Russia Warms to the Supermajors

Upstream Online reports of a new development in the Russian oil and gas sector under the headline “Putin offers surprise deal to Shell”:

Russian Prime Minister Vladimir Putin moved again to ease his government’s clasp over the energy sector at the week-end, capping off a week of foreign energy deals with a surprise offer for Anglo-Dutch supermajor Shell.

Weaker oil prices, now half of what they were a year ago, have persuaded Russia to scale back its resource nationalism. Moscow now looks to be balancing the dogged protection of its energy wealth with the need to have foreigners invest in it.

The offer to Shell, which comes days after Russia struck major deals with France’s Total, is emblematic of the renewed openness, because Shell was the victim of Russia’s most aggressive drive to re-take control of its natural resources.

In 2006, under intense government pressure, it ceded control of the vast Sakhalin-2 project to Russia’s Gazprom. But on Saturday, Putin invited Shell to help develop the giant Sakhalin-3 and Sakhalin-4 projects off Russia’s Pacific coast.

This should come as a surprise to nobody.  Last November I suggested that the supermajors’ Russian prospects had improved as a result of the global economic crisis taking its toll on the ability of Gazprom and Rosneft to finance their development plans, and concluded the post with:

But the fact remains that somebody needs to fund Russia’s development plans, and western oil companies are not only well suited to do this, but also – despite all – eager to gain greater access to Russia’s gigantic reserves.  Might we see the Kremlin once again warm to BP, Shell, and Exxon as the financial crisis takes hold?

It appears that we are seeing just that.  The major question outstanding, with the Sakhalin 2 debacle fresh in their memories, is what form of guarantees will the likes of Shell be asking from the Russian government before investing billions into a new oil and gas development?  Expect to see either the western majors asking for internationally-held bank guarantees, or prepare for another round of blubbering and hurt feelings in five years time.

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7 Responses to Russia Warms to the Supermajors

  1. Pingback: ???????.Net » Blog Archive » Posts about Putin as of 30/06/2009

  2. Howard Roark says:

    Interestiong blog Tim. It will be fascinating to watch how the majors cover themselves this time. To me, it is obvious that Russia will cry sour grapes themselves once they get back “off their knees” in a few years, complaining about the bad deal they got and that they were taken advantage of when they were weak. I don’t know much about this business, but will internationally-held bank guarantees do the trick? It seems that Russians are the master of the loophole.

  3. Howard Roark says:

    I actually have another question. I have a Russian friend living in Vladivostok who is writing a thesis about Sakhalin I. She is furious that Russia got a bad deal and that Chernomyrdin only set it up for his own personal gain. I don’t doubt the Chernomyrdin part, but did Russia get a bad deal? Could they have really launched Sakhalin I development without Western partners? My friend thinks Exxon, and anything American, for that matter, are purely designed to humiliate Russia. (typical Russian attitude, I suppose) Any thoughts on this would be appreciated. Thanks.

  4. varske says:

    Does that mean Shell will get a chance to help Gazprom in Nigeria or can they manage Africa on their own, just not Russia? That’s because it’s hotter in Africa?

  5. Pingback: Streetwise Professor » Lucy Putin Tees It Up

  6. Tim Newman says:

    Howard,

    I can’t say too much about the Sakhalin-1 project specifically because I don’t know the details of the PSA and also because I want to keep my job, but you might like to point out to your friend the following.

    Russia has an unimaginable quantity of oil and gas deposits which have yet to be developed, yet the progress on the development of even a few of them is moving at a snail’s pace. The only major developments which actually went from grand plans to pumping oil are the Sakhalin I and II projects, which uncoincidentally are the two which were western managed. If Russians think they got a bad deal from the Sakhalin I and II projects, they might want to consider why they have been unable to develop their deposits on their own. Russians might think they are getting a bad deal from the PSAs, but you’d struggle to pin down what they are comparing it to in terms of what actually exists: normally they compare the PSA terms against some theoretical income from a project which will never be executed.

  7. Howard Roark says:

    Hi Tim,

    Thanks for the answer. It’s certainly a reaffirming response for me, but probably not worth the effort to pass on to my friend. She’s still pissed off that American troops “invaded” Russia when they landed in Vladivostok in 1918, so one step at a time, I guess.

    And to leap across posts, I fully understand your confusion regarding Russian consulate rules, chaos, etc. I recently went to the consulate in Frankfurt, Germany and the minute you set your eyes on the building and see the herd of sheep standing in a big, lumpen queue in front of it, you know you’re in Russia again. At the kacca, there were stickers on the window for Visa, MasterCard, etc., but of course, they only took cash. :) Have a good one.

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