The British Experience: Oil and Murder

The end game looks near for the British in one of their pair of bouts of brinksmanship with Russia.

The two countries have been circling one another for months over oil and murder -- in one case, over who will control TNK-BP, the rich Russian oil company; and in the second, over whether British citizens can be murdered with impunity, allegedly by Russian visitors.

The latter issue, over the 2006 nuclear poisoning in London of KGB defector Alexander Litvinenko, may never be resolved. But the former question is highly active at the moment. It involves an attempt by a trio of Russian oligarchs to squeeze BP in their highly lucrativem five-year-old TNK-BP oil partnership. Those observing the dustup debate what the objective is, but there's no doubt that matters took a turn against BP today, when Russian bureaucrats barred Robert Dudley, BP-appointed head of TNK-BP, from working in the country. Visa officials are siding so far with the oligarchs, who in their effort to push Dudley out of the company have said his employment contract has expired.

But that's just the beginning. Last week, 16 senior Russian managers at TNK-BP filed suit for alleged discrimination. These are not billionaires -- they would not have done so were they not fairly sure of cover. Either they are certain that the oligarchs are going to emerge triumphant; they were recompensed generously for possibly risking their jobs; or they are certain they cannot be retaliated against. Whatever the case, things generally go bad for the foreign partner in the former Soviet Union as soon as the issues hit the courtroom.

In a story over the weekend by Andrew Kramer at The New York Times, unnamed analysts suggest that we are watching a new tactic in a now-accustomed Russian strategy of exerting state control over the country's prime energy assets. In this case, the article suggests, the Kremlin has effectively directed the oligarchs to do their worst, the aim being a renegotiation of the 2003 deal.

Indeed, according to my own sources in BP, the company has already resigned itself to losing control of TNK-BP; only, it wants to hand over that control to the state, and not to the oligarchs, who it thinks will simply raid the assets, as they did in a previous dustup in the late 1990s.

I think that's true too -- the Russian state at some point soon will take control of the majority of TNK-BP's assets. The questions are what is going on in the meantime, and how much will BP lose? The prevailing wisdom is that the company will keep most of its share. But is that definite? Will the oligarchs be completely out of the arrangement?

While the New York Times piece is interesting, I don't find it ultimately convincing. Over the last eight years of oil nationalism, Vladimir Putin has made a deliberate attempt to make the country appear governable again. Tax inspectors have swooped in, along with environmental bureaucrats, but the objective was clear, and the targeted Big Oil companies knew what it was; once they elected to surrender control, the rest was quite orderly. That's not the case here. And I find it hard to believe that the Kremlin is now going in reverse, and intentionally making Russia look entirely unmanaged by encouraging the oligarchs to run rampant over BP.

A more compelling argument, made earlier on O and G, is that the Kremlin is simply in turmoil and hasn't decided yet which power group will be the winner of assets such as TNK-BP; will it be Gazprom or Rosneft?

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Russia's Double Nelson

When the Czech Republic signed a deal this week to host U.S. anti-missile radar, Russia's Dmitri Medvedev said he was "extremely upset." He added, “We will not be hysterical about this, but we will think of retaliatory steps.”

Yesterday the Czechs -- like the Ukrainians, the Balts and the Georgians before them -- learned what that means. The Czechs say that the flow of oil from Russia -- their main supplier -- has suddenly slowed. Instead of about 120,000 barrels of oil a day, the Czechs are receiving about 70,000 barrels a day, and apparently will do so through all of July, according to an Interfax report quoting Euro Online, a Czech publication.

The development undercuts recent efforts by both Medvedev and his predecessor, Vladimir Putin, to assuage the West about Gazprom's growing market power in Europe. Both they and Gazprom chairman Alexei Miller have said that Russia is a reliable partner, and dismissed critics who say the country uses oil as an economic and political lever.

As Andrew Kramer at the New York Times notes, Moscow cut supplies to Ukraine in January 2006 in a dispute over prices, and later in the year stopped shipping oil to Lithuania when it sold an important refinery to a Polish buyer rather than Russia. In addition, Georgia, which has had a long, acrimonious relationship with Moscow -- has suffered numerous cutoffs of natural gas from Gazprom over the years.

This is nothing new. Such cutoffs seemed coincidentally to spring up during the Soviet period too.

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In the Interrogation Room with Gazprom

Police have used the tactic for centuries -- good cop, bad cop. After a few hours of roughing up by a nasty interrogator, a suspect warms to the coffee and banter brought by a seemingly sympathetic officer. Then the suspect throws himself on the mercy of the court.

One sees at least a bit of that strategy in the tandem of Russia's Vladimir Putin and Dmitry Medvedev. After years of nastiness by Putin, Europeans were feeling warm and fuzzy after Friday's European Union annual summit, where they were treated to Medvedev's good cop approach: "being nice to them," as The New York Times' Stephen Castle described it.

I raise this not because it's surprising -- a lot of us see Medvedev as Putin with a nice face; we shall watch how Europe responds.

