$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.

Photo: NCreatures
Rights: Creative Commons

Gazprom: To Fear or Not to Fear

The West often expresses the apprehension that Russia will use its energy for outside political leverage. The answer of course is that it already is -- its oil and natural gas is the source after all of its newfound confidence and influence in Europe. Yet the most vulnerable and victim-prone countries are Russia's former Soviet colonies. The upshot: The Caspian states need to keep up their guard.

Take a look at The Independent of London today, which has a good, long primer on Gazprom. The piece, by Anne Penketh, makes two conclusions: Gazprom is so unwieldy and large that it may end up being a paper tiger; and that, given the combination of Gazprom's management failures and its abiding need for continued profits from Europe, it will end up having to give someone the short end of the stick -- one of its former Soviet brothers.

A key quote for those who follow the non-Russian states comes from Pavel Baev of the International Peace Research Institute: "They are the victims of choice," he tells the newspaper. "A new gas war is predetermined."

Steve's comment: The world caught on to Russia's outside power during the last eighteen months or so when Europe's oil and natural gas supply was disturbed over disputes with Ukraine and Belarus, and the Independent piece focuses on those two former Soviet states.

But the Caspian states and foreigners who work there -- Azerbaijan, Kazakhstan, Turkmenistan and, as a transit country, Georgia -- have witnessed Moscow's willingness to wield the energy club since just a few months after the 1991 Soviet breakup.

Russia starved Georgia of natural gas. It cut off Turkmenistan's access to foreign export markets. It has done the same in Kazakhstan, reducing the value of its giant fields (Karachaganak, one of the world's ten largest natural gas fields, is absurdly reduced to exploitation as an oil field). To its credit, Azerbaijan has responded to Gazprom's threats by going off Russian gas cold turkey, and turning to the local supply.

Transneft's actions in terms of the region's oil exports is well documented and have been discussed previously.

Russia argues that its actions are market-oriented. Maybe. But one must add realpolitik -- Gazprom has been the cudgel to bring feisty neighbors (such as Georgia) into line. And there is no sign that the custom is changing soon.

Bonus: Russian Cutoff and Lord Browne

Two news items of note:

Russian oil cutoff in Germany

Over the last month, Russian oil supplies to Germany have been curtailed in an apparent dispute with Lukoil. The cut of about 50,000 barrels a day, in figures compiled by Reuters, may be restored in the coming days because of a compromise. The supply disruption does not appear on first glance to be linked to the Russian government. But it does come after Russia came under European criticism for cutting supplies to Ukraine and Belarus over the last couple of years. Read Reuters story

Back At Work: John Browne

Officially John Browne is going to work for a seven-year-old private equity company. But while doing so he will work with the repository of the corporate world’s marquee names of the past – the powerful Carlyle Group. He is joining to run the new London office of Riverstone Holdings, which is a partnership with Carlyle in energy investments, Carlyle announced on its Web site.

The 59-year-old Browne brought BP into some of the biggest deals in the former Soviet Union – offshore Kazakhstan and Azerbaijan, operatorship of the Baku-Ceyhan Pipeline, and the TNK-BP partnership in Russia.

For years, Browne was Britain’s most famous businessman, and was even knighted as Lord of Madingley. But he withstood unaccustomed tabloid treatment in May when he resigned from BP after a scandal involving a former lover.

While he will be Riverside’s biggest name, he is hardly so in the Carlyle crowd. Former President George H.W. Bush and former British Prime Minister John Major were advisers there. Its current roster includes Richard Darman, former director of the Office of Management and Budget under Bush Sr.; Mack McLarty, former chief of staff to Bill Clinton and president of Kissinger McLarty Associates; Karl Otto Pohl, former president of Germany’s Bundesbank; Arthur Levitt, former head of the SEC; and Norman Pearlstine, who formerly edited both Time and The Wall Street Journal. The Bloomberg story