Related Articles
Forward article link
Share PDF with colleagues

Russia: Foreign companies swoop

RUSSIA MAY look politically and economically risky to some, but not enough to stop international oil majors scrambling for oil and natural gas deals in the country. US, European and Asian companies all took significant strides towards Russian energy deals in September. By far the biggest transaction was ConocoPhillips' purchase of a 7.59% stake in Russia's biggest producer, Lukoil, at a privatisation auction. At the same time, the US major set up a strategic alliance to tackle fields in the highly prospective Timan Pechora basin, where Lukoil is the dominant player.

In what looks like a shrewd political move that could pay huge financial dividends, the companies also agreed jointly to seek reanimation of Lukoil's production-sharing contract (PSC) at Iraq's West Qurna-2 field, which was torn up in late 2002.

ConocoPhillips bid $1.988bn for the Lukoil share packet, slightly above the starting price of $1.928bn. It plans to top up its share to 10% by the end of 2004 on the open market ? a stake that will entitle the US firm to a representative on the 11-man Lukoil board. ConocoPhillips plans to raise its interest, although no higher than a 20% cap that falls short of a blocking minority. The firm's chief executive officer, James Mulva, described 20% as a ?substantive? stake, adding that ConocoPhillips will end up with a ?real, meaningful position in terms of ownership and influence at Lukoil?.

Securing a role in Lukoil's Timan Pechora developments is probably of more importance to the US firm than the equity purchase. ConocoPhillips has committed to invest $370m in the venture in northern Timan Pechora, in which it will hold 30% (Lukoil will hold the remaining 70%). By 2008, the venture is expected to produce about 200,000 barrels a day (b/d) of oil, to be exported through Lukoil's Varandey terminal, on the Barents Sea. Plans are for ConocoPhillips to help design and finance an expansion of Varandey to export up to 240,000 b/d by 2007, with growing volumes heading to the US.

Additionally, direct access to a dedicated terminal means the venture can avoid blending premium-quality Timan Pechora oil in the Russian pipeline system.

In Iraq, Lukoil and ConocoPhillips will work together to persuade Baghdad to revalidate the West Qurna PSC. Once the contract is secured, plans are to negotiate a development deal in which Lukoil would hold a 51% interest, ConocoPhillips 17.5%, the state 25% and other Russian firms, represented alongside Lukoil in the original PSC, 6.5%. At its peak, West Qurna could produce 0.6m b/d. Support from a US partner may help to reactivate the West Qurna PSC, to which Lukoil insists it is legally entitled. But, for now, there seems little hope of an early start to large-scale oil investment in the country.

For Lukoil, the more immediate benefits of the alliance will be fresh capital and impetus to kick-start long-stalled projects in Timan Pechora and an increase in its own stock price. With 1.7m b/d of production, Lukoil is slightly ahead of its 1.6m b/d partner. But ConocoPhillips' market capitalisation of $56bn dwarfs that of $27bn Lukoil.

Mulva brushed aside questions about the risk of doing business in Russia ? where the government is still embroiled in a long battle with Yukos over alleged tax evasion that looks likely to bring the 1.7m b/d major to its knees. Lukoil is different from Yukos and is the best company in Russia, Mulva said. Oil companies face ?commercial, political and technical risks everywhere in the world?, he said, adding that ConocoPhillips felt ?comfortable? with its Lukoil deal, which offers unique opportunities, including the possibility of adding some 10% to both its booked reserves and production.

Lukoil's president, Vagit Alekperov, said the country's business environment is excellent and the deal illustrates that it is open to foreign investment. Both leaders stressed that the government supports the alliance. President Vladimir Putin met Mulva and Alekperov in June, just before the privatisation was launched. He encouraged ConocoPhillips to invest in Russia's oil business.

It is now generally accepted that major oil-equity purchases in the country will not happen without direct Kremlin approval. Putin attended the signing of the 2003 agreement between BP and Tyumen Oil (TNK) that created TNK-BP. BP paid $6.2bn for 50% of TNK-BP, now Russia's third-biggest producer. Compared with ConocoPhillips' Lukoil share purchase, that deal looks unquestionably favourable.

A spate of energy deals were also signed with South Korean firms in September, during an official visit to Moscow by President Roh Moo Hyun. LG-Group agreed to join Tatneft in building a refinery and petrochemicals plant in Tatarstan. Export Import Bank of Korea and state-owned Vneshtorgbank are negotiating financial assistance for the project, which could cost as much as $3bn.

Meanwhile, Samsung plans to invest $0.5m modernising Alliance Group's 100,000 b/d Khabarovsk refinery, in Russia's far east. And KNOC has signed a preliminary deal with Rosneft calling for joint exploration and development offshore Sakhalin Island. South Korea's Kogas already plans to import gas from Rusiya Petroleum's Kovykta gas development, in eastern Siberia, and has been targeted by Shell-led Sakhalin Energy as a market for its liquefied natural gas (LNG) project, scheduled to start up in 2006-2007.

Foreign companies used to chase mainly oil deals in Russia. Now they are also going for gas. In September, Total agreed terms of a plan to buy 25% plus one share in Novatek, Russia's biggest independent gas producer. The value of the deal was not disclosed, but press reports claimed Total would pay $1bn for a blocking minority stake. Novatek produces around 18bn cubic metres a year (cm/y) of gas from fields in the Yamal Nenets region of western Siberia, but it is targeting output of 45bn-50bn cm/y of gas and 5m-6m tonnes a year (t/y) of liquids. Downstream, it plans to expand into petrochemicals.

Total is one of the few foreign producers in Russia. It is involved in the Kharyaga project, one of three production-sharing agreements signed in the mid-1990s. It has, for some time, been looking for new opportunities. Detailed studies of the Vankor field, in Krasnoyarsk region, eastern Siberia, have been conducted and Total is said to have considered targeting an equity stake in Sibneft.

Foreign majors are jumping on Russia's newly rolling LNG bandwagon. Gazprom and ChevronTexaco have signed a six-month memorandum of understanding, calling for joint studies of possible oil and gas projects both in Russia and the US. Attention will focus on LNG projects to supply the US and on upstream ventures in western Siberia.

Last month, Sakhalin Energy announced a ground-breaking LNG supply deal to the US. Over 20 years, it will deliver 37m tonnes of LNG to Shell Eastern Trading at Mexico's Energía Costa Azul plant. Gas will be used in Mexico, with excess volumes exported to the US.

Meanwhile, Shell became the latest foreign firm to express interest in tapping the Schtokmanovskoye gasfield, in the Barents Sea, which Gazprom hopes to develop for LNG exports. Schtokmanovskoye was on the agenda when the prime minister, Mikhail Fradkov, visited Shell in the Hague, in September. Statoil plans to join Gazprom at the 3 trillion cm gasfield. In return, Gazprom will gain access to Statoil's Snøhvit LNG project and to its US regasification capacity.

Also in this section
Carbon price drives generating fuel switch
8 August 2019
Coal pays for its greater carbon intensity in a rising European CO2 price environment
There's still life in coal
16 July 2019
Recent falls in the price of coal were due to increasing supply rather than declining demand
Transformation and sustainability may be the new watchwords
6 June 2019
Shrinking optimism over the longer term