Just as his predecessor William Knox d’Arcy paid tribute at the court of the Shah of Persia, the chief executive of BP, Lord Browne of Madingley, was yesterday granted an audience with President Putin of Russia.

A concession secured by Knox d’Arcy to explore for oil in Persia was the foundation of the Anglo-Persian oil company, which later became BP. Persian oil has not played much of a role at BP since the Iranian revolution and Lord Browne has recently said that BP will not do business in the country, the risk of rousing American ire being too great.

Russia is a different matter and of all the Western oil majors BP probably has the best position in one of the world’s last great oil and gas prospects that still tolerates (just) the presence of foreign investors. With TNK-BP, its Russian joint venture, BP has an enviable position in Western Siberia, a half share in a Russian company with Russian directors on the board and a significant portfolio of assets and unexploited opportunities.

It is hardly surprising, therefore, that Lord Browne should visit President Putin and introduce his successor at the helm of BP, Tony Hayward, because without TNK, BP would struggle to replace its reserves. Excluding TNK-BP, over the past three years, BP failed to fully replace the oil and gas it pumped from the ground with new reserves. In 2004, it only managed to replace 78 per cent and the performance has deteriorated. In 2005, it replaced 68 per cent and last year it replaced only 34 per cent of its production to its reserves according to filings to the SEC, America’s stock market regulator. TNK-BP came to the rescue, adding a billion barrels to the tank of BP’s proved developed reserves, boosting the total replacement ration, including the Russian joint venture, to 113 per cent.

For BP, it is absolutely crucial that this asset continue to perform, even if profits from Russian oil are not superb — tax is high, the oil suffers a price discount and transport costs are heavy. That means cooperating with the Kremlin and the commercial arms of the Russian state, such as Gazprom and Rosneft, BP’s partner in Sakhalin. There would be no question of BP competing with a government entity for an asset, such as the Rosneft shares held by Yukos, unless its bid was approved by the Kremlin.

TNK-BP’s Russian crown jewel, Kovytka, is a gasfield in Eastern Siberia, stranded for want of a pipeline to China. Without Gazprom’s cooperation, BP cannot build the link but Gazprom wants to take most of the asset and the Government is playing rough. TNK-BP is threatened with confiscation of its Kovytka licence for failing to produce enough gas, despite the lack of a market.

Signs that Gazprom, or possibly Rosneft, are interested in buying out BP’s joint venture partners, the Russian oligarchs Mikhail Fridman, Len Blavatnik and Viktor Vekselberg, are worrying, as it would upset the delicate balance of power in the joint venture. An investor group with entirely commercial objectives would be replaced by a political animal with other objectives.

BP would like its technical skills to open doors in Russia but political skills are what pays dividends.

The great Yukos sell-off

Yukos officially declared bankrupt at end of 2006

Lot one: March 27 Yukos’s 9.44 per cent stake in Rosneft along with promisory notes issued by Yuganskneftegaz. Starting price $7.3 billion

Lot two: April 4 Yukos’s 20 per cent stake in Gazpromneft, as well as 21 other assets including Articgaz. Starting price $5.54 billion

Lot three: April 17-19 A series of smaller assets to be sold off in three blocks To be confirmed: Tomskneft and Samaraneftegaz — Yukos’s main producing companies, with output of about 400,000 tonnes a year. Five refineries — three in the vicinity of the city of Samara on the Volga River, another in Achinsk in western Siberia and the Angarsk Petrochemcial Company in eastern Siberia

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