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."

The End of Big Oil

For those interested in the history and future of Big Oil, I've got a piece in The New Republic this week on how one or two of the companies might survive despite their stubborn resistance to change. TNR is a pay site but if you take a free trial subscription you can read the whole piece, plus a few other items that look interesting this week. Here are the first few paragraphs.


When historians one day dissect the long arc of humankind’s use of fossil fuels, they may very well zero in on October 9, 2006, as a turning point for Big Oil. That’s when it became clear that the major oil companies—the giants that had survived numerous predicted extinctions and gone on to ever-greater profit and influence—were undergoing a tectonic shift and would either reinvent themselves or die. It’s the day Moscow dashed the hopes of five major oil companies from three countries and announced that Russia itself, and not they, would develop the biggest new natural gas field on the planet, an undersea Arctic reservoir called Shtokman.

Shtokman is the oilman’s Angelina Jolie: much-coveted but out of reach. Experts believe it contains the carbon fuel equivalent of 23 billion barrels of oil—that in an industry that considers a field of one billion barrels gigantic. Shtokman alone contains sufficient energy to power all of Europe for several years, and the world’s big oil companies had sought rights to it for years.

In another time, Russia’s declaration that its natural gas behemoth, Gazprom, would develop such a field would have set off peals of laughter among Western oilmen. Gazprom lacked the know-how to keep production at its current fields from declining; how would it manage a technological feat under the deep, icy waters of the Barents Sea? But there was nothing humorous about Russia’s plans. Gazprom knew it wasn’t capable of drilling the field; instead, it planned to hire Big Oil to do so. Big Oil would be its employee.

That notion flew in the face of oil-industry orthodoxy, which says that big potential profits accrue to those who assume big risks. If a company developed an oilfield, it was rewarded with the gold star used by Wall Street to measure oil company value—the rights to “booked reserves,” in industry parlance. Booked reserves consist of how much oil and natural gas a company controls, and thus can sell at some point at, say, $95 per barrel or $260 per 1,000 cubic meters. The Securities and Exchange Commission measures booked reserves, and investors regard them as the main determinant of a company’s fundamental worth. Yet now Gazprom was suggesting stripping the Western oil giants of that incentive—they would be unable to book Shtokman’s natural gas. The industry mood has become even more somber over the last half-year as two European companies—France’s Total and Norway’s StatoilHydro— actually agreed to Russia’s terms.

The truth is that any of the oil majors—with the possible exception of Exxon Mobil—eventually would have. Why? Because oilmen know that, despite recent unprecedented profits—Exxon alone reported a record $11.7 billion in net income for the fourth quarter of 2007—they are on the decline. The combined booked reserves of the world’s biggest five companies have shrunk by almost 20 percent on average since 1999, according to a paper by Rice University’s James A. Baker Institute for Public Policy. Shtokman is a blueprint for how the major oil companies are increasingly being treated around the world. Today, state oil companies and ministries from countries like Venezuela, Saudi Arabia, and Russia control somewhere between 80 percent and 90 percent of the world’s known oil and natural gas reserves. And, over the next two decades and beyond, those countries are going to ask foreign oil companies to serve as their contract employees in the same way that Gazprom brought on Total and Statoil.

Big Oil, then—the indomitable giant symbolized by the pitiless John D. Rockefeller—is dying. At the very least, it will soon have to fundamentally change the way it does business. But the shock of Shtokman is merely a tremor compared with the coming revolutionary transition to a non- carbon energy economy. Big Oil could transcend its current woes and weather that future revolution—perhaps even lead it—if it reinvented itself as Big Energy, striving to develop renewable power sources like wind and solar, or even to deliver the industry’s holy grail: a clean energy mechanism that renders fossil fuels obsolete. True, no one yet knows what the revolution
will look like; but the odd thing is that, for the most part, the oil companies don’t seem to care.

continued (free trial subscription required)

Chevron and Exxon: Concession on the Caspian

A fresh concession by Chevron and Exxon Mobil in Kazakhstan is evidence of the shrinking influence of Big Oil.

After years of playing tough guy on the Caspian Sea, the two companies have knuckled under and paid their share of a whopping $309 million environmental fine to the country, according to an announcement yesterday. The story is posted on the Forbes website.

Just a few years ago, the companies went to the mat when Kazakhstan levied a $71 million fine for alleged violations at the supergiant Tengiz oilfield, in which they hold a combined 75% interest. They hollered, griped to journalists, deployed their lawyers, and the fine was reduced to $7 million.

But that was four years ago. Now, Big Oil has been knocked on its heels around the world, as national oil companies from Russia, Venezuela, Saudi Arabia and China have become the new, big and swaggering force in global energy.

So when Kazakhstan offered a cut of almost half in a newly levied $609 million fine for fresh alleged violations at Tengiz, Chevron and Exxon agreed.

This comes on top of conspicuous concessions the companies have made in recent months in Russia. There, Shell and France's Total have surrendered majority positions in oilfields, and Total and Norway's Statoil have agreed to be effective contractors at the giant Shtokman natural gas field.

Their calibration is that their bargaining position simply is too weak at the moment. Perhaps when crude oil prices drop they can talk tough again.

Photo: Niklas
Rights: Creative Commons