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Financial Times: Lubricating Russia's oil wheels: “The days of companies such as Shell and Exxon taking direct control of huge Russian projects appear to be over.” (


By James Boxell and Doug Cameron

Published: October 4 2004


ConocoPhillips has laid down a marker with last week's agreement to invest almost $2bn for a minority stake in Russia's Lukoil and competition is set to intensify among its peers for improved access to the world's biggest source of hydrocarbon energy.


The US oil and gas group has created a template for future deals with its acceptance of a minority equity stake and what Jim Mulva, president and chief executive officer, describes as the "upside potential" of a joint venture to develop a new field in northern Russia.


The deal came two weeks after Total of France agreed to pay about $1bn for a 25 per cent stake in Novatek, Russia's biggest independent gas producer. But while the stake will give it a voice in deciding management issues, Novatek lies at the tail-end of the large energy groups created from state-controlled assets during the 1990s. Total had been separately eyeing an investment in Sibneft, the fifth-largest Russian oil group, which entered an abortive merger with Yukos.


Natasha Tsukanova of JPMorgan, who advised the Russian government on the Conoco/Lukoil transaction, says recent moves are more about access than just bolstering western companies' reserves and production.


"The key is that it gives them an option on how they build a strategic platform for future exploration in Russia," she says.


"It has [also] increased the pressure on those who are not involved at the moment, and that would be ChevronTexaco," adds Stephen O'Sullivan, analyst at UFG, the Moscow-based investment bank.


With proved oil reserves of 69bn barrels, Russia is the largest source outside Opec and the seventh overall, but its enormous gas fields make it home to the world's largest energy reserves in total. Oil production has recovered from the lows of the mid-1990s, when economic malaise was combined with a lack of investment and infighting.


Conoco's initial 10 per cent stake in Lukoil will lift its reserves by about 10 per cent and production by 9 per cent.


BP paved the way for western energy groups investing in Russia last year when it paid $7bn for 50 per cent of TNK, Russia's third-largest oil producer.


However, bankers believe that the Conoco and Total deals show the sale of such large stakes are unlikely in the future.


The Russian government's position has strengthened and international companies appear more confident about taking minority stakes, despite worries over Yukos.


Royal Dutch/Shell and ExxonMobil have a presence in the country, leading multi-billion dollar projects to develop the fields off Sakhalin Island in Russia's Far East.


The US group has a 30 per cent stake in the Sakhalin 1 project, which it also operates, while Shell has a 55 per cent stake in Sakhalin 2.


However, Sakhalin is seen as a special case, and other production-sharing deals have often fallen foul of disputes between the partners, and an unattractive tax regime for such agreements.


The days of companies such as Shell and Exxon taking direct control of huge Russian projects appear to be over.


"Sakhalin-style deals will not be repeated," says Doug Stinemetz, partner at Houston law firm Haynes and Boone who specialises in Russian energy deals. He says these deals reflect the lack of interest by Russian oil authorities in developing the remote fields, despite their proximity to Japan's export market.


Chevron, the second-biggest US energy group, has focused on developing fields in Kazakhstan, but has been clear in its intention to expand into Russia. Like Total, it has eyed Sibneft.


Bankers believe Chevron has three options: return to Sibneft, wait for a potential break-up of Yukos, or aggressively pursue its recent alliance agreement with Gazprom, Russia's dominant gas producer.


Gazprom is the one relic of the old Soviet-style system of energy production, and accounts for close to 90 per cent of Russia's gas production and reserves. But its ownership is being slowly opened up despite the state's control, and analysts say it has substantial liquid energy reserves of its own.


One suggestion is that Chevron could seek to become Gazprom's "in-house oil company".


The clear message from the past two weeks is that western groups must look to equity stakes as a calling card. There is a widespread expectation among oil analysts that both Chevron and Exxon will pursue investments in Russia over the next 18 months.


Exxon is understood to have held talks with Yukos last year before the Russian group's owners became embroiled in their dispute with the Russian authorities.

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