$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

Putin's Show: An Opening on the Caspian

Yesterday's Caspian Sea summit in Tehran was decidedly the Vladimir Putin show, but the ostensible common front oddly enough seems to have revealed an opening for a spoiler. The West ought to climb through.

The main news of course was the states' rejection of being used as a staging ground to attack Iran. That's a very real issue, as the word has been on the street for almost a year that U.S. offensive plans against Iran included possible land attacks from both Azerbaijan and Afghanistan. If true, it would be downright unneighborly not to go along with Putin's proposed declaration against such an attack; Azerbaijan's Ilham Aliyev specifically couldn't disrupt the bonhomie and say, "Sorry, fellas, but we have to punch Mahmoud's lights out."

Yet, given Russia's similar peacenik act in Serbia in 1999, Putin's reach for the moral high ground this time wasn't all that surprising.

The more interesting topic I think regarded the issue of controlling activities on the Caspian. In the guise of environmentalism, Russia has long urged that all five Caspian states be vested with a veto against any work on the sea by any of its neighbors.

The actual reason for Moscow's supposed concern for sturgeon and seals is control of the region's oil and natural gas -- as long as no pipeline is built across the sea, Kazakhstan and Turkmenistan are effectively bottled up, and subject to a Russian stranglehold on energy exports.

Tehran was no different. Putin told the other presidents, "Projects that may inflict serious environmental damage to the region cannot be implemented without prior discussion by all five Caspian nations." Read AP account.

Yet, according to the AP account, his fellow former Soviet leaders were noticeably non-commital on the topic. Kazakhstan's Nursultan Nazarbayev, for example, said only that "pipeline routes need to be coordinated with nations whose territory they cross." That logic would not preclude building a cross-sea line, say, from Turkmenistan to Azerbaijan, as long as both agreed.

Russia, of course, expresses no such ecological concern when it regards Nord-Stream, its natural gas pipeline project across the Baltic Sea.

This is a hunch, but it could be that Kazakhstan and Turkmenistan are a bit fed up with, and not a little suspicious over, Putin's turns of glad-handing and subtle pressure to consign their energy future -- and independence -- to Russia.

As it stands, the eastern Caspian states are effectively in Russia's pocket because of the absence of trans-Caspian pipelines west to export their oil and especially natural gas free of Moscow's interference.

It's long been in their interest to commit to construction of that route. And it's in the West's interest -- particularly Europe's -- to make it happen once that commitment is made.

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.