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Financial Times: Nyet effect

Published: December 19 2006 02:00 | Last updated: December 19 2006 02:00

If there is one word that sums up 2006 for the global energy industry, it is nyet. The year kicked off with Gazprom, Russia’s state-controlled energy giant, briefly cutting off gas supplies to Ukraine. By December, Royal Dutch Shell was painfully aware that legal contracts in Russia count for only so much when the Kremlin says “no”.

The rise of so-called national oil companies (NOCs) has been punctuated by the sound of doors slamming – mostly in the faces of traditional energy companies. Control of energy supplies has re-emerged as a geopolitical priority. Look at how the European Union’s ideal of an untrammelled, unified energy market has descended into several member states promoting vertically integrated national champions and striking bilateral deals with big external suppliers such as Gazprom.

Consolidation is also accelerating in the oil sector. Yesterday, Statoil and Hydro, Norway’s listed NOCs, announced a long-awaited deal to integrate their energy businesses, creating the world’s largest offshore operator. The timing is explained partly by high commodities prices – including that of aluminium, which will help Hydro’s separate smelting business. The move is also defensive. Gazprom decided recently it did not need the help of either Statoil or Hydro in a major Russian offshore project. With far bigger NOCs flexing their muscles, it makes little sense for Hydro and Statoil to compete with each other for international assets.

Oil mergers do not create new reserves, but they do provide scale and diversification. Next year, average oil prices look set to stop climbing. That, combined with continuing oil industry cost inflation, will put pressure on margins and share prices. The big, established oil companies are already looking over their shoulders. PetroChina’s market capitalisation recently surpassed those of both Shell and BP. Meanwhile, Rosneft, the Kremlin’s other big energy company, talks of taking on the supermajors. In the longer term, the location of reserves makes closer ties with the NOCs a strategic inevitability for the western majors. For now, saying “yes” to each other presents a more palatable option.

Copyright The Financial Times Limited 2006

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