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The Capital Spectator: ANOTHER KREMLIN VICTORY IN ENERGY

December 22, 2006

If you’re looking for one more reason to worry about the future of global oil production, take a gander at the news on Royal Dutch Shell’s coerced sale of a majority stake in its Sakhalin-2 oil and gas project in Russia to the state-controlled Gazprom.

On the surface, it all looks quite innocent. Shell sells 50 percent plus one share of the project to Gazprom. The deal comes after a 12-month effort by the Kremlin of running interference on the project, reportedly because of environmental concerns. Shell and its partners read the writing on the wall and threw in the towel. The result: another victory for the Russian government’s not-so-subtle strategy of nationalizing the lion’s share of its energy business.

“You are never going to have majority control under this regime in Russia,” Tim Harris, chief investment strategist for Europe, the Middle East and Africa at J.P. Morgan Private Bank in London, told Bloomberg News. “That’s a fact of life. The resource opportunity in Russia is vast. The risk is political.”

This is more than of passing interest to the West. Russia, after all, pumps as much if not more oil than Saudi Arabia. With the Kremlin slowly but surely taking control of its vast energy reserves, there’s reason to wonder about what comes next for Russia’s oil game, which is increasingly under Putin’s thumb.

The larger message from Russia concerns developing nations, which collectively harbor the only real potential for new energy discoveries. Unfortunately, the lesson seems to be that it’s okay to nationalize energy projects. That is, nationalize after private oil companies spend billions locating and developing the opportunities, as Shell did in Russia. Then, when it’s clear that there’s gas and oil to be had, the state will take over.

The example in Russia for private, for-profit oil companies isn’t encouraging when it comes to making fresh capital committments for investing in new energy projects. What’s true for Russia will be true for other regions of the world where the rule of law resides on even shakier ground.

The problem all of this carries for the West is that the main opportunities for increasing oil production reside in Russia and other nations where political risk is high–and rising. After reading the news today, it’s hard to imagine the major oil firms will find new inspiration for sinking billions of dollars into projects in faraway lands that run the risk of being snatched away at the 11th hour.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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