But it's interesting in combination with a great example of journalistic initiative (also on Friday) by the Financial Times' Carola Hoyos and Ed Crooks. It was a strong email interview the pair managed to land with Gazprom's gonzo CEO Alexei Miller. The paper devoted space on page one, in which Miller says that Gazprom will eclipse Exxon and become "the most influential [company] in the energy business," and dismisses OPEC as no longer relevant. It ran a second article on page three, in addition to a full transcript on-line, in which Miller expands on what's been a self-evident strategy toward which foreign oil companies get new energy deals in Russia: those willing to help Gazprom in its quest to become "a global player on the energy market."

Miller also defended his recent prediction that world oil prices will hit $250 a barrel.

While Russian energy titans are prone to flights of bloated rhetoric, this is not empty talk. Given its vast stores of natural gas, Gazprom may already be the most important energy player in Europe, and Miller says it is striking new deals ranging from Nigeria to North America. In the U.S., Miller is interested in the talk of new natural gas pipelines in Alaska.

In terms of big geopolitics, Miller predicts outright that South Stream, Russia's weapon to defeat Washington in the natural gas pipeline war in Europe, will definitely be built. In the remote chance that the U.S.-backed Nabucco pipeline is also erected, he says, it will pose no threat to Russia's South Stream.

So O and G readers should look for more, not less, Russian assertiveness in global energy. It will simply be quieter.

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Guest Column: Khanna Explains The Second World

Today we have the pleasure of helping to launch a terrific new book. It's The Second World: Empires and Influence in the New Global Order, by Parag Khanna, director of the Global Governance Initiative at the New America Foundation. I asked Parag to write for the blog today not only because of the quality of his book, but because his travels took him through our turf, and he came away with a different take from my own in some cases, in particular about Gazprom. Without further ado, here is Parag's posting:

Thanks very much to Steve (with whom I share a terrific editor at Random House) for allowing me to post an introductory note on this esteemed blog about my book, which has been released today.

The book covers my travels through about 40 countries to look at their changing and increasingly multi-directional leanings, and focuses on societies that are increasingly divided socially, politically, and economically between haves and have-nots, winners and losers, first- and third-worlders -- hence the "second world." It's a happy coincidence that the countries of interest to O&G readers used to be called the "second world" until the term fell out of use. I spent quite some time in Ukraine, Turkey, Georgia, Azerbaijan, Kazakhstan, Uzbekistan and the like for my research.

I want to jump into two ongoing debates: Gazprom/Europe and the Shanghai Cooperation Organization/Afghanistan.

Very often Gazprom diplomacy and Russian diplomacy are taken as synonymous, and recently the two have appeared as well-coordinated as Chinese synchronized divers. But we should not forget last year's tiffs with Belarus, and the current bickering in Ukraine, both of which serve as examples of corporate logic undermining diplomatic logic.

Gazprom's demand that Belarus -- Russia's only major ally in the former Soviet Union (alongside perhaps Armenia and Tajikistan) -- pay market prices didn't win it friends other than those who saw bankruptcy and incorporation into a State Union with Russia as desirable. It also woke up EU members to the need to diversify fast.

And in Ukraine, the creation of RusUkrEnergo to continue Gazprom's bullying for constant pay-outs on amounting arrears has only alienated wider segments of Ukraine's leadership. One can only imagine that the population is as well, meaning that future election outcomes may not be as close a split between Russian and Western -leaning sides as has been the case to date. Gazprom logic would care little for such an outcome. But an increasingly Russia-skeptical Ukraine could abandon caution and welcome overtures from NATO more than it has to date -- making Putin's worst fear a reality. Diplomacy is about making friends, while corporations exist to make money. Unless Russia balances the two, oil and glory may not be forever connected.

Furthermore, the argument that Russia has Europe permanently over a barrel on gas supply assumes a long-term Russian stability while ignoring that it is Europe that can invest in diversification over the long term, drawing more oil/gas from North Africa, for example, thus gradually increasing its leverage over Russia.

The other issue is the recent talk of NATO reaching out to China (perhaps via the Shanghai Cooperation Organization, known as SCO, though Russia for obvious historical reasons wants no part in any Afghan operations) to potentially run a Provisional Reconstruction Team (PRT) in Afghanistan, or run one jointly with other nations, even the U.S. Apparently the offer was made, and China was enthusiastic, but their letter to the State Department is said to have gone unanswered for lack of coordination with NATO or a decision on how exactly to respond. So the U.S. may have dropped the ball. (Any updates/insights on this would be appreciated.)

Across the 'Stans, it's only a matter of time before NATO and SCO mingle ever more closely, and friction possibly occur. Rumors from on the ground (yet again) that the Kyrgyz might demand a shutting of America's Manas base have such maneuvering at their root. So concrete outreach between the two "alliances" beyond mundane briefings in Brussels would be where geopolitics and diplomacy intersect today. That could be quite exciting to watch unfold as NATO stands on the brink of failure in Afghanistan while Chinese and Iranian infrastructure projects -- such as in Tajikistan and Afghanistan -- move forward across the region, eventually allowing the two to connect safely overland.

Will it be the new Great Game or new Silk Road? I predict both: America continues to support political liberalization in the region, meaning some opening to greater cross-border flows, while also hoping to maintain lily-pad like bases across the region. From China's view, it too requires open borders to facilitate its exports while importing energy, and through the SCO sees itself ever more as a contributor to regional stability. Throw in Russia and Europe and you have a recipe for all the intrigue and mystery that characterized both the Silk Road and Great Game eras.

