How to Survive in the New World of Big Oil

Italy’s Eni continues to pioneer a successful path to survival in Big Oil’s treacherous new world – get in bed, don’t compete, with the world’s state-owned oil companies.

Eni’s flexible strategy has already made it Big Oil’s most successful company in both Russia and Kazakhstan. Today, it announced a fresh partnership with Russia’s Gazprom – to build a $14 billion natural gas pipeline between Russia and Europe. The pipeline directly challenges U.S. and European Union policy.

Called South Stream, the pipeline would ship Central Asian and Russian natural gas into southern Europe. It’s part of a three-pronged Russian strategy to deepen its dominance of Europe’s natural gas market. Russia is also building a natural gas pipeline called Nord Stream, which would serve northern Europe. A third line would feed cheap Turkmenistan and Kazakhstan natural gas into Nord Stream and South Stream.

Eni hopes to parlay its cooperation with Gazprom into natural gas development deals in Russia, which has recently sharply resisted such relationships with western oil companies.

Washington and the EU are fighting to blunt the market impact of the trio of Russian lines. They are doing so by championing rival natural gas lines from Turkmenistan into Europe. But, as today’s announcement shows, Russia is more advanced in the contest.

Photo: Mini D
Rights: Creative Commons

Update on Demise of Big Oil: What Goldman Sachs Knows

Venerable Goldman Sachs, seemingly the only private institution to be actually earning money during the current international banking crisis, has issued a contrarian recommendation: Buy Eni, says the investment banker to the rich.

That's a good call. Why? Because, among all the Big Oil dinosaurs, Italy's Eni has figured out a modus vivendi with the new power on the block -- the world's national oil companies, specifically Russia's Gazprom.

Big Oil is on the way out -- its reserve base is cratering, and it's been supplanted as global oil king by state-owned companies in Venezuela, Russia, China, Saudi Arabia, Kazakhstan and so on.

But this is a fresh wrinkle: Who will survive in the decades ahead? One can quibble with Eni's methods and associations. But Goldman's call can be seen as a sign of confidence that this flexible company, with its carefully negotiated entanglements with Gazprom, is one model for a re-invented oil major.

I won't be surprised down the road to see an effective or actual merger of the two companies.

Photo: Infomofo
Rights: Creative Commons

Why Eni is Russia's and Kazakhstan's Best Friend

Over the last several years, ENI has grown from a mom-and-pop Italian would-be into one of the largest oil majors in the world. It is the most successful western oil company in both Russia and Kazakhstan, winning an exclusive perch for example as Gazprom's partner in natural gasfield development in Russia.

An example of why that is the case came over the weekend in a press scrum with ENI CEO Paolo Scaroni. ENI faces terrible trouble in Kazakhstan because it is going to be at least five years -- and probably seven years or more -- late in producing first oil at the Kashagan oilfield. Kashagan is the biggest oil find on the planet in three decades, and could easily produce 2 million barrels of oil a day (the partners currently say their production sights are set lower, but if an independent export channel opens up, look for the higher figure).

Talks are to start soon in which Kazakhstan is probably going to ask for a higher share of the revenue. The boilerplate oil company response to such temerity is shock and horror before agreeing to some of the demands.

Not Scaroni. Here is what he told reporters over the weekend: "The Kazakh government intends to renegotiate the contract and this does not surprise us. We think it's normal because the contract was born when oil prices were much lower." Read story

Thus Scaroni, in acknowledging validity to Kazakhstan's claims, takes the edge off the talks from the outset. Given ENI's record in the former Soviet Union, look for an amicable outcome. Some of the Italian company's partners want to force it to relinquish its role as operator, but as long as it is on friendly terms with Kazakhstan, it is in the driver's seat.

Kazakhs Threaten to Expel Italians as Operator

Guy Chazan of The Wall Street Journal has a
scoop today that Kazakhstan is exasperated with progress in developing its Kashagan oilfield, the largest discovery on the planet in more than three decades. The upshot - Italy's ENI may lose the prestigious operatorship of the field.

The first part of Chazan's story:
ASTANA, Kazakhstan -- Ratcheting up the rhetoric over a cost-overrun dispute at one of the world's largest oil fields, the prime minister of Kazakhstan said his government might remove Italy's Eni SpA as operator of the project. "We are very disappointed with the execution of this project," Karim Masimov said in an interview in the Kazakh capital, Astana. "If the operator can't resolve these problems, then we don't exclude their possible replacement." Mr. Masimov's comments signify intensifying brinkmanship ahead of a face-off this week between the government and the Eni-led consortium developing the strategically important Kashagan field. Oil-industry observers and regional insiders have said Kazakh authorities aren't likely to take the extreme step of firing Eni as operator because of the project's complexities. But they will probably demand a bigger and possibly earlier take from revenue.

Steve's comment: It is probably true that Masimov's remarks amount to brinksmanship. But Kazakhstan is not the only party exasperated with ENI's performance -- its partners in the supergiant field are also fed up with what now looks like a seven-year delay in first oil, until 2012.

To get the partnership, ENI had to fend off rivals Exxon Mobil and Total. So, quite apart from the Kazakhs' sentiments, there is reason to expect some change in the operatorship, starting with greater formal involvement of ENI's partners. Expect Exxon Mobil to lead the charge.

Counting the Geopolitical Winnings on the Caspian

John C.K. Daly has an interesting article on the latest geopolitical fallout in pipeline politics on the Caspian.

ANNAPOLIS, Md. (UPI) -- The death of Turkmen leader Saparmurat Niyazov last Dec. 21 set off an unseemly but discreet scramble among a number of nations eager for access to the world's fourth-largest reserves of natural gas. Seven months later, the clear winner for the race to control Turkmenistan's energy is Russia, with China as also-ran, while the United States and other Western nations essentially lost. What happened? The answer might be the Realtors' creed, "location, location, location." Read rest of article

Steve's comment: From the mid-1990s, Washington played a brilliant game on the west side of the Caspian, and a massively inept one on the east. The difference was that in Azerbaijan and Georgia, it had strong, far-sighted partners in Heydar Aliyev and Eduard Shevardnadze. In the east, however, Kazakhstan's Nazarbayev and Turkmenistan's Niyazov never joined the geopolitical combat posed by their Azeri and Georgian neighbors, and maneuvered Washington into an embarrassingly absurd diplomatic exercise.

U.S. officials paraded into Astana and Ashkabad to persuade the Kazakhs and Turkmen to do what was manifestly to their advantage -- build an energy pipeline link independent of Russia, and the Kazakhs and Turkmen delivered platitudes on how, yes, they would cooperate before promptly forgetting they had done so.

The recent Kazakh and Turkmen decision to sign a long-term contract for most of their natural gas to Gazprom -- and to build yet another pipeline north to Russia -- appears to be a nail in the coffin for the eastern half of the grand U.S.-backed East-West Energy Corridor to Turkey.

The biggest question is why have Nazarbayev and Turkmenistan's Berdimukhamedov signed such a deal. One answer is that it is the easiest short-term option -- avoid the sparks of geopolitical conflict, and simply sell to one's traditional northern trading partner. They may believe that they retain the opportunity in the future to balance out the increased leverage they have granted to Russia. It is difficult to see how, given the agreement, such a trans-Caspian pipeline could be built any time in the foreseeable future.

Here is an interesting piece on how, contrary to the prevailing wisdom, Italy may not have entirely bet the store on continued good will from Gazprom. Instead, Italy appears to be hedging its bets.