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Majors must go to Gazprom to get access to Russia’s vast natural oil and gas store

Financial Times: Majors must go to Gazprom to get access to Russia’s vast natural oil and gas store

“Shell has had a strategic alliance with Gazprom since 1997 but had yet to partner the state-controlled Russian company in any major project. On Thursday, however, the company announced that it would partner Gazprom in not one but two multi-billion dollar projects.”

Tuesday 12 July 2005

By Thomas Catan and Arkady Ostrovsky

Published: July 12 2005

Even as terrorist bombs were going off across London on Thursday, Alexei Miller of Gazprom, the Russian gas monopoly, was shuttling around the City, meeting some of the world’s top oilmen.

In the midst of the chaos Mr Miller, Gazprom’s chief executive, signed a deal with Jeroen van der Veer, his counterpart at Royal Dutch/Shell, that will make the two companies partners in two huge Russian gas projects.

As the ink was drying on that deal, Mr Miller went to meet Lord Browne, BP’s chief executive, to “review the prospects for bilateral co-operation in the energy markets”, Gazprom said.

That Mr Miller is in such high demand in London comes as little surprise. The company he presides over has a lock on Russia’s vast natural gas reserves – the world’s largest – at a time when the oil “supermajors” are desperate for access to new resources.

Many international oil companies are struggling to replace the reserves of oil and gas they have already extracted, but none so more than Shell.

The company was having trouble finding additional resources even before it was forced to slash its proved reserve figures by nearly a third last year.

With most Middle East countries off-limits, Russia is one of the few places the oil majors can go to do large deals. Getting into Russian gas today means talking to Gazprom.

“It is impossible to look at opportunities in the Russian gas industry in isolation of Gazprom,” Merrill Lynch said in a research note last month.

“Any project under consideration should also be evaluated in the context of Gazprom’s view and how it might respond.”

Gazprom has a monopoly on gas projects, controls the pipeline network and plans to extend its reach further. Mr Miller told the FT in a recent interview that the company wanted to become one of the largest integrated energy companies in the world, spanning oil, gas and electricity.

It is also on the political ascendancy. Gazprom is seen as a preferred vehicle by which the Kremlin is reasserting control over Russia’s oil industry. Vladimir Putin, the Russian president, said at the weekend that Gazprom had been holding talks to take over Sibneft, Russia’s fifth-largest oil producer, currently controlled by Chelsea football club owner Roman Abramovich. However, Mr Putin stressed that this was “a relatively private deal” not being pushed by the Russian government.

Even so, analysts see the Kremlin’s hand in the takeover and the oil majors understand that they can only reach deals in Russia with the approval of the president.

So it comes as little surprise that the western oil companies are so keen to build a relationship with Gazprom.

Shell has had a strategic alliance with Gazprom since 1997 but had yet to partner the state-controlled Russian company in any major project.

On Thursday, however, the company announced that it would partner Gazprom in not one but two multi-billion dollar projects.

Under the preliminary deal, Gazprom will take a 25 per cent stake in the massive Sakhalin-2 liquefied natural gas project off the eastern coast of Russia, of which Shell is 55 per cent owner.

In return, Shell will get a 50 per cent stake in the lower deposits of Gazprom’s Siberian gasfield, Zapolyarnoye. The company said the deal would expand its resource base in Russia and that it was seeking to sign more deals with Gazprom.

“We very much would like to grow in Russia,” Shell says. “We would see [Thursday’s deal] as a stepping stone to further integration and co-operation [with Gazprom]. We’re discussing co-operation on a number of projects.”

Shell is vying with a number of rivals for a slice of Gazprom’s Shtokman gasfield in the Barents Sea, one of the world’s largest gas fields with reserves of 3.2 trillion cubic metres of gas.

The interested parties include BP, ExxonMobil, Statoil of Norway and Total of France.

Gazprom is due to make a decision by the end of the year but Mr Miller holds out the possibility that Thursday’s deal could favour Shell.

“This deal will assist us in defining the criteria we apply in choosing other partners . . . Of course, I am talking about Shtokman,” he says.

BP holds regular talks with Mr Miller and says that it “always looks forward to co-operation between ourselves and Gazprom”.

But it has adopted a different strategy towards Russia from Shell and the other rivals. Instead of picking up projects on an incremental basis, Europe’s largest oil producer has gone in feet first. It owns 50 per cent of TNK-BP, a joint venture with Russia’s Alfa Group and Renova-Access Industries.

Through its joint venture, BP already has significant exposure to Russia, where it gets more than one-fifth of its global production.

Meanwhile, ExxonMobil, Chevron and other US oil companies have so far gained only limited access to Russian reserves.

“Part of the reason everyone’s getting so excited and trying to do these deals [with Gazprom] is that BP, with TNK, is so far ahead of everyone else in Russia now,” says Frank Harris of Wood Mackenzie, the oil consultant.

“With the exception of Shell, the rest of the companies really are a long way behind. And with Gazprom and Rosneft [the state-owned oil company] taking a more active role, there’s not a huge amount on offer for the supermajors.”

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