Foreign energy firms carry the begging bowl to Russia economic forum

By bne IntelliNews June 9, 2008

Lev Fach in St Petersburg -

For a company that could lose 20% of its global oil reserves and a quarter of its production over a murky dispute with its partners in TNK-BP, Tony Hayward's words to an investment forum in St Petersburg on June 6 were something of an anticlimax.

Russia needs to promote the rule of law and ease the tax burden on energy companies to boost flagging oil production, the BP boss told delegates. "If those three things are in place and applied consistently," he added, "then there will be very significant inward investment in the oil and gas sector.'' No threats to pull out and no warnings of an impending exodus of money if the Kremlin doesn't behave better.

Other executives echoed Hayward's comments as well as the pleading tone of them. Rex Tillerson, head of the world's largest oil company ExxonMobil, even praised the Sakhalin-1 project - where his company is involved in a protracted dispute with the Kremlin about whether it can export the natural gas - as an example of "cooperation and inter-dependence." A touch bolder than Hayward, he added that there was "still no confidence in the rule of law in Russia - that will come with a track record."

Top line-up

Hayward and Tillerson were part of an impressive line-up of oil and gas executives sharing the stage. Among their peers were the bosses of Shell, Total, ChevronTexaco, ConocoPhillips, Dow Chemical, Schlumberger, as well as Alexei Miller and Vagit Alekperov, heads of Gazprom and Lukoil, respectively. Other senior executives were in the audience. A bomb in the room would have wiped out the top tier of the world's energy sector.

The line-up confirms that the St Petersburg International Economic Forum hasn't just supplanted its London rival, but consigned it to the dustbin of history. Critical voices were notable in their absence and the forum's emphasis was on the Russian economy, but high-profile attendance from other sectors suggests that even Davos now has a genuine rival.

But what the energy session said most clearly was that the Western majors want access to Russian crude like never before. Forget whatever anyone has said about the Kremlin's consolidation strategy of the last few years putting energy companies off the country - if they're in, they want to stay there; and if they're not, they want to be there.

Yet ever since Gazprom grabbed control of the Sakhalin-2 project from Shell in 2006, it has been obvious that the majors will only be allowed access as junior partners in Russian-led ventures. Total's minority stake in the Shtokman gasfield development now looks like a model. The company's chief, Thierry Desmarest, praised the arrangement, even if some analysts say the French firm's participation in the project is effectively as a hired service contractor for Gazprom, which keeps control of the reserves.

Gazprom's ascendancy isn't just above the Western majors. At the conference, the gas company's boss Alexei Miller reminded customers in Western Europe who was in control of the gas they need. Referring to the company's two proposed gas export pipelines to Europe, Nord Stream and South Stream, Miller said he found it "astounding" that Gazprom's participation in such projects meets opposition in the EU, "especially if one takes into account the acute energy deficit currently facing the European economy."

Despite doubling investment in the upstream to $30bn this year - "real investments in the energy security of Europe" - Gazprom was "encountering problems that are completely unrelated to either production or real business issues," Miller said. "One gets the impression that certain European officials are still unable to decide what it is they fear more - a real energy shortage, or the fictitious Russian threat."

And he also warned customers in the bloc that Russian consumers would remain the company's priority. Russia supplies the EU with about 156bn cubic metres a year (cm/y) of gas, while domestic demand is 420bn cm/y. As domestic prices rise to European levels over the next few years, Miller said, so will the profits - and importance - of the Russian market. The notion that its Russian customers are an expensive drain on a company that would rather do business with premium consumers in the EU would soon end, he said.

In another sign of the company's self-confidence, Miller said that Gazprom will establish a new gas exchange in St Petersburg, to be on line by 2009. When the Nord Stream pipeline, which will export up to 56bn cm/y from Russia to Germany, comes on stream, "international gas trading will commence in St Petersburg", Miller said. And the trading will be done in rubles.

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