Big Oil Keeps Cool to Russian Welcome

Yamal Fields
(Click to Enlarge)

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Sept. 23, 2009

Russia will this week put out the welcome mat for Big Oil, as Prime Minister Vladimir Putin hosts a meeting on developing the huge natural-gas reserves of Yamal, one of the energy world's last great prizes. But it is unclear whether any of the world's leading oil companies will be interested in the tough terms Russia is expected to demand.

The meeting is the latest in a series of signals from the Kremlin that Russia might be softening its notoriously Draconian stance on foreign investment in its oil and gas. Moscow has long insisted Yamal was off-limits to the Western majors, and that Russian giant OAO Gazprom would develop the region's resources on its own.

Buoyed by rising oil prices, Moscow spent 10 years cementing its control of Russia's natural-resources sector, squeezing foreigners out and grooming state-run giants like Gazprom and OAO Rosneft as national champions.

But the mood changed when oil prices slumped late last year, Russia entered its first recession in a decade and funds dried up. "There's a realization that they need the majors' financial and technical capabilities," said one Western oil executive.

The guest list at Thursday's meeting, in the far northern Russian town of Salekhard, reads like a roll call of the super-majors. Senior executives from Royal Dutch Shell PLC, Total SA, StatoilHydro ASA and E.ON AG, among others, will be in attendance, according to the companies.

But industry officials say the terms on offer for entering Yamal are expected to be highly unattractive to the majors. It is thought Gazprom will retain full ownership of the peninsula's fields and only allow foreign companies in on technical service contracts. That would echo the terms offered to Total and StatoilHydro in Shtokman, another Russian gas field in the Barents Sea.

"If it's like Shtokman, then some of the big U.S. guys are likely to say 'no thanks,'" said a Western industry executive.

Others, however, say the meeting reflects a subtle shift in Russian energy policy that could have far-reaching consequences.

"The tone has changed," said Ed Verona, head of the U.S.-Russia Business Council and a former Russia-based Exxon Mobil executive. "There is clearly less of the strident nationalist rhetoric and a lot more talk about cooperation -- which makes sense if you think about what happened to the Russian economy over the last year."

Some top officials recognize that the country will struggle to develop its oil and gas reserves without Western help. Many untapped fields are in remote areas such as the Arctic, Eastern Siberia and the Barents Sea, and Russian companies lack the experience and funds to develop them.

Yuri Trutnev, Russia's natural-resources minister, last week proposed easing laws restricting foreign participation in offshore energy projects and said Gazprom and Rosneft, currently the only companies that can bid on tenders for offshore exploration licenses, should form consortia with foreign companies to work on Russia's continental shelf. Neither Gazprom nor Rosneft has much experience producing oil or gas offshore.

Also last week, Arkady Dvorkovich, economic adviser to president Dmitry Medvedev, said laws introduced last year to restrict foreigners' access to oil and gas fields considered strategic have proved too tough and may be modified. One law requires foreign firms to seek permission from a government committee before they can acquire more than 10% of the equity in a firm exploring a field considered strategic.

Yamal -- which means "End of the World" in the local Nenets language -- is central to the debate on the future of energy policy. The peninsula, in the remote far north of Russia, is thought to contain at least 12 trillion cubic meters of natural gas -- enough to satisfy Europe's needs for 25 years. Gazprom, whose mature Soviet-era fields are in decline, sees Yamal as a priority.

Yet the challenges are enormous, even for a company such as Gazprom used to tough climatic conditions. Yamal is a region of sand and permafrost: the absence of rocky soil makes any heavy construction difficult.

Development of the region's gas will cost $100 billion, and if gas prices stay at their current low levels, it could be uneconomic.

Last June, Gazprom said it may push back the startup of Yamal's largest field, Bovanenkovo, by a year to 2012, as the global recession demolished demand for its gas in Russia and Europe.

The situation around Yamal mirrors developments at Shtokman, in the Barents Sea. Gazprom initially said it would develop Shtokman on its own, and later changed its mind, tapping Total and StatoilHydro as partners. Yet many in the industry consider the terms highly unappealing: The Shtokman consortium won't own the gas in the field and will have to sell all it produces there to Gazprom.

Some observers say Russia's new apparent openness toward Western companies should be taken with a pinch of salt. "It always depends on the price of oil," said Mikhail Korchemkin, head of East European Gas Analysis. "If the Russian government believes the price is not high enough, they invite foreign partners. If the price goes up again, they dump them."  

Copyright (c) 2009 Dow Jones & Company, Inc.

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