Financial Times: ENERGY: The state’s unsated appetite

By Catherine Belton
Published: April 20 2007 11:20 | Last updated: April 20 2007 11:20

When BP’s Russia venture TNK-BP gallantly lost to state-controlled Rosneft in the recent cut-price auction of remaining assets of the Yukos oil group, its participation helped legitimise a process criticised by Yukos shareholders as expropriation, analysts say.

Italian energy majors Eni and Enel swiftly followed – winning a second Yukos assets auction only to hand control of their winnings to Russia’s state gas monopoly, Gazprom.

The kowtowing has underlined the new subservience of foreign oil majors seeking a place in Vladimir Putin’s new energy order, which for many industry observers began with the smashing of Mikhail Khodorkovsky’s Yukos oil company over back tax claims.

The humility has taken such a hold that when Gazprom took over Royal Dutch-Shell’s Sakahlin-2 oil and gas venture last November after a crushing government campaign, Jeroen van der Veer, Shell’s chief executive, enthusiastically thanked Mr Putin for his support.

Since Yukos’ main production unit Yuganskneftegaz was sold to pay off back tax claims in December 2004, the state’s direct and indirect share of Russian crude output has risen from 28 per cent to 50 percent. By the time the last bit of Yukos has gone under the hammer on May 11, the state’s share will likely have risen to nearly 55 per cent.

The few remaining independent and foreign oil majors operating in Russia question how much further the state control drive will go. In a global energy environment of high prices and increasing clout by state-owned companies, “not one asset that belongs to a major foreign corporation in Russia is free from the risk of being swallowed by a state company,” says Vladimir Milov, former deputy energy minister. In four years, foreign oil majors have gone from nearly landing a significant stake in Yukos – which could have given direct access to nearly a quarter of Russia’s oil reserves – to being squeezed on all fronts. “The rules are clear if you want to be in the game,” says Chris Weafer, chief strategist at Alfa Bank. “The state has direct control and will selectively bring minority partners in.”

“It is extraordinary to see this transformation,” says Daniel Yergin, chairman of Cambridge Energy Research Associates. “But this is an era in which power has shifted toward state companies and the questions international oil companies are facing in Russia are similar to the access questions they are facing elsewhere.”

“The increase in oil prices. . .has facilitated this in Russia as in other countries,” he says. TNK-BP, owned 50-50 by a group of Russian billionaires and by BP, is under increasing pressure to fit into the new paradigm. The Russo-British venture faces government threats to revoke its license for a huge gas project, the east Siberian Kovykta field. Analysts and bankers say its battle over Kovykta is part of a bigger game in which Gazprom or Rosneft is seeking to buy out the Russian half. Even though TNK-BP’s billionaire shareholders have denied they intend to sell out, bankers say a takeover is only a question of time. “I think the question is not so much if, but when and by whom,” says Frank Kujilaars, global head of oil and gas at ABN Amro. “This is just going to be a phone call,” says another banker familiar with the matter. “If they are told to sell, they will sell.”

Also facing possible pressure, says Mr Milov, is the Exxon Mobil-led Sakhalin-1 venture on the far east island near Japan, 80 per cent owned by a consortium of Exxon, India ’s ONGC and Japanese companies. Oleg Mitvol, the Russian official who led the probe over alleged ecological violations at Sakhalin-2 that ended in Gazprom’s takeover, is due to start checking Exxon’s record in May.

Investors also think Russia’s last remaining major independent oil company, Lukoil, faces risks too. It trades at a price/earnings ratio of eight times, compared to more than 20 times for Rosneft. The reason for Lukoil’s valuation, says Mr Weafer, is because “investors see that company as stuck in no-man’s land”. One way Lukoil appears to be shoring up a future with the state was its announcement earlier this year that it would form a joint venture with Gazprom Neft, Gazprom’s oil arm that was formerly Roman Abramovich’s Sibneft.

Lukoil’s president, Vagit Alekperov, denied that the venture was the only way it can win access to new fields in east Siberia and the Arctic. “We will back each other up and build enough resources to develop not just separate fields but entire new oil provinces,” Mr Alekperov told the FT.

The state’s undeniable voracity for new energy assets may still be held back by its own inefficiencies, analysts and bankers say. Debt levels at Rosneft and Gazprom are ballooning.

Most importantly, the Kremlin and state-controlled companies recognise they need foreign technology to develop complicated new provinces like the Arctic. But as with Gazprom’s snap decision last year to develop its vast Arctic Shtokman gas field alone, any foreign participation is likely only on Moscow’s terms. Foreign oil majors such as Norsk Hydro, ConocoPhilips and Total may be invited to take part in Shtokman only as contractors, Gazprom has said.

Arkady Dvorkovich, Mr Putin’s economic advisor, sees state ownership in the energy sector gradually falling back, for example via additional share emissions by Rosneft.

But as Russia’s investment needs mushroom – developing new gas fields on the Yamal peninsula alone needs investment the size of Russia’s $100bn stabilisation fund, Mr Milov argues – it is going to need greater foreign participation, critics say. While Gazprom is expanding into other sectors of the economy such as electricity and oil, the country already has a gas deficit of 4bn cubic metres this year. The International Energy Agency argues that with delays in developing new capital-intensive supply sources such as Yamal, that number is only set to climb.

Copyright The Financial Times Limited 2007

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