The Why's of Pipeline Politics

One thing highly unlikely to change under Dmitri Medvedev is Moscow's hard-line energy policy. Indeed, one sometimes gets the impression that Russia wants the West to build pipelines that go around it.

As evidence, take a look at two disputes: Chevron's long-frustrated efforts to ship more oil through a pipeline that technically was built exclusively for its use; and Gazprom's cutoff of natural gas today to Ukraine.

The California company is nothing if not patient and persistent. It's hard to believe that its travails with Moscow have gone on for almost two decades, but it was 1989 when the California-based company first laid eyes on the Tengiz oilfield. The western Kazakhstan field, right next to the Caspian, contains 10 billion barrels of recoverable oil reserves or more, a considerable volume in an industry that regards a 1-billion-barrel field as a supergiant. The final contract awarding Chevron 50% of the field was signed in 1993.

Since then, it's been one stumbling block after another from Russia, which has seen it in its interest to keep Tengiz bottled up. It took eight years before a long-planned dedicated pipeline from the field -- known as CPC -- finally was running. But, while CPC has been producing 320,000 barrels of oil a day, Chevron has always seen Tengiz as at minimum a 700,000-barrel-a-day field, and more reasonably capable of 1 million barrels a day of exports. As of later this year, Chevron is ready for a mid-range production increase to 540,000 barrels a day.

Only, that would require an expansion of CPC, and Russia has blocked it. As the years have gone by, Transneft, which does the negotiating for the Kremlin, has seemed always to have a new demand. When that's met, there's been another. This time, it seems to want Chevron and its partners to finance another pipeline -- a line connecting the Black and Mediterranean seas overland from Bulgaria to Greece.

This isn't public, but Transneft is currently circulating a compromise. People who have received the Transneft memo tell me that Russia is willing to allow Chevron and its partners to raise exports through a process called "de-bottlenecking," which basically means getting the kinks out. The companies could modernize existing pumping stations, but add no new ones. Exports would rise from the current 28 million tons a year to around 38 million tons; that's far less than the 67 million tons a year that the companies seek.

There's no word on whether Chevron and its partners will accept -- they have 30 days to answer -- but it seems unlikely they'll reject it. But what is the ultimate impact of Russia's intransigence? Well, what happens when water is blocked from one drain? It seeks an outlet elsewhere. So look for a greater push for a trans-Caspian oil pipeline from Central Asia to Baku.

Meanwhile, Russia's Gazprom today cut off some 35% of its natural gas supplies for Ukraine. It says its neighbor owes some $600 million for exports this year. Ukraine Prime Minister Yulia Timoshenko disputes the figures. Given that the accounting books are closed to the public, and are disputed by those to whom they are open, there's no way of knowing for sure.

But, while they talk, both Gazprom and Ukraine say their dispute won't again disrupt supplies to Europe (Europe receives more than 30% of its natural gas from Russia, and most of that flows through Ukraine), as they did in 2006. I wouldn't bet on that. Jitteriness in Europe is Ukraine's best leverage over Gazprom.

That's the point of a current natural gas pipeline competition between Russia and the West. Because of its repeated conflicts with Ukraine and others, Russia wants to build a completely new set of natural gas pipelines to supply Europe. But such deepened reliance on Russia makes Europe and the U.S. nervous. So they have mounted a plan to diversify the European supply by going completely around Russia.

Gazprom's latest cutoff will only redouble the European-U.S. effort.

The End of Big Oil

For those interested in the history and future of Big Oil, I've got a piece in The New Republic this week on how one or two of the companies might survive despite their stubborn resistance to change. TNR is a pay site but if you take a free trial subscription you can read the whole piece, plus a few other items that look interesting this week. Here are the first few paragraphs.


When historians one day dissect the long arc of humankind’s use of fossil fuels, they may very well zero in on October 9, 2006, as a turning point for Big Oil. That’s when it became clear that the major oil companies—the giants that had survived numerous predicted extinctions and gone on to ever-greater profit and influence—were undergoing a tectonic shift and would either reinvent themselves or die. It’s the day Moscow dashed the hopes of five major oil companies from three countries and announced that Russia itself, and not they, would develop the biggest new natural gas field on the planet, an undersea Arctic reservoir called Shtokman.

Shtokman is the oilman’s Angelina Jolie: much-coveted but out of reach. Experts believe it contains the carbon fuel equivalent of 23 billion barrels of oil—that in an industry that considers a field of one billion barrels gigantic. Shtokman alone contains sufficient energy to power all of Europe for several years, and the world’s big oil companies had sought rights to it for years.

In another time, Russia’s declaration that its natural gas behemoth, Gazprom, would develop such a field would have set off peals of laughter among Western oilmen. Gazprom lacked the know-how to keep production at its current fields from declining; how would it manage a technological feat under the deep, icy waters of the Barents Sea? But there was nothing humorous about Russia’s plans. Gazprom knew it wasn’t capable of drilling the field; instead, it planned to hire Big Oil to do so. Big Oil would be its employee.

