Deutsche Bank analyst JJ Traynor in a recent research paper.

The freezing seas off southeast Siberia may hold part of the answer. BP has an option to bid for acreage in the as yet unopened Sakhalin 5, a section of a seven-part offshore basin close to Japanese gas markets.

The Sakhalin Basin is only 10 percent tested, but already boasts proven reserves of 5-10 billion barrels of oil equivalent (boe). "It's like the early days of the Gulf of Mexico or the North Sea," said one insider. "It'll need billions of dollars (invested) over the next decade. It's one for the big boys."

BP's rival supermajors Royal Dutch/Shell and Exxon Mobil are already in. Sakhalin 2 is the only one of seven sections already producing. Shell holds 62.5 per cent after a stake swap this month with Marathon Oil, and got 10-11 million barrels out this year before the six-to-seven-month winter shut-in.

Sakhalin 1 will start up next and has a key Production Sharing Agreement (PSA) in place. Operator Exxon holds 30 percent, Indian group ONGC Videsh Ltd is negotiating to buy half of Russian state-owned Rosneft's 40 percent stake. BP is also interested.

Sakhalin is near the Kuril Islands, site of a territorial dispute between Russia and Japan. But with Japan's Mitsui, Mitsubishi Corp and Sodeco involved, partners see few geopolitical problems. BP holds other Russian cards.

The primary aim of the Sidanko investment was always as a conduit to Kovyktinskoye (Kovykta) - a huge gas field in Irkutsk, near Mongolia, from which it aims to pipe gas to China and Korea. BP now holds its own 25 per cent stake in Rusia Petroleum, the major player in Kovyktinskoye, in addition to a smaller interest through Sidanko.

The ambitious project received a boost earlier this month, when Korea's Kogas joined a feasibility study due to be completed by 2002. BP has also moved closer to Lukoil, Russia's biggest oil producer and a long standing partner, inheriting a direct seven per cent stake when it bought the U.S. oil major Atlantic Richfield (Arco) this year.

BP cooperates with Lukoil in the Azeri Caspian through the Azerbaijan International Operating Co project. The joint venture Lukarco and its 12.5 per cent of the Caspian Pipeline Consortium, also came with Arco.