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The Wall Street Journal: Total Settles for Less, Wins Russia Project

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Gazprom-Venture Stake
Confers No Title to Gas;
Signal Sent to Sarkozy?
July 13, 2007; Page A6

French petroleum company Total SA prevailed in a long-running effort to participate in the development of Russia’s vast Shtokman natural-gas field, one of the world’s last great untapped energy prizes.

But the tough conditions imposed by Russian gas monopoly OAO Gazprom underscore the huge difficulties major Western oil and gas companies face in trying to acquire ownership of fresh reserves, particularly in that energy-rich nation.

Located about 340 miles offshore in Arctic waters, Shtokman has enough gas to supply the world for a year. But it also presents huge engineering challenges, not least the Arctic environment with its icebergs, stormy seas and months of darkness. Developing it could cost as much as $20 billion, analysts estimate. Total was among a number of Western oil companies that have been negotiating to participate in the project.

Taking a Backseat

Under terms of the accord, expected to be signed in Moscow today, Total would essentially take a backseat in the lucrative project and won’t be able to claim ownership of the gas produced. Gazprom Chief Executive Alexei Miller yesterday said Total would take a 25% stake in a new company that would design, finance and build the first phase of the project and own its infrastructure.

Gazprom would own the remaining 75%, though it could cede a part of that to other foreign partners, he said. Mr. Miller stressed that Gazprom would retain full ownership of the gas produced at Shtokman and the subsidiary that owns the license for the field.

It was unclear from his statement whether Total would be allowed to book a share of Shtokman’s reserves. Reserves are traditionally seen as an indicator of future production, and the ability of oil and gas companies to find new reserves to replace supplies pumped out of the ground is closely watched by investors. Total, like other major oil producers, has struggled to replenish reserves because many of the best remaining reservoirs are hard to reach or off limits to Western companies.

Total declined to provide details of the tentative deal ahead of today’s signing, but noted it would represent only a preliminary step. “The agreement won’t amount to an investment decision,” spokeswoman Patricia Marie said. “That will come in at a later stage.”

Analysts said an arrangement where a Western partner is granted a stake in a managing company separated from the underlying asset was unusual. But it may become more prevalent due to the growing power of state-run energy companies like Gazprom, which are loath to give up ownership of reserves.

“Big international oil companies are going to have to convince the markets that they should be given credit for deals like these, even if they can’t book the reserves,” said Alex Turkeltaub, managing director of Frontier Strategy Group, an emerging-markets consultancy. “These deals are actually quite profitable.”

Still, the agreement with Gazprom represents a breakthrough for Total, which has suffered repeated setbacks in Russia since the country opened up to foreign investors in the 1990s. The Shtokman deal “establishes Total as a major player in the Russian upstream sector where they’ve been underweight up till now,” said Tom Ellacott, an analyst at consultant Wood Mackenzie.

At 4 p.m. in New York Stock Exchange composite trading, Total’s American depositary receipts rose 3.5%, or $2.92, to $86.42.

The agreement shows how Western oil companies that want to participate in Russia, which has the world’s largest reserves of natural gas and is also one of its largest oil producers, are having to accept much tougher terms than they used to as the Kremlin extends its control over the country’s natural resources.

In recent months, Western oil majors BP PLC and Royal Dutch Shell PLC reached deals that ceded control of major projects to Russian companies. The dismantling of former Russian oil giant OAO Yukos in a dispute with the Kremlin over allegations of unpaid taxes led to losses for many Western investors.

In 1995, Total was one of the first international oil companies to get its hands on a Russian oil field. But the Kharyaga deposit in northern Siberia yielded the equivalent of 8,000 barrels of oil a day last year, or just 0.3% of Total’s global output. Then in 2005, Total’s attempt to buy a 25% stake in Russian gas company OAO Novatek for $1 billion was blocked by Russian antitrust authorities.

The Shtokman agreement marks the latest in a string of bold moves by Total to seek new sources of oil and gas. The company has increased its presence in Africa and has secured participation in liquefied-natural-gas projects in Yemen, Australia, Qatar and Nigeria. But like other companies, it faces challenges in the increasing number of energy-rich countries that want bigger stakes for themselves after reaching less lucrative agreement in years when oil prices were low.
Gazprom has always lacked the technological expertise to develop Shtokman on its own. It was clear from early on it would need the help of a Western major like Total or Exxon Mobil Corp. with the experience of drilling offshore in hazardous conditions and freezing the gas to make liquefied natural gas, or LNG, for export to countries like the U.S.

Surprise Announcement

In the end, Gazprom announced a shortlist of five potential partners — Total, Chevron Corp., ConocoPhillips and the two Norwegian companies Statoil ASA and Norsk Hydro ASA. But the gas giant shocked the industry last year by announcing that foreign companies wouldn’t be given equity in Shtokman’s gas reserves and would have to settle for the role of contractors. Some, such as Chevron, said they weren’t interested. Norsk Hydro and Statoil said they were still negotiating with Gazprom.

Observers noted a geopolitical element to yesterday’s agreement. France’s new president, Nicolas Sarkozy, has worried some in Russia with his harsh criticism of Kremlin policies. By doing a deal with Total, Moscow is signaling to the Elysée Palace the economic benefits to be gained from keeping on good terms with Russia, analysts said.

The European Union has been lobbying for better access to Russia’s energy sector amid concerns that the continent’s dependence on Russian gas will increase dramatically in the coming decade as Europe’s own reserves dry up.

•  The News: France’s Total reaches a deal to play a minority role in developing a vast Russian gas field.

•  Supply Concerns: Total and other oil companies face pressure to tap new sources of oil and gas.

•  Future Glimpse: Total’s deal could pave the way for similar arrangements that give Western companies access to Russia’s mineral wealth.

Write to Guy Chazan at [email protected] and David Gauthier-Villars at [email protected] and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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