That notion flew in the face of oil-industry orthodoxy, which says that big potential profits accrue to those who assume big risks. If a company developed an oilfield, it was rewarded with the gold star used by Wall Street to measure oil company value—the rights to “booked reserves,” in industry parlance. Booked reserves consist of how much oil and natural gas a company controls, and thus can sell at some point at, say, $95 per barrel or $260 per 1,000 cubic meters. The Securities and Exchange Commission measures booked reserves, and investors regard them as the main determinant of a company’s fundamental worth. Yet now Gazprom was suggesting stripping the Western oil giants of that incentive—they would be unable to book Shtokman’s natural gas. The industry mood has become even more somber over the last half-year as two European companies—France’s Total and Norway’s StatoilHydro— actually agreed to Russia’s terms.

The truth is that any of the oil majors—with the possible exception of Exxon Mobil—eventually would have. Why? Because oilmen know that, despite recent unprecedented profits—Exxon alone reported a record $11.7 billion in net income for the fourth quarter of 2007—they are on the decline. The combined booked reserves of the world’s biggest five companies have shrunk by almost 20 percent on average since 1999, according to a paper by Rice University’s James A. Baker Institute for Public Policy. Shtokman is a blueprint for how the major oil companies are increasingly being treated around the world. Today, state oil companies and ministries from countries like Venezuela, Saudi Arabia, and Russia control somewhere between 80 percent and 90 percent of the world’s known oil and natural gas reserves. And, over the next two decades and beyond, those countries are going to ask foreign oil companies to serve as their contract employees in the same way that Gazprom brought on Total and Statoil.

Big Oil, then—the indomitable giant symbolized by the pitiless John D. Rockefeller—is dying. At the very least, it will soon have to fundamentally change the way it does business. But the shock of Shtokman is merely a tremor compared with the coming revolutionary transition to a non- carbon energy economy. Big Oil could transcend its current woes and weather that future revolution—perhaps even lead it—if it reinvented itself as Big Energy, striving to develop renewable power sources like wind and solar, or even to deliver the industry’s holy grail: a clean energy mechanism that renders fossil fuels obsolete. True, no one yet knows what the revolution
will look like; but the odd thing is that, for the most part, the oil companies don’t seem to care.

continued (free trial subscription required)

Another Death in England

England is seeming less and less safe for its multitude of political exiles. The latest death is a colorful Georgian businessman named Badri Patarkatsishvili (whom I will call Badri). British authorities say they expect to finish a post-mortem on the 52-year-old Badri today after he was found dead yesterday of a possible heart attack in the county of Surrey. As is their routine in unexpected deaths, they have handed over the case to their major crimes investigation unit. (Photo by Reuters' David Mdzinarishvili)

Badri’s possible enemies list isn’t short. Just a few short weeks ago, he lost in an election for president of Georgia against Mikheil Saakashvili. He has been charged there with plotting a coup and planning a ``terrorist attack'' on a government official. He denied the charges.

But Badri was best known as the main business partner of Russian oligarch Boris Berezovsky, who himself lives in England in political exile. That has put both Badri and Berezovsky on a black list in Russia. Both men have been charged with fraud there for allegedly stealing cars in the mid-1990s from AvtoVAZ, a company they controlled.

If the British deem foul play to have been involved, Badri's business dealings would also be in question. In his 2000 book on Berezovsky, American journalist Paul Klebnikov described Badri as Berezovsky's "primary emissary to the traditional underworld."

In a BBC report, Berezovsky said he had seen Badri yesterday. He said that Badri wasn’t sick but did complain about his heart. "I have lost my closest friend," Berezovsky said.

Pipeline War Watch—Russia’s Vladimir Putin has astutely assembled most of the pieces for a Gazprom triumph in its battle with the West to control Europe’s natural gas market, and win the political leverage that goes with it. By appearances, he’s got the main player on board – Turkmenistan, which has all the natural gas. And he also has the main countries along the route of his proposed South Stream pipeline – Bulgaria, Austria and even Serbia.

Now, Putin seems to be moving in to harden the market victory by tying up the second-tier buyers of Turkmen gas, the objective being to completely submerge the West’s comparatively amateurish, rival pipeline plans. The key second-tier buyers of Turkmen gas are Hungary, Slovakia and Poland.

Readers of The Oil and the Glory know that when middlemen show up, deals get murky. That’s the situation with this latest turn in the pipeline war. I’m told that two middleman companies – a Hungarian firm named Millander International, and a shadowy Ukrainian-Russian company called RosUkrEnergo – are working to seal a long-term contract selling Turkmen natural gas to Hungary. The deal would be signed by these two firms, Gazprom, Turkmenistan and Hungary. I am told that it could happen as early as this week.

Currently, no Western oil company has obtained rights to any Turkmen gas fields, so there’s no guaranteed natural gas to feed into the West’s proposed trans-Caspian and Nabucco pipelines.

Such Gazprom deals mean to keep it that way.

Putin, Utility Bills and Missiles

One still marvels at the notion of the president of a country announcing the successful settlement of a utility bill.

But that’s the way it is in the former Soviet Union, where the failure to pay one’s heating bill is regarded so seriously that the cutoff of service to entire other countries can result. Such as to much of Europe.

