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The Wall Street Journal: BP Feels Pressure as Kremlin Puts Heavy Hand on Resources

COMMENT FROM breakingviews 
December 28, 2006

The last thing BP needs is another big problem. The oil giant is already dealing with a fight over management succession and faces U.S. lawsuits on safety lapses and trading practices in the futures markets. But Russian resource nationalism could well join the list, if reports of a government investigation into TNK-BP’s Kovytka gas field prove correct.

This could be no more than a little local difficulty. TNK-BP, 50% owned by BP, can only exploit Kovytka fully if Gazprom lays export pipelines out of Eastern Siberia. Gazprom, though, wants a big share of the revenue. And the new investigation into a technical contract violation — where TNK-BP produced less gas than agreed, but only because there were no buyers for any more — sounds like a means of getting its way.

BP hopes that this isn’t the start of a pattern of harassment. The company has certainly tried to do everything right in Russia. It put its investments in a 50-50 joint venture with Kremlin-favored oligarchs; the TNK-BP contract terms give the government a huge share of profits; and it has paid the government $40 billion in taxes and duties since 2003. Needless to say, it is anxious to find acceptable terms on Kovytka.

But the pessimistic interpretation is more persuasive. It looks like the Russian government has no interest in allowing significant foreign ownership of any of its resources. The leaders’ logic is simple. Unlike Nigeria or Angola, Russia is big and organized enough to prosper without the multinationals, especially if oil prices stay high. So why not follow Saudi Arabia, Brazil, Mexico and Iran in nationalizing all production?

BP’s good behavior may have made it less of a target for the Kremlin’s economic nationalists. Its friendly approach may also help with negotiations if there is a forced sellout. But as long as export markets don’t dry up, the trend toward government control of Russian resources will be hard for any company to stop.

Nigerian Oil

The explosion of a pipeline in Nigeria that took at least 265 lives hasn’t moved the oil price, or the shares of foreign oil companies that do business there. It turns out that the pipeline supplied petrol for domestic consumption, and wasn’t used for foreign energy exports. But as foreign companies increasingly bet on Nigeria to expand their bottom lines, the blast is a reminder that doing business in the country is risky.

Pipeline explosions have occurred before in Nigeria. A blast in 1998 claimed more than 1,000 lives. Reports from this recent accident suggest that thieves broke into the pipeline to sell petrol on the streets of Lagos. This type of theft is one reason why Nigeria, despite being the 10th largest oil exporter, must re-import petrol to fill its own domestic needs. Terrorism is another problem. This year the country’s biggest oil exporter, Royal Dutch Shell, lost around 40% of its production through attacks by rebels.

Yet foreign oil companies are placing large bets on Nigeria’s future. Exxon Mobil — the second largest producer of Nigerian crude — is investing $11 billion in the country’s oil sector. Total, Shell, and Eni are investing billions to expand the country’s liquefied natural-gas industry, which will fill gaps in dwindling U.S. and U.K. domestic natural-gas production.

Nigeria’s government is offering generous financial incentives to foreign oil companies to reach its goal of nearly doubling the country’s oil production over the next three years. Those opposed to government rule have been less hospitable. This month, Shell evacuated the families of foreign workers after militants set off a car bomb near one of its compounds.

The tragedy in Lagos highlights the dangers of doing business in a country where the people are so poor that they are prepared to take extraordinary risks to make some petty cash. But if political and social instability gets any worse, foreign oil companies could find the costs of investing in Nigeria don’t justify the returns.

–Edward Hadas, Nicole Lee, Cyrus Sanati
 

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