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Russia’s Continental Divide


Russian President Vladimir V. Putin is exploring a plan to cede control of the vast gas and oil fields on the Russian continental shelf to state-controlled companies Gazprom and Rosneft.

If a proposal now under discussion at the Kremlin becomes law, it would prohibit foreign companies like Exxon Mobil and Chevron from acquiring majority stakes in projects in what is potentially among the richest oil and gas regions in the world. It would also reaffirm the Russian companies' role as national champions, lifting them over smaller Russian-owned energy companies.

The plan, first reported in the Russian daily Vedomosti, comes in the wake of increasing concerns about Russia's role as an energy supplier to Europe. The nation provides roughly 25% of Western Europe's gas. But brief shutdowns of pipelines running from Russia through Ukraine and Belarus resulted in two midwinter dips in energy supplies in the last year.

Last weekend, German Chancellor Angela Merkel visited the Russian president and pointedly criticized him for allowing disputes with Russian neighbors to interrupt energy supplies and for failing to warn that Russia planned to shut off the pipeline. (For its part, the Kremlin has blamed the shutdowns on Ukraine and Belarus and repeatedly insisted that Europe has no cause for concern about the nation's commitment to remaining a steady, stable supplier of energy.)

Investors and analysts also consider the Kremlin's offshore strategy the latest in a series of efforts to seize control of the nation's natural resources and put them in the hands of Kremlin-controlled companies. Moscow has used environmental and other regulatory maneuvers to pressure foreign energy companies into giving up stakes in large oil and gas projects. Recently, Royal Dutch Shell and its Japanese partners sold their controlling stake in the $20 billion Sakhalin-2 project to Gazprom amid charges that the foreign consortium had violated environmental regulations.

For potential foreign investors, this comes as yet another blow. While Russia holds the world's largest natural gas reserves, as well as 60 billion barrels of proven oil reserves, geologists and analysts believe there may also be massive amounts of undiscovered petroleum resources hundreds of miles offshore.

According to Vedomosti, Russia's Natural Resources Ministry predicts that oil finds and production on the nation's continental shelf will increase by as much as tenfold between 2010 and 2020. But the Kremlin-controlled companies have thus far been reluctant to give access to offshore fields to foreign investors. Late last year, five French, Norwegian and U.S. companies, including Total, Statoil and ConocoPhillips, vied for access to the giant Shtokman gas field in the Barents Sea, but Gazprom stunned the energy world by announcing it would take on the project without foreign equity partners.

While that continues to be Gazprom's plan, at least publicly, there may be a place for foreign investors in offshore development, either as a contractor or minority partner.

Gazprom and Rosneft lack the technological and financial expertise to exploit this difficult offshore terrain on their own, analysts say. In a research note, analysts at Moscow-based bank Deutsche UFG called the plan "another example of Russian energy nationalism" and argued that as result, "the quality of offshore field developments may suffer if private companies, and in particular foreign companies, do not get access to the reserves."

But for these potential investors, the consolidation of resources poses another risk, says Cliff Kupchan, an analyst at the political risk consultancy Eurasia Group. He says the plan initially puts Gazprom and Rosneft in a dominant position. Offshore production is expected to outpace onshore over many decades. But the company's strong positions are contingent on a Putin-controlled political structure that becomes less predictable as time goes on. While Putin is expected to handpick his successor when he leaves office next year, as the Russian constitution mandates, it becomes increasingly difficult to assess the political situation there after 2012 when the successor's term ends.

"Gazprom and Rosneft are 'national champions,' " Kupchan notes, "but what that means operationally is that they use their connections in the presidential administration to obtain beneficial treatment--like a lock on offshore development. A future president might prefer Lukoil, or smaller Russian companies, undoing the premise that many foreign corporates are currently basing their actions on."

© Forbes

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