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.

Photo: ynskjen
Rights: Creative Commons

Pakistan's Playboy and the Oil King

Who Will Succeed Bhutto? The clearest thing amid all the chaos in Pakistan is that the country's most likely kingmaker won't be Pervez Musharraf, and it certainly won't be the United States. It will be Benazir Bhutto's 51-year-old husband, Asif Zardari. The roguish Zardari isn't very well known in the West, but in South Asia he's a celebrity, a charming former playboy who was imprisoned by Musharraf for corruption during Bhutto's terms as prime minister. I've interviewed Zardari, and he's got a natural feel for politics, and has his own magnetism, something lacking in most of the other people Bhutto surrounded herself with. I strongly doubt that he himself could lead the party because of his tainted past. But, given the sympathy factor, and the disarray engulfing Bhutto's Pakistan People's Party, he is likely to choose who does. Dark horse: remember the name Aitzaz Ahsan, who led the lawyer's uprising against Musharraf. He broke with Bhutto but could emerge from the pack, that is should Musharraf ever release him from prison.

Exxon in Russia: The American company may be undergoing the Shell treatment. Last year, Shell was forced by Gazprom to hand over control of the giant Sakhalin-II natural gas field – that is if it wanted to keep doing business in Russia. Now, Russia’s respected business newspaper Vedemosti says that the two giants of the world – Exxon and Gazprom – have held talks about Gazprom taking a stake in the American company’s Sakhalin-I project. This isn’t a shocking report – Vladimir Putin has made it clear that Russians, and not foreigners, will control the country’s energy resources. And it could simply be a trial balloon, as the Russians are prone to float. But it comes after Exxon’s tough-guy negotiating style in Russia and Kazakhstan, insisting that it will never buckle under to resource nationalism. And it’s clear that ultimately the company will have to retreat and compromise in both countries as its roster of possible new global reserves shrinks.

Is Gazprom Trying Turkmenistan Shuffle on Exxon?

Gazprom is pushing Exxon to sell the natural gas from its huge Sakhalin-I field not to China, as the American oil giant prefers, but to the domestic Russian market. It's easy to get suspicious and see the drift of Gazprom's successful Turkmenistan strategy to Russia. It goes like this: Buy gas cheaply locally, and sell it at a profit in Europe.

Here is the first paragraph of the Reuters account: Russia's gas export monopoly Gazprom said on Tuesday it needs gas from Exxon Mobil's Sakhalin-1 project for domestic use, mounting pressure on the U.S. major to drop plans to export gas to China. Read story

Steve's comment: My own feeling is that this is precisely what Gazprom has in mind -- get Exxon to sell the natural gas at domestic prices, then effectively sell the same gas to Europe at a huge markup.

Russia has played this game with Turkmenistan since 1992. It claims that the Turkmenistan gas is going only to former Soviet customers who pay subsidized rates, and not to Russia's European customers. So it pays Turkmenistan a discount rate for its natural gas.

But that is a ruse -- all natural gas goes into a single, collective pipeline system passing through Russia. Turkmen gas is indistinguishable from that produced anywhere in Russia. So in effect, Russia is earning export profit from the Turkmen gas, and the Turkmen have been the losers for 15 years.

In Exxon's case, it says that the deals it has in mind with China would pay more. Russia says the domestic market needs the gas, yet at the same time, Gazprom is having more and more trouble meeting its supply commitments to Europe. Where will some of the extra gas come from? Sakhalin-I perhaps?