07MOSCOW4240, RUSSIA ENERGY: TNK-BP LOOKING INTO IRAQ,

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Reference ID Created Released Classification Origin
07MOSCOW4240 2007-08-29 13:25 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO3159
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #4240/01 2411325
ZNY CCCCC ZZH
P 291325Z AUG 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3383
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUEHAH/AMEMBASSY ASHGABAT PRIORITY 2036
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0190
RUEHCV/AMEMBASSY CARACAS PRIORITY 0233
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 004240 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT, HEGBORG, EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR MCKIBBEN 
 
E.O. 12958: DECL: 08/27/2017 
TAGS: EPET ENRG ECON PREL RS IZ TX VE
SUBJECT: RUSSIA ENERGY:  TNK-BP LOOKING INTO IRAQ, 
TURKMENISTAN, INCREASING CAPEX 
 
REF: ASHGABAT 877 
 
Classified By: Econ MC Eric Schultz for Reasons 1.4 (b/d) 
 
------- 
SUMMARY 
------- 
 
1. (C) TNK-BP VP for International Affairs Shawn McCormick 
told us on August 24th that the company is venturing into 
Iraq, has sent a team to Venezuela with mixed results, and is 
optimistic about prospects in Turkmenistan.  Its capital 
expenditure budget is up $700 million in 2007 to $3.4 billion 
and expected to rise again in 2008.  U.S. firms appear poised 
to win a significant chunk of this year's contracts.  The 
possible acquisition of the Russian shares of the company by 
either Rosneft or Gazprom is unlikely anytime soon as both 
suitors are finding it difficult to raise the $20 - $25 
billion needed to make such a purchase and the TNK owners are 
still fighting amongst themselves.  End summary. 
 
---------------------------------------- 
TNK-BP LOOKING TO EXPAND INTERNATIONALLY 
---------------------------------------- 
 
2. (C) During an August 24 lunch, McCormick told us the 
company's Deputy Chairman, German Khan, will travel to Erbil, 
Iraq this week to meet with Kurdish leader Massoud Barazani 
to talk about hydrocarbon prospects.  McCormick said he 
declined to join Kahn due to security concerns.  He will 
update us upon Khan's return.  McCormick also told us a 
TNK-BP team just returned from Venezuela with the assessment 
that the geological potential of proposed sites offered to 
TNK-BP were good, but that there were serious doubts about 
the terms offered as well as the political situation there. 
McCormick said Lukoil had been given a "real dog" of a 
license, which Chavez had used to rope Russia into political 
support.  Cuba had also invited TNK-BP, among others, to 
explore its waters but McCormick insisted that TNK-BP was notQlanning on sending a team to Cuba anytime soon.  In response 
to our question, he said Iran has not been mentioned as a 
potential site for future expansion. 
 
3. (C) McCormick was positive about TNK-BP's push into 
Turkmenistan, where it hopes to develop at least one field 
(in the Block 1 area) and possibly a second.  He suggested 
that Petronas needs a partner.  He added that BP is pursuing 
its own interests in Turkmenistan separately.  Describing the 
difficulties of doing business there (as Ashgabat alluded to 
in reftel), McCormick said TNK-BP had been asked to develop a 
resort on the Caspian coast of Turkmenistan to gain more 
favorable consideration of its pursuit of hydrocarbons. 
Since TNK-BP is not in the resort-building business, 
McCormick said it was scratching its head trying to figure 
out next steps.  He emphasized that TNK-BP is after oil, not 
gas, in Turkmenistan since transportation difficulties 
detract from the value of gas assets. 
 
--------------------------------------------- 
FUTURE OF TNK SIDE OF COMPANY STILL UNCERTAIN 
--------------------------------------------- 
 
4. (C) On the long-rumored sale of the TNK half of TNK-BP 
(owned 50% by Mikhail Fridman's Alfa Group, 25% by 
billionaire Viktor Vekselberg, and 25% by U.S. firm Access 
Industries), McCormick said the future is unclear.  Only 
Gazprom and Rosneft would have the Kremlin's blessing to buy 
the Russian shares.  But, given a valuation of between 
$20-$25 billion for the TNK half (based on market prices of 
TNK-BP's small free-float), neither can afford it right now. 
McCormick confirmed that banks have told TNK-BP they simply 
cannot lend more money to either of the over-extended state 
giants at this time.  In any event, there is dissension among 
the TNK shareholders as some waffle over which state company 
might offer the highest price and others (especially 
Vekselberg) focus on parochial concerns related to how to 
leverage such a sale into better positions for their other 
businesses. 
 
MOSCOW 00004240  002 OF 002 
 
 
 
-------------------------------------------- 
LARGE AND GROWING CAPITAL EXPENDITURE BUDGET 
-------------------------------------------- 
 
5. (C) McCormick said he wasn't concerned about possible GOR 
actions to bring TNK-BP (Russia's 3rd largest oil producer) 
under state control on the cheap.  He suggested BP's 50% 
ownership helps protect the company, as a move against TNK-BP 
would further tarnish the Kremlin's reputation in the West. 
Senior TNK-BP management and ownership is confident in the 
company's fu
ture, as demonstrated by the $700 million 
increase in the 2007 capital expenditure budget to $3.4 
billion, which is set to rise again in 2008.  This, McCormick 
noted, is not what companies do if they think they could be 
taken over by the state, adding that Sibneft sent all its 
earnings out as dividends rather than reinvesting in the 
business before its sale to Gazprom. 
 
6. (SBU) McCormick said TNK-BP was trying to accelerate its 
spending (it has only spent $500 million of its capital 
expenditure budget this year), but lacks both the human 
capacity to manage it, as well as capable partners to supply 
it with the products and services it needs.  He specifically 
asked us to point U.S. suppliers to opportunities with 
TNK-BP.  On August 27, the company announced its second big 
tender of the summer -- a $1.3 billion offer for workover 
rigs.  In July the company announced a $2 billion tender for 
drilling rigs.  (Note:  The human resource concern is often 
cited by companies as a major challenge in Russia.  Like 
other companies, TNK-BP is pouring money into Russian 
higher-education institutions to train the people it needs 
for its continued success.  End note.) 
 
------------ 
DUDLEY VISIT 
------------ 
 
7. (SBU) McCormick said that TNK-BP president (and Amcit) Bob 
Dudley would visit Washington October 17-18 and hoped to see 
senior officials at State, Energy, Commerce, the NSC, and 
others. 
 
------- 
COMMENT 
------- 
 
8. (C) TNK-BP's rising investment, international expansion 
efforts, and human capacity development plans clearly reflect 
a company convinced of its long-term sustainability.  It is 
an example of the value that sophisticated international 
partners such as BP bring to their operations in Russia.  If 
TNK-BP can remain independent, it will likely continue to be 
a force for good -- greater transparency, effective 
deployment of capital, and management efficiency -- in 
Russia's energy sector.  In that regard, it is unquestionably 
fortunate that that the souring of the credit markets has 
made it difficult for Gazprom and Rosneft to further expand 
their reach in the sector. 
 
9. (C) Dudley's trip to Washington is a good opportunity for 
the USG to urge more U.S. company involvement in TNK-BP's 
growth and to explore the possibilities in third countries 
for cooperation with this unique half-western, half-Russian 
company. 
Burns

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