Russia leaves door ajar for more foreign investment

CGES | SEPTEMBER 2009 | SOURCE: FSU Oil & Gas Advisory Service

Russian officials have been making more conciliatory noises about foreign investment in the country’s energy sector, only a year after passing legislation aimed at restricting the input of overseas firms.

In particular, the government is keen to focus on the capital intensive offshore sector, but finding investment for the development of natural gas reserves in the Yamal Peninsula has also become a high priority.

Russia leaves door ajar for more foreign investment

"We will look into this issue [laws regarding foreign investment] first of all in relation to offshore exploration. We believe that state regulation creates many obstacles for exploration," Natural Resources Minister Yuri Trutnev was quoted by Reuters as saying last week.

Russian Prime Minister Vladimir Putin, meanwhile, has just finished chairing a meeting with a host of oil majors on developing natural gas reserves in Yamal.

Direction but not detail

So far there has been little detail on specific reforms, but Russian officials have been fairly explicit in terms of the direction they wish to go. This certainly applies to the offshore sector where only Gazprom and Rosneft are permitted to explore for oil and allowing foreign firms to form consortia with the two Russian outfits, perhaps using the Shtokman project as a model, is ikely to be on the cards.

There have also been some indications that the Kremlin would take more of a hands on role when awarding foreign firms stakes in energy projects, diluting the input of Rosneft and Gazprom in the process. Potential foreign partners, meanwhile, will most likely be after generous tax breaks and perhaps even controlling stakes in projects, though the latter could prove unattainable given the experience with Shtokman.

Putin’s recent summit with the chief executives of several of the world’s top oil companies including StatoilHydro, Total, Shell, ExxonMobil and ConocoPhillips – with Gazprom and independent gas-producer Novatek also in attendance – on developing gas deposits in the Yamal Peninsula (see Table 1), possibly along with an LNG terminal, also suggests a more regional approach. The meeting came after he hinted earlier this year that some foreign involvement would be necessary to develop this region.

There is still some doubt as to whether any changes will be pushed through, especially if oil prices march on beyond the $75/bbl mark. Deputy Prime Minister Igor Sechin, a key decision-maker in the energy sector, has also yet to voice support, for example. Moreover, the terms offered by the Russian government could prove insufficiently attractive to some Western firms, despite the resources on offer.

Overall though, the financial situation of the Russian government and companies along with the noises coming from the Kremlin suggest that foreign companies could have a golden opportunity to acquire some valuable Russian acreage.

Once bitten

Nonetheless, the Kremlin has some persuading to do to entice firms such as those that attended the Yamal conference to invest in these complex projects. Until recently, the Russian government’s relationship with these majors was frosty.

BP’s trouble with its partners in the TNK-BP consortium, widely viewed as being engineered by Moscow, followed the forced sale of TNK-BP’s controlling stake in the Kovykta gas field to Gazprom – a deal that has yet to be concluded. In 2006, Shell was forced to cede control of the Sakhalin-II project to Gazprom in the most oft-quoted example of Russia’s recent resource nationalism. Russian President Dmitry Medvedev and Putin will need to provide reassurances that such behaviour will not recur.

The oil firms being courted by the Kremlin are in a strong position. Not only do they bring technical expertise but also funding. There can be no doubt that Russia’s state-owned companies are strapped for cash, with almost $12 bn of debt maturing this year for Rosneft.

Russia’s First Deputy Prime Minister Igor Shuvalov also said last week that the government may consider selling part of its 75% stake in the oil producer to raise capital. Gazprom, meanwhile, has cut its planned spending for 2009 by 20% to around $16 bn, placing in jeopardy its flagship projects.

Progress at fields such as the giant Bovanenkovo gas deposit in Yamal will be crucial if the firm is to meet its 2015 production target of 610-615 billion cubic metres/yr. The Russian government, for its part, is anticipating a budget deficit of $112 bn this year, its first deficit since 1999, and it will want to reduce its outlay on the energy sector.

The main impact of Russian firms’ failure to invest will probably not be felt until 2013, when rising output from new oil fields brought into production over the prior twelve months is no longer able to offset underlying output declines in many of the large producing oil fields in Western Siberia, but this does not lessen the Kremlin’s sense of urgency.

Related article: Russia’s estimated oil production for 2011

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