With minutes to spare before Russia planned to sever a quarter of the natural gas supply to Ukraine, Russia’s Vladimir Putin and Ukraine’s Yuri Yushchenko today announced that they had resolved their differences. Ukraine would begin to pay off somewhere over $1 billion in overdue bills to the Russian behemoth Gazprom. So, unlike in Russia's 2006 cutoff of gas to Ukraine, Ukraine's and Europe's winter heat will be spared.

That dialogue between nations at the highest levels can be disrupted over such matters is notable to say the least. It’s even more so when one looks just underneath the surface and finds the interest of a shadowy middleman company that, at least so far, Russia is highly resistant to push out of the picture.

This company, called Rosukrenergo (for Russia-Ukraine Energy company), is the official supplier of Turkmenistan’s natural gas to Ukraine. It’s half-owned by Gazprom and only partly unidentified private Ukrainian businessmen.

Who are these men? One has come forward -- a billionaire named Dmitry Firtash. But neither he nor anyone else will confirm who his partners are. One name that appears frequently is mobster Semyon Mogilevich, who before his recent arrest in Moscow was on the FBI’s Most Wanted List, and sought by other countries as well.

It can only be conjectured why actually two layers of middlemen – Gazprom and Rosukrenergo – are required to sell Turkmen gas to Ukraine. It’s also a mystery why Ukraine and Gazprom won’t identify who specifically is controlling – and earning the profit from – half of Ukraine’s natural gas supply.

The mystery is broader because Rosukrenergo also sells Turkmen gas on to Hungary, Poland and Slovakia.

Gazprom has said that, sure, you can cut out Rosukrenergo, but if you do, your gas bill is going to go up. Despite that warning, Yushchenko said today that a committee has been formed to unwind Rosukrenergo’s involvement. He expects it to be completed within a year. Having Putin at his side, he could speak with confidence on the full settlement of this utility issue.

For an excellent backgrounder on this company and its personalities, read pages 49-57 in this 2006 report by Global Witness.

More Missile Diplomacy: In the same news conference, Putin also raised the specter of a fresh missile dispute with the West. He said that, if Ukraine proceeds with the idea of joining NATO, and that if as part of that agreement an anti-missile shield goes up in Ukraine, “This would prompt Russia to take retaliatory action." Specifically, he said that Russia might point its missiles at Ukraine.

I have not heard of a public proposal to make Ukraine a part of the U.S.-proposed missile shield -- which has not yet been proven to work -- but according to a BBC report, Putin said, "I am not only terrified to utter this, it is scary even to think that Russia, in response to a possible deployment of... [parts of the] missile shield in Ukraine... would have to target its offensive rocket systems at Ukraine."

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Try That in Russia, Exxon

One lesson of recent years in Big Oil is that while most of the industry zigs, Exxon zags.

So it was last week, as the company won attention for court victories that froze some $12 billion in Venezuelan state assets abroad. This involves its dispute with Hugo Chavez over his demand for control over oilfields in the country. Exxon also got a judge to seize hundreds of millions of dollars due to Venezuela in a bond deal.

Is such confrontation wise corporate strategy? The rest of the industry – sitting conspicuously on the sidelines as spectators in this rumble – wants to know, too.

Some analysts have read the news as a warning to all the petro-nationalists out there that Exxon at least won’t be pushed around. And if Exxon is successful, the others might follow suit.

One sign that Exxon’s muscle-flexing is a limited tactic, and not a strategy, however, is its experience with its giant natural gas project in Russia, called Sakhalin-I.

Over the last year, the other big companies working in Russia – Shell, Total, BP – have all caved in to Russia’s demand for a controlling share of their projects. (In Venezuela, too, the other companies involved – Chevron, BP, France’s Total and Norway's Statoil – went along with the state demands and are still operating there)

So far Exxon alone hasn’t been forced to compromise. Specifically, the company is insisting on allegiance to an entirely reasonable contractual clause allowing it to sell Sakhalin’s gas to whomever it wants. It has seemed to want that customer to be China.

Russia’s behemoth Gazprom, however, has other ideas – it wants the gas. And according to a report by Reuters’ Denis Dyomkin, Gazprom at least believes it will get its way. The article quotes Gazprom's deputy head, Alexander Ananenkov, as reporting to Russia’s next president – Gazprom Chairman Dmitri Medvedev – that he expects to sign the deal with Exxon in April or May. In case there was any doubt previously, that means Exxon would be going head-to-head with the Kremlin.

Exxon knows the history of companies going to court to get their way in the former Soviet Union – despite “victories,” they mainly end up empty handed. The FSU states simply don’t honor the courts’ rulings, and leave it to the companies to figure out what to do next.

The distinction is that Russia is not Venezuela, and Vladimir Putin (and probably Medvedev) is not Hugo Chavez. Indeed, Putin and Exxon are fairly similar – both have been disagreeable about being pushed around.

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The Shadowy Game of Natural Gas

Russia is again threatening to cut off natural gas supplies to Ukraine. It says the reason is accumulated debt on the part of its neighbor. Gazprom, the Kremlin’s stalking horse, says Tuesday morning is the deadline – pay $1.5 billion, or lose a quarter of your supply. Talks are supposed to be going on in Moscow.

