The Economist: Russian arm twisting

AFP

Jun 22nd 2007
From Economist.com

BP is the latest Western energy firm to back down, agreeing to sell a prized asset to Gazprom

AT A much publicised ceremony in 2003, Vladimir Putin looked on approvingly as BP and its Russian partners signed an agreement to set up a joint venture called TNK-BP. But there was no sign of Mr Putin and no fanfare on Friday June 22nd, when TNK-BP agreed to sell a prized asset to Gazprom, Russia’s largely state-owned gas giant. In just four years, Mr Putin has turned from a friend of Western oil companies into one of their most notable foes—with dramatic consequences for the industry.

Foreign firms had drooled at the prospect of access to Russia’s huge and relatively underexploited reserves of oil and gas since the collapse of the Soviet Union. In the 1990s Exxon Mobil and Royal Dutch Shell, among others, signed production-sharing agreements to exploit particular fields. Other foreign firms own minority stakes in Russian oil companies. But BP was the only foreign company that managed to buy such a sizeable stake (half) of a big Russian oil firm.

The creation of TNK-BP, which had seemed to signal a new dawn for foreign investment in Russia’s oil industry, in fact marked its zenith. Mr Putin first turned on Yukos, a private oil company with many foreign shareholders that was led by Mikhail Khodorkovsky, an uppity tycoon. Mr Khodorkovsky had been in talks with Exxon Mobil and Chevron about a possible sale of a stake. The authorities bankrupted the firm with swingeing tax bills, while Mr Khodorkovsky found himself jailed for fraud. Next, the government turned its sights on Shell, which was developing several oil and gas fields off Sakhalin Island in Russia’s far east. After officials stepped up complaints about environmental breaches, Shell and its partners got the message and sold Gazprom a majority stake in the project.

Something similar has happened to TNK-BP. It owned a majority share in Kovykta, a huge gas field in eastern Siberia. But it was not able to meet the production quotas stipulated by the authorities, since Gazprom, which has a monopoly on gas exports, refused to develop any export pipelines. After officials threatened to cancel the licence, and the courts refused to intervene, TNK-BP seems to have seen the writing on the wall, and agreed to sell its stake to Gazprom for around $800m—although the final sum has not been settled. TNK-BP had long been in talks with Gazprom about Kovykta offering it a majority stake in the project, but Gazprom refused to deal.

BP may well have decided to surrender Kovykta without much of a fight in the hopes of safeguarding TNK-BP’s other assets. After all, it was not counting Kovykta’s gas in its proven reserves, and was not making much money from the small amount of gas it was selling to local customers. But TNK-BP owns many other fields, which account for a quarter of BP’s production worldwide, and a tenth of its profits. Moreover TNK-BP continues to find more oil than it pumps, something that BP’s other units have strugggled to do in recent years. Rumours suggest that Gazprom might like to buy out TNK-BP’s Russian shareholders, or BP itself, a development BP would be keen to avoid.

So even after this latest upheaval, the future of the Russian oil industry remains opaque. Foreigners, led by Exxon, control a majority share of another big project off Sakhalin, partly because of protection offered by Rosneft, which has a minority stake. Even so this arrangement looks increasingly out of keeping with the new order. Russian politicians make it clear that in future all big oil and gas fields will be developed by Russian firms. But most observers doubt that they are capable of doing so. At any rate, Shell is still involved in the Sakhalin project that Gazprom took over on the Russian firm’s behalf. On the whole, Gazprom and Rosneft, its state-controlled counterpart in the oil business, have been slower than private firms to develop new fields.

That delay has had an impact on the price of oil. In the mid-1990s Russian oil production boomed. From 1999 to 2004 additional Russian output accounted for over a third of the total increase in global production. But after control over some of the largest oil assets had passed into state hands Russian output growth drastically slowed down—just around the time that the oil price was beginning its recent ascent. Disappointing production from Russia and other countries continues to contribute to the current high price. The sweeping changes in the Russian oil industry have an impact well beyond Russian borders.

http://www.economist.com/world/europe/displaystory.cfm?story_id=9390152

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