Russian atmosphere hard for Western oil companies

Sep 23, 2004 02:00 AM

Is Vladimir Putin's Russia any place for an international oil company?
Putin's government has eviscerated Russia's Western-style oil company, Yukos, in what has been widely viewed as political payback. The Kremlin has altered petroleum tax laws retroactively, and it has ignored what ExxonMobil and ChevronTexaco believe are their contract rights for a mega project off Sakhalin Island.

The strong arm of the Kremlin is imposing unpredictable, even capricious changes in Russia's energy sector. While his behaviour to date falls short of a renationalisation of the country's oil and gas industry, analysts say Putin is remoulding Russia's energy industry on his terms.
Trying to operate in such an arbitrary environment violates many of the usual tenets of smart investing.
And still they come. The majors need Russian oil and natural gas. Russia "is a seller's market," noted Julian Lee, senior energy analyst with London's Centre for Global Energy Studies. "The oil companies are falling all overthemselves to get in there."

Take France's Total, which purchased a 25 % stake in Novatek, Russia's largest independent gas producer, in a deal Deutsche Bank analysts believe is valued at $ 1 bn. Houston-based ConocoPhillips is aggressively bidding to buy the Russian government's 7.6 % stake in the giant Russian producer LUKoil.
The majors are sniffing around the remains of Russian producer Sibneft following the demise of its merger deal with Yukos. And ChevronTexaco announced it had signed a six-month agreement with Russia's Gazprom, the world's largest natural gas company, to study the feasibility of bringing LNG from Russia to the United States.

BP led this latest oil stampede, agreeing last year to pour $ 7 bn into a joint venture with Tyumen Oil Co. called TNK-BP.
"Five years from now, everyone will say (BP CEO) John Browne was a business leader par excellence who really had vision," Lee noted. “But if events in Russia go terribly wrong, the wags will be saying, ‘Tsk, tsk, tsk. Told you so’."

Putin's actions may look like a re-Sovietisation of the country, but that's unlikely to be the long-term result, says Robert "Bud" McFarlane, a former national security adviser for Reagan who has been investing in overseas energy projects for more than a decade. Putin is the kind of politician who is more comfortable having direct control over the allocation of resources. But McFarlane believes Putin realizes he needs to be able to deal with foreign investors credibly if he wants to solve his country's problems.
"At the end of the day he's a politician who wants his legacy to be that he made the lives of Russian people better," McFarlane said. "I don't think ConocoPhillips would be thinking of buying a 7 % stake of LUKoil if it really worried that nationalization was the long-term trend."

The majors can hardly be blamed for being intrigued by Russia, warning bells notwithstanding. Russia boasts 60 bn barrels worth of proven oil reserves. After the collapse of the former Soviet Union, Russia's oil output nose-dived. Production has since rebounded, and last year, Russia ranked as the world's second-largest oil producer after Saudi Arabia.
The major oil companies, meanwhile, are desperate to find huge new oil and gas deposits to replace their dwindling reserves, analysts say. Indeed, in Lee's estimation, investing in Russia is more important for the majors than it is to Russia.

And while dealing with the Putin government may be difficult, other regions of the world with vast oil reserves -- West Africa, the Caspian Sea region, northern Alaska -- have their own risks. The oil companies are accustomed to operating in difficult places.
"They can deal with the status quo, no matter how bad it is," noted Terry Hallmark, director of political risk and policy assessment for IHS Energy in Houston.

The problem is the status quo in Russia keeps changing. Putin created the confusion last year, when his government took on Yukos.
Yukos was accused of failing to pay its taxes, a charge which could be levelled against any number of Russian energy companies. The government now says Yukos owes billions. The Kremlin has repeatedly brushed aside the company's efforts to negotiate and has pushed it to the brink of bankruptcy. But Yukos was led by independent-minded Mikhail Khodorkovsky, who didn't run his decisions by the Kremlin and didn't dispel rumours he might emerge as a political rival to Putin.

Oil industry executives are hoping Yukos is a unique case, since other Russian oil companies have been much more careful to include the Kremlin in their decisions. And they take heart from Putin's own statements, which acknowledge the importance of the energy sector. In true Russian fashion, Putin said last year: "The fuel and energy sector is the goose that lays the golden egg. Killing the goose would be insane, stupid and unacceptable."
But Putin apparently doesn't want an oil industry run by independent giants. Instead he is creating new energy powerhouses, controlled by the state. Earlier, Putin was personally involved in Gazprom's deal to buy the state-owned Rosneft, Russia's fifth-largest oil producer. The Russian government will have a controlling stake in the new behemoth, said to have assets comparable to ExxonMobil.

Putin's government also frustrated ChevronTexaco and ExxonMobil, when it turned over rights to explore an area off Sakhalin Island to Rosneft and the Korea National Oil Company. The American firms had won the rights to explore in that area back in 1993, but the government said the companies missed exploration deadlines.
ChevronTexaco spokesman Stan Luckoski said ChevronTexaco and its partners still consider themselves the winners of that tender and are still negotiating with Moscow in the hopes of resolving the issue.

At least for now, the international oil companies may have to content themselves with purchasing a smaller stake in a company, as Total is doing with Novatek rather than a controlling share, noted Blake Marshall, executive vice president of the US-Russia Business Council in Washington.
The oil companies must understand that Putin is a nationalist, Hallmark noted.
"He'll do whatever he believes is in the best interests of the Russian state."

Source: Houston Chronicle
Market Research

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