No one is opening up his accounting books, so we don’t know the true state of affairs on the two countries’ balance sheet. But there are enough dribs and drabs to get a picture of what’s at least partly going on.

This partial answer is Rosurkenergo. An entirely opaque go-between company – half-owned by Gazprom, and the other half by Ukrainian businessmen – Rosurkenergo buys natural gas from Turkmenistan sells it on to Ukraine.

Ukraine says it will pay off whatever debt it owes if the deal with Rosurkenergo is severed. But last week, a Gazprom official named Ilya Kochevrin told the Financial Times that, if that happens, Ukraine should expect a steep hike in its bill.

That line is probably not straight out of Mario Puzo, but it could be. One might rationally ask why a joint Gazprom-Ukrainian company is more capable of negotiating cheap gas than Gazprom and Ukraine directly.

One thing to note is that it has seemed that the Kremlin is attempting to get a lot of its financial house in order before the ascension of Dmitri Medvedev to the Russian presidency in next month’s elections.

Vladimir Putin, for example, has been peripatetic in his efforts to get Gazprom's pipeline deals with Central Asia and Europe sealed fast.

It’s also been a principal suspicion in the recent arrest of Russian mobster Semyon Mogilevich, an internationally hunted fugitive who lived for years in plain sight in Moscow before Russian authorities miraculously charged him last month with tax evasion. Mogilevich has been linked as a possible shareholder in Rosurkenergo, which if true could mean that his arrest was related to the company, and how and with whom the proceeds are shared.

This is all Kreminology. At the intersection of commerce, crime and geopolitics, such questions in the end get resolved. But what of the collateral victims, such as Europe? Gazprom claims this is just between Russia and Ukraine, and has assured Europe – which receives 80% of its Russian gas through Ukraine – that its supply won’t be affected.

Does anyone really believe that Ukraine won’t pass on the crunch to Europe in order to build up leverage?

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Guest Column: Khanna on the Pipeline War

Parag Khanna, the director of the global governance initiative at the New America Foundation, is the author of The Second World, which Random House is publishing next month. It's already getting much attention, including an essay on the cover of The New York Times Magazine two weeks ago. One thing I noticed immediately in the book galleys is Parag's very different take from my own on Russia and the Pipeline War. In an email exchange yesterday, Parag said he agrees with Paul Sampson's more optimistic take on a win-win outcome to the pipeline competition, published Sunday on this blog. Parag writes that he agrees with Paul "at least in terms of the long-term outcome of Gazprom remaining strong while the EU pursues a more stable energy relationship with Russia." We'll try to get more of both Paul and Parag on this blog in the coming month.

Here are the rest of Parag's remarks:

One has to wonder what strategies Europe can employ to increase its negotiating position before the 2025/30 estimates of reduced dependence on Russian gas.

For example, what would be the impact of restoring friendlier ties with Turkey in the coming years given its position as a pipeline conduit and its blossoming bilateral investment relationship with Russia?

What sorts of price stability and corporate governance demands can be brought to bear on Gazprom & Co. through [Italy's] Eni and/or other potential (e.g. Hungary) partners in the new operations?

Given Boris Tadic's re-election in Serbia, what kind of incentives can the EU offer to mitigate Gazprom's strength there even if they move ahead with the deal selling Gazprom 51% of NIS?

I'd welcome anyone's comments on the way ahead in getting Europeans on the same page (finally) on this issue.

Guest Column: How the Pipeline War Will Turn Out

Hi, my name is Paul Sampson, a London-based journalist for the newsletter Nefte-Compass who shares Steve's fascination with energy-related intrigue in Russia and Central Asia. When Steve asked me to contribute to his blog, I agreed partly because I really enjoyed his book, which ranks alongside those two oil greats, The Prize and The Seven Sisters, and partly because I’ve never blogged before. This is my first effort, so readers please go easy and save your ammo (or polonium) for later. A quick disclaimer: These views are strictly my own and no-one else's.

As hard as it tries, the European Union and the United States are no match for the 800-pound Russian gorilla when it comes to pipeline politics. Russia’s natural gas colossus Gazprom and its masters in the Kremlin have so far successfully countered the EU- and U.S.-backed Nabucco natural gas pipeline. But can they actually stop Nabucco? My hunch is no. In the end, both Nabucco and the Russian-backed Nord Stream and South Stream pipelines will be built. And the EU and Russia will find a modus vivendi that keeps Gazprom powerful, but lets new suppliers such as Azerbaijan join the fray.

This is the way it has to be. After all, neither side wants a new cold war over gas supplies, do they? If Brussels and Moscow agree to work more closely on energy, then I see no reason why Washington wouldn’t go along.

It’s been an excellent 2008 so far for Gazprom and its chairman, Russia’s president-in-waiting, Dmitry Medvedev. Medvedev and his mentor Vladimir Putin signed a deal in Bulgaria giving Gazprom a 50% stake in the crucial European hub for South Stream, which Gazprom and Italy’s Eni plan to build under the Black Sea. Then Serbia's Boris Tadic gave Gazprom majority ownership of a trunk line into South Stream, plus a 51% interest in Serbia’s state oil company, NIS. Finally, the Russians won joint ownership of Central Europe's largest gas marketing hub at Baumgarten, the terminus for the West’s proposed Nabucco pipeline. According to Nefte Compass, Gazprom now has its sights set on a gas deal in Hungary.

