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BP cuts production by 3.5% during 2005's second quarter

MOSCOW, July 27 (RIA Novosti) - Although the TNK-BP Russian-British joint venture has expanded its output, British Petroleum cut production by 3.5% in the second quarter of 2005 due to the higher taxes being levied on Russia's oil sector and to oil-export restrictions, BP said in a report Tuesday, Gazeta.ru reported.

However, market watchers disagree with this assessment.

"Indeed, Russian taxes and duties have soared by some 20% of corporate earnings since early 2005. Still this factor cannot explain subsiding BP output. Corporate production may have plunged because of lower output from other BP-owned assets. Or BP simply sold off part of its units," said Andrei Gromadin, an analyst with MDM-Bank.

"Generally speaking, the British company has proved that it did not acquire Russian oil assets in vain. TNK-BP transferred 50% of its net January-June 2005 profits (more than $1 billion) to the British side. Moreover, BP has already recouped 40% of its $7.5-billion Russian investments," Gromadin said.

But profits may be a distraction from a bigger problem, according to Igor Vasilyev of the Financial Bridge Investment Company.

"Sky-high profits conceal great risks, mostly political," Vasilyev said.

The national Tax Service slammed TNK with 26-billion ruble ($906.28 million) tax claims for 2001 this spring. Although less serious, TNK-BP has other problems to deal with. They have now stopped developing Eastern Siberia's largest Kovyktino deposit that contains an estimated 869.7 billion cubic meters of gas condensate. The concerned parties initially wanted to export gas to Asia. However, BP was forced to agree that Kovyktino resources could be used to gasify some Russian regions instead.

The company is still trying to display its loyalty to the Kremlin. BP believes that its problems can be solved in the course of negotiations.

"BP faces risks in Russia. At any rate, it is obvious that BP will not follow in Yukos' wake, nor will it repeat its fate. And BP's high-risk investments on Russian territory are yielding positive results," Gromadin said.

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