Putin, Sakhalin, and The Lion's Purr

A narrative familiar to all oilmen with long exposure to Russia is under way: With cash reserves running down and insufficient economic relief in sight, Prime Minister Vladimir Putin, his growl turned into a purr, is welcoming back Western oil companies to work Russia's natural gas fields.

So how should Shell and Total -- both of them the recipients of Putin's renewed niceness -- respond? Are Putin's past revocations of deals, expulsions from fields at knock-down rates, and ho-hum attitude toward shakedowns reason not to do business with him now that Russia is trouble?

Specifically, Shell is being offered an unspecified role in the highly complex, offshore Sakhalin 3 and Sakhalin 4 natural gas projects (BP walked away from the latter last month after drilling dry holes). Total signed a smallish, $900 million deal to work with Russia's independent Novatek on the Termokarstovoye natural gas field, and Putin says it's "entirely possible" that the French company will be permitted to work on future stages of the supergiant Shtokman natural gas field.

The subtext is a World Bank projection last week that Russia's economy won't recover to pre-crisis growth until at least 2012; and an International Energy Agency forecast this week that any global oil supply shortage -- and thus a possible return to $100-plus-a-barrel prices -- isn't likely before 2013.

The necessity for the involvement of foreigners who still have access to credit -- such as Big Oil -- seems plain: Shtokman's developers said in December that the global credit crisis may delay field development.

In other words, for Russia there's little noticeable light at the end of the tunnel. And Moscow needs to be sure that Gazprom can remain the country's most powerful economic driver.

More subtext: O&G readers recall that in 2006, Russia unleashed environmental regulators onto Shell in order to persuade it to relinquish its majority stake in Sakhalin-2 to Gazprom for what many analysts at the time regarded as a comparative firesale price of $7.6 billion. The same year, Total had a similar experience when Rosneft canceled a $3 billion partnership in the Vankor oilfield. Exxon Mobil has been forced to sell the natural gas from its Sakhalin I project at cut-rate prices within Russia rather than as it had planned in higher-paying China, as Paul Ausick reports at 24/7 Wall Street. And then there's long-suffering BP, which, in a series of fresh indignities this year while the Kremlin has stood by, has been powerless as its Russian partners in TNK-BP have steadily swallowed control of the oil-rich venture.

David Lee Smith at Motley Fool suggests that Shell's apparent agreement to let bygones be bygones and embrace the extended hand is "goofy." But Tim Newman, a Briton who lives on Sakhalin and blogs at White Sun of the Desert, writes that Shell will be wise to demand international bank guarantees in exchange for fresh investment. Short of that, Newman says, expect "another round of blubbering and hurt feelings in five years time." Over at TPRR, Tim Pendry argues that the totality of events reflects Russia's "complex gamble on events."

Pendry and Newman are both right. While seeking foreign investment at home, and failing to arrest serious depletion of its domestic fields, Gazprom still hasn't abandoned its geopolitically driven global dealmaking. In addition to continuing to promise to build new multi-billion-dollar gas pipelines into Europe, it signed a deal with Nigeria last week promising $2.5 billion in exploration investment there.

Meanwhile, another natural gas row is on the near horizon between Russia and Ukraine. Ukraine has a $4.2 billion bill coming due to Gazprom on July 7th, and lacks the money to pay. As Carl Mortished at The Times of London reports, the European Union is attempting to get some emergency money for the Ukrainians from the International Monetary Fund or the European Bank for Reconstruction and Development. The good news is that the latest dust-up is not occurring in the dead of winter.



Whether or not another jump in the deep end is wise, in the end Russia is a prime example of Big Oil's history of returning for more to the scene of its greatest debacles. The reason is the usual one: These behemoths need to book fresh reserves, and they are hard to come by.

In Total's case, for instance, the French company capitalized on an alliance not only with Gazprom, which owns 19% of Novatek, its local partner, but with oil-trading king Gennady Timchenko, a favored old KGB friend of Putin's, who owns 18% of the company.

In perhaps a touch of irony, Total CEO Christophe de Margerie said after the signing, "I don't think it's difficult to work in Russia. One only needs to learn to work efficiently with Gazprom, Novatek and Rosneft."

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?