Viewing cable 09MOSCOW2353,

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P 141352Z SEP 09
FM AMEMBASSY MOSCOW
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Cable dated:2009-09-14T13:52:00C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002353SIPDISDEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN, S/EEE MORNINGSTAR DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER NSC FOR MMCFAUL, JELLISONE.O. 12958: DECL: 09/14/2019TAGS: EPET ENRG ECON PREL RS

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Summary 
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¶1. (SBU) Outgoing TNK-BP COO Tim Summers told the Ambassador on September 11 that his company’s production would rise about 3% in 2009, that the company’s finances are in good shape, and that relations with the Russian shareholders are “rational and professional.” Summers noted, however, that the sector overall still operates very inefficiently and government policies hindering modernization are not likely to change anytime soon. End summary. 

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TNK-BP HAS BRIGHT FUTURE 
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¶2. (SBU) Outgoing TNK-BP COO Tim Summers and his successor, Bill Schrader (previously head of BP’s Azerbaijan operations), told the Ambassador in a September 11 meeting that 2009 would be a good year for the company and that the future also looked bright. Summers said TNK-BP expects 3 percent production growth in 2009. He said the firm paid out approximately $1.5 billion in dividends in the first half of 2009, and will likely pay out another $1 billion in the second half. 

¶3. (SBU) According to Summers, TNK-BP’s financial performance has helped to smooth relations between BP and the Russian shareholders (AAR) -- “They don’t want to kill the only goose in their portfolio that is laying golden eggs.” He said relations between shareholders and management is “more rational and professional” than he has seen in the past, and he foresees no strategic disagreements on the horizon. Given a strong cash position and low debt, TNK-BP has raised its capital budget several times over the past year, without controversy from the board. He noted that the board was completely aligned on the attempt to take over Sibir Energy, for which TNK-BP’s $2.5 billion offer fell short of Gazprom’s bid of $3 billion. Summers added that he does not believe AAR partners will give up equity in the company anytime soon, as had previously been expected. 

¶4. (SBU) Summers said he was concerned, however, that at some point BP’s role in TNK-BP will be questioned by the political leadership because BP has “put in $8 billion” into the company and has “already taken out $12 billion.” He explained that since BP reinvests its dividends largely in projects outside of Russia, he expects the company to receive more political scrutiny. 

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OPERATIONS
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¶5. (SBU) Summers told us TNK-BP will spend about $7 billion in the coming years moving from exploration to production in major fields in the Yamal region. According to Summers, the company’s Ruskoe field should yield “at least” 1 billion barrels of oil, even if TNK-BP exploits it very inefficiently. He said the Yamal fields should tie into Rosneft’s pipeline infrastructure for its Vankor field, but that given the difficulties of negotiating these arrangements in Russia, it is entirely possible that TNK-BP would have “to waste $2 billion” building its own pipeline to move oil out. TNK-BP is also planning to invest $1.5 billion over the next five years in refining, an area in which Schrader has spent much of his career. In all, Summers said, TNK-BP is likely to invest up to $3-4 billion per year over the next ten years. Expat experts who had left the company during the dispute between the shareholders are returning, but Summers believed the company could use another 50 such employees. 

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INEFFICIENCIES ABOUND 
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¶6. (SBU) Summers was less sanguine about the oil and gas 

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sector as a whole. He indicated that built-in inefficiencies and government influence hamper the rational development of the, many parts of which are facing tough times. Summers said he believes both Gazprom and Lukoil have put many employees on unpaid leave. He said Gazprom will continue to face pressure from increased and cheaper global LNG supplies -- “If you’re a European buyer, the last molecule of gas you will want is from Gazprom.” He noted that due to the recession, subcontractors were having difficulty maintaining quality and delivering services on time. 

¶7. (SBU) The inefficiencies in the system “are so huge,” according to Summers, that it would take a very long time to modernize the Russian oil and gas sector. For example, Summers pointed out that a well that would take 10 days to drill in Canada would take 20 days to drill in Russia. He said moving a drilling rig from one site to another, a process that might take 7 or 8 hours in Canada, takes 28 DAYS in Russia -- “multiply that by hundreds or thousands and you can start to imagine the costs to the economy.” 

¶8. (SBU) One way to get around the operational inefficiencies would be to have American oil-field service companies license and manufacture their products in Russia. According to Summers, that would make life politically easier for companies like TNK-BP and it would improve the efficiency of Russian industry. However, he lamented, Russia continues to be seen as too risky by many service companies, which have concerns about intellectual property protection of licensed products and are scared off by the negative headlines about Russia. He explained that many of these companies are not large enough to absorb the potential losses from a major investment gone bad. Furthermore, he added there were simply better opportunities for these companies elsewhere over the past few years during the oil price boom. 

¶9. (SBU) In discussing the various difficulties facing the sector, Summers complained about the perennial problem of a lack of adequate access to Gazprom’s pipelines. He said that while Gazprom plans to invest tens of billions in new production, TNK-BP and other oil companies have large amounts of gas available that they cannot sell. The gas cannot even be booked as a part of these companies’ reserves until it has access to a market, he said. Summers suggested that such an inefficient situation is simply not sustainable and that common sense should ultimately prevail to force change. 

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CRISIS HAS NOT SOBERED GOR 
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¶10. (C) That transition, however, doesn’t seem imminent. Responding to the Ambassador’s inquiry about the GOR’s posture toward foreign investment in the wake of the economic crisis, Summers said he has seen “no evidence” of a change. He said oil company Slavneft (on whose board Summers sits), had been ordered to cancel an order for foreign equipment in favor of a domestic supplier, even though the foreign equipment was clearly superior. He said that Deputy Prime Minister Igor Sechin (who is in charge of the energy sector) told Summers directly that he should be using Russian gas turbines instead of the preferable GE models TNK-BP was buying. Summers also expressed some concern about TNK-BP’s involuntary involvement in a Russian oil company consortium in Venezuela, but deemed it would “not be terminal.” 

¶11. (SBU) Summers said he believed “the moment had passed” for reform. He explained that the financial and economic pressures favoring reform lasted for too short a period -- “it would have been better from a long-term perspective to have had several quarters of losses in row.” Given economic stabilization and a rebound in oil prices, reform will now wait. 

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COMMENT 
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¶12. (SBU) Summers appears to be leaving behind a company in good shape, but in an industry that badly needs the 

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modernizing influence of western companies and executives. Unfortunately, as Summers pointed out, the GOR, despite welcome words by some of its leaders, has not taken actions to attract more of this influence. End comment. Beyrle