These deals reveal the extent to which energy and politics are intertwined in Russia. Take the Serbian deal, which was signed ten days or so before today's second round of presidential elections in the country pitting pro-European incumbent Boris Tadic against the nationalist Tomislav Nikolic. That Tadic was in Moscow to sign the pact with Gazprom suggests that it was all designed to improve his chances of re-election. Crude tactics indeed.

In general, the deals help to polish Medvedev’s image as he campaigns to inherit Putin’s mantle next month. Having kept a low profile over the past years, Medvedev is now taking some of the limelight and portraying himself as a strong and credible leader. How much freedom he will have when he ascends to the throne and to what extent Putin and the siloviki will control him is a subject for another blog.

Horelma: Here is a quick addition to Steve’s blogs on the mysterious Kazakh buyer of the $100 million London property. My interest isn't who the real owner is – let’s face it, $100 million isn’t that much for your average Kazakh billionaire – but why anyone would pay so much for such a bizarre place on a busy street in north London. I drive down Bishops' Avenue perhaps once a month, and it never fails to astound me how over-the-top the houses on it are. Having lived for several years in Dubai, I've seen my fair share of post-modern eye-sores. But Bishops Avenue has to take the biscuit.

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Rights: Creative Commons

Wall Street Grasps Big Oil's Lumbering Future

Wall Street is narrating the story of the decline of Big Oil. Bloomberg’s Fred Pals and Eduard Gismatullin report today that fewer than half the analysts they track are recommending Exxon and Chevron. But almost all are championing Gazprom and Brazil’s Petrobas.

It means that investors are getting the big picture – the long-term future is with state-owned companies with access to huge, home-grown reserves, and the technology-laden oil service companies that can help them get at it efficiently.

There are few scenarios in which Big Oil has a bright future. One is for companies that merge with state-owned oil enterprises. Another is the doomsday global warming option – the Arctic cap melts, the world panics, and suddenly they have free access to the huge polar oil and natural gas reserves now roped off because of technological and environmental obstacles.

Guy Chazan at The Wall Street Journal has a piece today on Gazprom’s steady retail inroads into the European gas market. Some prominent analysts have recently argued that Europe has actually got Russia over a barrel when it comes to energy and economic leverage. This reminds me of the boxer who emerges from the ring to say, “I’ve got that guy just where I want him. Did you see? I hit him five times in the glove with my face.”

Here is what Bloomberg says about Wall Street’s current view of the industry: “Twelve of 13 Wall Street analysts tracked by Bloomberg tell investors to buy Gazprom and 15 of 15 recommend Petrobras, the biggest oil company in Brazil. For Exxon Mobil, 10 of 21 endorse the stock, while for Chevron Corp., the second-largest U.S. oil producer after Exxon, it's eight of 21. Shell's A shares in London have a ``buy'' rating from 20 of 37 analysts.”

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Rights: Creative Commons

Russia's New Abbott and Costello Defense

Vladimir Putin -- listen up.

You now have an airtight defense against those who have savaged you ever since you temporarily cut off natural gas shipments to Europe a couple of years ago in a pricing dispute with Ukraine. It would make Abbott and Costello proud.

Last week, Turkmenistan made news by cutting off natural gas supplies to Iran. The Central Asian nation, the runt forever being picked on by neighborhood bullies, had been shipping 23 million cubic meters a day to Iran, but is tired of being short-changed by Russia and Iran for its natural gas and wants more money. Russia is now paying $130 a thousand cubic meters (versus $350 it plans to charge Europe); Turkmenistan presumably wants at least that much from Iran.

Here's where the story gets wind. You see, even though Iran buys natural gas, it also sells it. But this is an incredibly cold winter, and Iranians are freezing. The country needed those Turkmen imports. So it has cut off Turkey, which was supposed to receive 30 million cubic meters a day from Iran but is only getting about 5 million.

Except it's also mighty cold in Turkey. So it has cut off Greece.

The poetic coda? The rescue squad is from Russia. Gazprom, the lightning rod for things that go wrong across Eurasia, is shipping an extra 8 million cubic meters of natural gas a day to Turkey and 1.5 million cubic meters a day to Greece.

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Rights: Creative Commons

Question: Who's As Seductive As Gazprom? Answer: Schlumberger

What is Big Oil’s default answer to periods of trouble? Merge. It happened during the $10-a-barrel oil phases of the 1980s, and again in the 1990s. That’s why we’ve got Exxon Mobil, Chevron Texaco, ConocoPhillips and BP-Amoco-Arco.

So why would it happen now, with oil around $100 a barrel? Because that price camouflages the industry’s deep, long-term crisis. Majority state-owned companies like Gazprom, Aramco and Venezuela's Pdvsa own between 80% and 90% of the world’s known energy reserves, and are quite content to develop them themselves. For the Big Oil companies, there's no visible, long-term growth under the current business model.

Think Detroit.

That leaves Big Oil the traditional option of merging itself into the future. Two of the likeliest courtship targets I see are Russia’s natural gas giant Gazprom; and Schlumberger, one of the only long-term growth bets in the oil industry. Business Week features a long, thought-provoking piece by Stanley Reed this week on Schlumberger.

