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Energy Tribune: Russia’s State-Sponsored Energy Robberies

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Posted on Aug. 17, 2007
By Michael J. Economides and Pavel Romanov

Two decades of Pax Americana are coming to a screeching halt. Starting with Ronald Reagan, the end of the Cold War, and the collapse of the Soviet Union and its empire, the world was supposed to enter a new era of democracy, freedom, and free enterprise, far away from what everybody thought was stifling state control.

Fat chance. It all began with the low oil prices Ronald Reagan precipitated in the mid-80s by persuading Saudi Arabia to flood the market. This caused the Soviet Union, whose economy was then entirely dependent on oil and gas for hard currency, to crash. Those very same oil prices have now gone full circle, giving Russia and others renewed reasons for bravado. Enough to once again cover their other deficiencies.

It is a current characteristic of the West, headed by the United States, to take longer than they should to understand emerging threats to their economies. In a bygone era, recent actions by Russia and others such as Venezuela would have elicited much stronger responses.

The signs of trouble are everywhere. In June, BP became the latest victim of Russian sponsored robbery en route to complete control of its oil resources – resources that a decade ago Boris Yeltsin auctioned off, needing any cash he could get his hands on.

The only reason BP entered its multibillion-dollar joint venture with Russia’s Tyumen Oil Company (TNK) has disappeared. BP thought that by partnering with a local company, by becoming a good corporate Russian citizen, it would be shielded from the vulture appetites of Vladimir Putin’s government, which enjoys feasting on the carcasses of once-private energy companies. No such luck. And for most seasoned observers of Russian energy, it was not really surprising. TNK-BP decisively lost its uneven battle with Gazprom, Russia’s gas monopoly and the battering ram of Putin’s assault, for control of the Kovykta field in East Siberia. The field is the largest proven natural gas reservoir in Russia, containing more than 2 trillion cubic meters (70 Tcf) of reserves. Worth tens of billions of dollars, the field was taken over by Gazprom for a fraction of that amount. TNK-BP owned 62.8 percent in Rusia Petroleum, which had been the operator of the Kovykta license.

The event did not lack for symbolism and the connections were not hard to make. Gazprom’s takeover of the BP concession occurred during the state visit to Moscow by Venezuelan firebrand Hugo Chávez. Both Russia and Venezuela, riding sky-high oil prices, are usurping their indigenous energy companies, and as of late, the largest multinational oil companies. At almost the exact time that BP lost Kovykta, two of America’s largest companies, Exxon Mobil and ConocoPhillips, announced their unwillingness to play along with Chávez’s recent re-nationalizations. Their exit from Venezuela is all but assured.

Just a few months ago, another giant oil company, Shell, lost its stake in the massive Sakhalin-2 project after investing billions of dollars in exploration and early stages, the project’s most critical aspects. Exxon Mobil is not far behind. It remains the only supermajor still in control of a major Russian energy project, and is in danger of losing its share in Sakhalin-1.

But the Sakhalin matters have been, for the most part, pretty straightforward. The Kovykta case borders on the bizarre.

Obtained in 1997, the license for the Kovykta field obligated the operator to produce as much as 9 billion cubic meters a year to supply gas to the local settlements in the Irkutsk region. Originally, Sidanko, under a joint venture with BP, and eventually TNK-BP, made efforts to get the giant gas project up and running. But failure was custom-built into the project plan from the start. Any company producing the entire 9 billion cubic meters would be bound to cut back on production because Irkutsk and the neighboring regions could not even come close to absorbing so much gas. Besides, any gas produced for that market would be replacing the region’s coal production, one of its largest employers. In short, the mandates of the license doomed the project from the outset.

The only way for the project to have a go would be to export gas from Kovykta to China – an obviously hungry and imposing market – but this could not occur without a pipeline. Constructing several thousand miles of pipeline would not be cheap, even in the best of circumstances. But more to the point, Russian gas export is under the monopoly of Gazprom.

Although the Putin administration discussed the possibility, Gazprom, sensing the obvious, was disinclined to build a pipeline for TNK-BP, which would thereby give the foreigners the ability to keep control over the huge Kovykta asset. So the gas giant kept delaying the pipeline’s construction.

As if the entire situation were not dire enough, a new Russian weapon was unleashed on TNK-BP – and it was the same weapon used on Shell in the Sakhalin-2 project. Russian environmental watchdog agencies and special prosecutors opened a series of investigations. In addition, Russian officials suddenly determined that Kovykta also held world-class reserves of helium. Given helium’s skyrocketing prices in recent months, that announcement further queered TNK-BP’s license. Then, Rusia Petroleum was cited by the Ministry of Natural Resources for falling short of the production requirements of its license. Top-level negotiations between President Putin and ex-BP CEO John Brown failed to resolve the impasse. Following Brown’s early retirement, TNK-BP’s days were numbered.

Once the inevitable became obvious, TNK-BP’s attempts to get a reasonable price from Gazprom for its Kovykta stake were rebuffed. The payout was a paltry $600 million to $900 million (the exact amount of the deal is still not clear) for a 62.8 percent share in the project. Miraculously, the day following the announcement, the Russian deputy minister of natural resources said that his agency had decided not to recall the Kovykta license after all. What a surprise. Meanwhile, BP tried to put on a happy face, saying that it “looks forward” to “future cooperation” with Gazprom on other projects. Sure. Just like a fat young lamb “looks forward” to having dinner with a pack of hungry wolves. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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