The signs are not looking good for foreign companies wishing to play a role in the oil and gas industry of the former Soviet Union.
Firstly, the government of Kazakhstan has stepped in with a hastily written law in order to block China National Petroleum Corporation’s (CNPC) $4.18 billion takeover of Canada’s PetroKazakhstan:
[T]he upper chamber, the Senate, passed a complex Bill that aims to give Kazakhstan the right to intervene in the sale of foreign-held stakes in oil players. It also seeks to limit property rights over “strategic resources” like oil and gas.
The Bill, which only needs President Nursultan Nazarbayev’s signature to come into law, could derail CNPC’s bid for PetroKazakhstan, a Canadian-listed producer with almost its entire operations in the Central Asian republic.
In recent years, Kazakhstan has sought to bring its oil and gas resources under greater state control and set tougher terms for foreign oil companies.
And in Russia:
Russia’s Natural Resources Ministry expects a law limiting foreign participation in the country’s largest oil and gas to come into force in 2007, a year later than initially planned.
The official added that the government will draft amendments to existing laws so it can limit foreign participation in next year’s planned sales of Arctic oilfields.
Effective renationalisation of the oil and gas industry in the FSU is all the rage at the moment, mainly because the governments of such countries have seen the hike in oil price and are feeling disgruntled that the outside companies are making an awful lot of money, which should be going to the government coffers instead. So they simply push the outsiders off the job and take back what they deem to be rightfully theirs. This will work fine whilst the oil price is sky high and there are plenty of proven reserves to exploit. It will not work so well come the day that the oil price readjusts to a more sensible figure or more exploration is needed.
It is all very well for governments to grab back these resources when the prices are high, but are they going to be in a position to run the industry efficiently and safely when the price drops? No. The governments are intending to sit back and cream off the cash as much as they can, and I doubt if any of them have a clue what to do if and when they actually have to put money back in to facilities which are no longer profitable. Western private companies are far better at running facilities in hard times than national companies, simply because their management, maintenance, and operating systems are vastly more efficient. They are also far better at running facilties safely, safety being something which gets abandoned when a state-owned facility is under pressure to perform economically.
There is also the issue, touched on in a previous post here, of exploration, an area of the oil and gas industry which requires a lot of up front investment with a lengthy payback period. Investment in exploration requires the company in question to have a lot of faith in the resource owner’s long term policies, and it is difficult to see how any future exploration is to be encouraged by the current actions of the governments of Kazakhstan and Russia.
However, Kazakh Deputy Energy & Mineral Resources Minister Bakhtykozha Izmukhambetov thinks differently, telling senators before the vote that:
“These new restrictions do not mean a worsening of the republic’s investment climate.”
No? Well, let’s see what the investors think.