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Daily Mail: Kremlin stokes cold war on oil majors

Sam Fleming,
4 December 2006

A top Kremlin official has warned western oil giants their money is no longer needed for the development of Russia’s huge energy reserves.

President Vladimir Putin’s deputy spokesman Dmitry Peskov said Russia’s decision to exclude US and European companies from the development of a massive Arctic field earlier this year would not be the last.

While Russia will honour deals struck in the 1990s when the country was economically enfeebled, the days of offering foreign firms such generous terms are over, he said.

Instead, oil majors will be allowed to offer technical assistance as subcontractors to Russian companies. They will only be given stakes in Russian fields if they have significant assets of their own to swap in exchange.

Peskov’s warning was made at a Kremlin briefing on Friday night. It will come as a huge blow to western giants such as Exxon, Royal Dutch Shell and France’s Total, which are struggling to secure new reserves as energy-rich governments freeze out foreign players.

And it could leave BP, which is involved in a major Russian joint venture with TNK, in a difficult position over future projects.

Peskov said: ‘In the year 2006 we don’t anymore need to attract western companies to explore our gas. We have lots and lots of money and we don’t know what to do with it.

‘Yes we are extremely interested in attracting them on a mutually beneficial basis. But of course they would prefer just to come here, to be an owner of a gas field, to pump it out from the hole, to export it abroad and that’s it. But we are not interested in that anymore.’

Firms including Total and Norway’s Statoil spent months preparing bids for participation in the vast Shtokman field, which contains 4.7 trillion cubic yards of gas, only for Gazprom to announce in the summer that it would develop the field alone.

Peskov also renewed the Kremlin’s attack on Shell, which is under fire over alleged environmental violations on the Pacific island of Sakhalin.

‘Have you heard at least one time when Shell denied the existence of ecological problems?’ he said. ‘Can you give me an example? No. Because they really have ecological problems and they really have violated some paragraphs of their licence.’

Peskov claimed Shell had shifted one pipeline from the agreed route, damaging dozens of rivers in the process

Related Article

Russian gas giant shows human face
Sam Fleming, Daily Mail
1 December 2006

Deep in a windswept playground in the Siberian city of Novy Urengoy stands a monument to Gazprom’s victory over Russia’s energy industry.

A solitary plaque carries the name of Yukos, the oil giant that was pounded into dust by Vladimir Putin after its founder’s political aspirations became a threat.

The playground is a relic of the times when Yukos was a deep-pocketed player here. Now its former boss Mikhail Khordokovsky stares out between the bars of a cell further east and Gazprom stands unopposed atop the world’s biggest gas empire.

The energy titan has long been seen as a potential buyer of British Gas owner Centrica, giving it millions of British customers for its huge supply.

Its headquarters are in a bleak tower in south-west Moscow. But if you had to find its spiritual home it would be here on the Arctic Circle, in Novy Urengoy. Settlers – called ‘pioneers’ – came from the ‘big land’ of mother Russia in the early 1970s to develop promising gas finds into fuel for the Soviet regime.

Underneath hundreds of metres of permafrost lay what was to become the world’s biggest gas deposit.

Today Gazprom has become notorious in the West, less as an energy explorer and more as a tool for the regime of President Putin.

Episodes such as its decision to cut off the Ukraine in a pricing dispute nearly a year ago have sparked fears that the Kremlin is using Gazprom and its growing pipeline network to create an energy stranglehold over western powers.

But the firm is anxiously trying to rebrand itself as a commercially driven enterprise rather than an arm of the state. That effort is leading to dramatic reforms that can be felt acutely in cities like Novy Urengoy.

Here the toast is ‘to us, to you, and to gas’. Vodka is one of the comforts in a deep freeze-city that is plunged into semidarkness for much of the winter. Some 110,000 people call Novy Urengoy their home, most of them here directly or indirectly because of Gazprom. The city’s tight grid of tower blocks is surrounded by thousands of miles of snowy tundra punctuated by violent flashes of orange flame from gas flaring towers.

This frigid wilderness has spewed out over 5.5 trillion cubic metres of the fuel in its lifespan so far and accounts for over 30% of Russia’s annual production. In winter the workers toil in temperatures that can fall below minus 60 degrees Centigrade.

The city is built on sand because otherwise the buildings would sink when the tundra turns into a mosquito-infested swamp during the brief summers. ‘We are just like the United Arab Emirates,’ says Svetlana Umanskaya, who helps run Novy Urengoy’s kindergarten network. ‘We are founded on top of sand, oil and gas.’

Gazprom has for decades educated the Novy Urengoy population, maintained its roads and hospitals, built its sports stadiums and even run the local TV channel.

That cosy existence is now changing as the firm shed smunicipal responsibilities across the country as part of its efforts to adopt a more commerical edge. Umanskaya says she does not want her schools to be pushed out of the Gazprom nest. ‘We give more to our children,’ she says. ‘We want to stay part of Gazprom because they treat us well.’

But it is not only Gazprom’s 330,000 employees who are being affected by its reforms. The firm also wants to drive up returns by raising prices it charges domestic customers. Gazprom makes more than three-quarters of its revenue from profitable exports even though most of its gas is sold at home.

The Kremlin is considering a measure to allow Gazprom to lift prices charged to local industry. That has provoked fears across Russia that ordinary customers’ heavily- subsidised rates could eventually rise – ending one of the more benevolent inheritances from the Soviet era.

The firm has also been tightening its grip on the media, including last week’s takeover of Komsomolskaya Pravda newspaper.

Its activities now extend to airlines, banking, TV, radio, hotels and cinemas, suggesting it is part of a Kremlin attempt to reassert state control over the economy.

Spokesman Sergei Koupriyanov claims that Gazprom wants to divest media assets and sell a stake of its banking unit. But this week the firm was lashed by the Organisation for Economic Co-operation and Development for displaying a ‘seemingly insatiable appetite for asset acquisition’.

A result of this diversification may be that Gazprom fails to focus enough on its core business of finding new gas. Over half its capital expenditure budget last year was spent on building pipelines, whereas only 31% was ploughed into production. Novy Urengoy’s gas production boss, Nickolai Dubina, is a bear-like man who was among the region’s first ‘pioneers’ in Soviet days.

‘The gas supply will be guaranteed – it will be enough for domestic and foreign customers,’ he says. ‘Stop worrying, gentlemen.’

Anna Boutenko of Morgan Stanley is not so sure. ‘In the short-term there is a very low likelihood of acute gas shortages, though the balance is indeed rather tight. However unless domestic Russian prices increase substantially from current levels, Gazprom may continue to regard investment into new gas production regions as uneconomical.’

The citizens of Novy Urengoy, operating in some of the most extreme conditions on earth, are as focused as ever on their quest for the ‘blue fuel’. But the empire they work for still has a mountain to climb before it convinces the West it is the reliable supplier it portays itself to be.

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