The Big Oil companies are vastly enlarging their natural gas component. That’s where Exxon’s growth is, for example -- in the Qatari natural gas fields. So a merger with Gazprom would be a natural, providing any company instant access to the world’s largest gas reserves. For Gazprom, merger with a Big Oil giant would provide instant fulfillment of its ambitions to be accepted in the West, and to be both an oil and gas company.

Both Big Oil and Russia are notoriously egotistical. Could either get down to a serious discussion, or are we talking Ali and Frazier? One wonders. But the likeliest partnership would be between Gazprom and Italy’s Eni, which have a deep and close relationship in various strategic pipelines.

As for Schlumberger, here’s a company that’s profiting from Big Oil's decision in the 1980s and 1990s to slim down by jettisoning its talented geologists, its drilling operations, and much of its research function. Schlumberger took that trend the opposite direction by bulking up with these very same capabilities.

Now, with the national oil companies disinterested in partnering but only in using western oil giants' technology, it’s companies like Schlumberger that are welcome in all these countries. So if a Big Oil company actually owned Schlumberger, that would be a good foot in the door.

Who would merge with Schlumberger is anyone’s guess -- Shell, BP, Exxon, Total, Chevron?

And what about a merger of the giants themselves – Schlumberger and Gazprom? The Business Week story says that Schlumberger’s Russia business is growing gangbusters, and that it expects Russia to be as important to its bottom line as its biggest current venue of work, the U.S.

Let's watch.

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Rights: Creative Commons

$100 Oil and The Centuries-Old Art of the Deal in Russia

One side story about hundred-dollar oil is how the Big Oil companies are being forced to scramble, grovel and just plain grit their teeth in sorry deals.

Take Russia. Russians are among the most amazing negotiators in the world. Century after century, decade after decade, they somehow get westerners to fall over themselves to trade the store for access to the Russian market.

In the 19th century, Immanuel Nobel, the ingenious father of dynamite inventor Alfred Nobel, moved his entire family to Russia to try to sell his know-how in the laboratory to successive czars. He went home poor. Five decades later, one of his grandsons – the oilman Emanuel Nobel – got rich, but then had to flee the Bolshevik revolution disguised as a peasant.

In the 1920 and 1930s, American industrialists literally built the spine of the Soviet economy – car factories, steel plants, dams – and as part of the deal gave the Soviets the technology needed to do so. Suffice it to say that Stalin then asked the foreigners to leave, and the Soviets started doing the work themselves.

So it is in Russian energy today. During the 1990s, western companies got access to some of Russia’s most technologically difficult-to-develop oil and natural gas fields. Now that they have delivered the know-how, majority ownership in most of those deals has reverted back to state-controlled companies (it didn't help that the companies appear to have gotten sweetheart terms), and no new such access being granted.

And from there, a clear Russian energy policy has emerged: foreign oil companies can have access to Russian energy – but only if it’s part of a swap of assets elsewhere in the world. That is, you can buy a quarter of my house if I can own part of yours.

On its face, that sounds fair, especially to the Russian side, which as usual is negotiating shrewdly. But what about the western side -- what are they giving and what are they receiving for that access?

Which leads me to two German deals for access to a supergiant natural gas field called Yuzhno Russkoye, or South Russian. This northwest Siberian field contains the equivalent of 5.1 billion barrels of oil.

Last month, Germany’s BASF won 25% minus one share of the field. In exchange, Gazprom increased its share in Wingas, a hugely lucrative German utility, from 35% to 50% minus one share.

BASF's access to a quarter of Yuzhno Russkoye arguably wouldn’t be a bad deal if the company could “book” the reserves; that’s how Wall Street values oil companies – how many barrels of oil equivalent they actually own. If BASF gets 1.25 billion barrels of oil equivalent, one might be able to make a case for trading hard assets such as a 2,000-kilometer-long European natural gas pipeline network and an extensive natural gas and fiber optic marketing business.

Whether BASF is booking those reserves hasn’t been discussed publicly as yet. But one has to wonder after Gazprom's last couple of deals – with France’s Total and Norway’s Statoil in Russia’s supergiant Shtokman natural gas field. Gazprom has kept all the reserves to itself. But perhaps the Germans pulled succeeded where the French and the Norwegians failed.

Meanwhile, German’s largest utility, E.ON, is also negotiating for a stake of 25% minus one share in Yuzhno Ruskoye (Gazprom will own the remaining 50% plus two shares). E.ON is talking about a payment of 1.2 billion euros, plus just under a 50% stake in the German company’s Hungarian natural gas trading and storage units, and other unspecified assets. One possibility under discussion is a piece of E.ON’s gas-to-power plants in Great Britain. Again, there's no public discussion of booking reserves.

As oilmen friends tell me in email exchanges, the Germans must know what they are doing. But I still wonder -- even if one can book reserves, one is essentially exchanging an unguaranteed cash flow -- the sale of natural gas -- for hard assets. To me, both deals have the ring of selling one’s seed corn for cash.

Yet, if the past is any teacher, expect more such deals.

That's how oilmen are having to deal with the world of hundred-dollar oil.

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Rights: Creative Commons