Russian roulette - and next stop, Libya

When his reputation as the "Sun King" who could do no wrong was still intact, BP's chief executive, Lord Browne, signed a landmark deal to create TNK-BP, a joint venture with Russian businessmen to extract their country's oil and natural gas. Four years on, Lord Browne's reign at BP has come to a dramatic end - and one of the prize assets of TNK-BP is on the brink of being snatched away.

Russian authorities are expected to revoke TNK-BP's licence to operate the huge Kovykta field, with an estimated 2 trillion cubic metres of gas reserves, although a final decision was delayed on Friday for two weeks. A bigger headache still for Lord Browne's successor, Tony Hayward, is the impending sale by BP's Russian partners of their 50 per cent stake in the joint venture, which is responsible for about a quarter of the group's reserves and total production. Gazprom, the Russian state-controlled gas giant, is the likely buyer and could try to take over other BP assets.

With continuing uncertainty over TNK-BP, it must have been doubly galling for Mr Hayward, who became chief executive on 1 May, to hear Tony Blair announce his com-pany's $900m ([pound]450m) gas deal with Libya last week before it had been signed. BP has not been dubbed "Blair Petroleum" for nothing. The deal gives BP the right to drill 17 wells in and off the coast of the north African state, a project in which it could invest up to $2bn over the next decade. BP returns to the country more than three decades after being thrown out - along with other foreign oil firms - when Libya's leader Colonel Gaddafi nation-alised the industry.

The Libyan deal is not as large as TNK-BP (which saw BP invest $6bn). Nor is it as groundbreaking - when it was signed, TNK-BP was the first foreign energy joint venture of its kind in Russia. Besides this, BP's British rival Shell and the Italian oil group Eni are already active in Libya, which has smaller reserves than those of Russia.

Mr Blair's headline grabbing notwithstanding, Mr Hayward can notch up the Libya deal as BP's f irst major agreement on his watch. It is also the first piece of good news for months at BP, which has been dogged by investigations over its safety record and distracted by succession planning in the run-up to what was to become the messy departure of Lord Browne. (The former chief executive quit over revelations that he had lied to a High Court judge over how he met his boyfriend.)

Mr Hayward has only just completed his f irst month in the top job at BP, where he was previously head of exploration and production, so he would have been involved in the group's major decisions. The new regime is slowly starting to make itself felt. Last week it announced the departure of the head of ref ining, John Manzoni, who was criticised by US safety regulators over the explosion at a BP refinery in Texas that killed 15 workers. He will be replaced by Iain Conn, the head of safety and environment. Analysts expect other personnel changes, but say it would be wrong to expect major changes in strategy so soon.

Making new appointments is the easy part for Mr Hayward. Deciding whether to change BP's strategy is altogether harder. It's important to put the revocation of the Kovykta licence in perspective. The Siberian field certainly is huge - it represents 6 per cent of BP's total non-proved global oil and gas reserves (or a fifth of the TNK- BP total). The threat to the Kovykta licence was far from unexpected. As one veteran auditor of Russian oil companies puts it: "It's par for the course. For TNK-BP, losing the Kovykta licence or having to renegotiate was a case of not if but when". Oil companies are used to having to operate in politically unstable parts of the world; Russia is no different, and its government has been reviewing foreign investment in its energy sector for some time. At the beginning of the year, Shell had to dilute its stake in the $20bn Sakhalin 2 gas project and cede control to Gazprom.

Because it is getting harder to find new oil and gas reserves, the bargaining power of host governments such as Russia is growing. BP's replacement reserve ratio - which measures how much new oil a company is finding to replace the oil it is pumping out of the ground - is above 100 per cent, so its reserves are still growing. But, using the Securities Exchange Commission standard, BP's ratio, has fallen every year since 2002, when it was 153 per cent, and by last year it stood at 114 per cent.

BP's current reserves situation is actually more healthy than that of its rivals, especially Shell. Between now and the end of the decade, Citigroup analysts expect BP's production growth to average just over 6 per cent per year. Beyond that, its long-term production will depend on the size of its unbooked reserves. These stand at about 40 billion barrels of oil and gas. But over a quarter of these reserves are in Russia, where nothing is ever certain. Clearly, BP cannot abandon Russia, even if it wanted to.