Financial Mail on Sunday: Russia’s a cuddly bear in the energy war

17 December 2006
LISA BUCKINGHAM, FINANCIAL MAIL EDITOR

Drilling for oil and gas has never been for faint hearts. And as most of the easily recoverable fields are now rapidly being run down, energy giants are being forced to confront bigger and bigger risks in an effort to replenish their reserves. 

Once again, though, Russia has demonstrated that the political risks involved in ensuring that an oil giant has a viable future can be every bit as challenging as the physical hurdles.

By subjecting Shell to an almost paralysing blizzard of environmental complaints on the giant Sakhalin project, Moscow has succeeded in securing control for its own Gazprom.

Certainly, Shell’s contract secured in the Nineties now looks attractive, but energy prices then were lower and Russia lacked – and still does – the necessary expertise for such a huge liquefied natural gas project.

However, Shell and its Japanese partners simply cannot make Sakhalin work without Russian cooperation, so ceding 50% of the project to Gazprom is regarded as an acceptable price.

Walking away was not an option. Shell has already invested billions of dollars in this ‘elephant’ project. And even if it were ready to take such a whopping financial hit, the long-term need to find new sources of oil and gas means compromise is a necessity.

Russia is reckoned to be sitting on about 30% of the world’s gas – a somewhat more potent bargaining chip than its stash of ageing nuclear weapons.

Reserves this size mean it is in the driving seat, both as a fuel supplier to other countries and as the provider of resources to be exploited by its own and foreign energy groups.

The country is not shy of throwing its weight around in either role.

For example, Gazprom last week threatened to cut off supplies to one of its former Eastern Bloc neighbours in a move that could disrupt supply to Germany.

Following Shell’s experience, BP is expected to face similar pressures on its joint venture with the Russian company TNK. Gazprom – already so large that it is practically unmanageable – has its eyes on TNK’s 50% and would like to secure majority control by taking part of BP’s share too.

For all his public utterances over the security of energy supplies to Europe, Vladimir Putin wants to restore pride in the country.

He wants to control its strategic assets and thinks nothing of using Russia’s companies as an arm of Kremlin policy.

These are wild frontiers behind which our energy companies are trying to operate.

But though the challenges are great, they are nothing new. Muddling through with hostile political regimes is day-to-day stuff for oil giants.

The expropriation of assets is, historically, par for the course. Remember, for example, that BP had a goodly part of its business swiped by Iran.

And don’t let’s pretend that we haven’t felt vulnerable to energy exploitation by countries that detest our way of life.

As BP’s chief executive, Lord Browne, remarked when discussing the difficulties of doing business in Russia, if not there then the alternative was violent, war-ravaged Africa. Looked at from this perspective, Russia appears eminently hospitable.

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