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Burying the hatchet

it seems a bit late to be cheering the end of the cold war more than a decade after the Soviet Union fell apart and Russia opened its doors to West. But that is how the partnership forged between the US and Russia after September’s terrorist attacks in the US is being celebrated, writes Isabel Gorst.

ON THE OIL AND GAS front, the momentous geopolitical shift that began last autumn and is still playing out will probably prompt Russia and the West to put aside what the European Commission's president, Romano Prodi, calls the "economic baggage of the cold war" and create the possibility for a surge in Russian oil and gas exports. This is likely to be underpinned by much more foreign investment in Russia's energy sector.

The events of 11 September alerted US oil consumers to the risk of relying heavily on the Middle East, especially Saudi Arabia, for supplies. Russia, where production and exports have risen rapidly over the past few years, was quick to move in and offer an alternative, reliable source of oil. Russia's reserves are a state secret, but they are certainly nowhere near as big as Saudi Arabia's.

And, for now, the county has no deep-water ports capable of loading the type of large tanker that would be required to make the long journey across the Atlantic.

Caspian influence

Russia is also a particularly influential member of the Caspian group of states, alongside Azerbaijan, Iran, Turkmenistan and Kazakhstan. Caspian oil reserves amount to a huge 39bn barrels, according to estimates by consultancy firm Wood Mackenzie.

Russia's share totals only 1bn barrels, but it dominates the export routes from the landlocked area and is familiar with many of the big oilfield developments that were first discovered during the Soviet era.

One of the fruits of the new partnership is a joint declaration, made during the May summit between President George Bush and the Russian leader, Vladimir Putin, calling for an energy dialogue between the nations. The arms treaty signed on the same occasion eclipsed news of the dialogue, but the declaration laid the groundwork for a major increase in westbound energy exports, facilitated by a greater flow of foreign investment to the oil and gas sectors.

Reducing volatility and enhancing predictability in global energy markets was listed as a priority among the seven main areas of the declaration. The dialogue also seeks to encourage "investment aimed at the further development and modernisation of Russia's fuel and energy sector, including expansion of oil and gas production in eastern Siberia, the far east and offshore areas".

For the downstream, there was a resolution to "promote access to world markets for Russian energy, including through the commercial development and modernisation of Russian port and transport infrastructures, the electric power and gas sectors and oil refining capabilities".

Some Russian government and industry officials had hoped the accord would provide more concrete investment commitments from the US. Lukoil invited 20 US congressmen to visit Timan Pechora province, in the far north, where it has an impressive upstream portfolio, some of which it hopes to develop in partnership with US firms, such as Conoco and ChevronTexaco.

Unlike any other Russian firm, Lukoil exports one oil cargo a month to the US for refining and supply to its Getty retail chain, in the northeast. Now it is looking for investment to support a plan to build a deep-water oil port at Murmansk, on the Barents Sea, which would be the starting point for a major expansion in trans-Atlantic oil trade.

Yukos has also set its sights on the US oil market. Yukos will be the main investor in the Adria project to tie Russia's Druzhba export pipeline to Croatia's Omisalj port, on the Adriatic. Deep harbours at Omisalj can load very large crude carriers. Yukos may also seek foreign financial support for its planned 28m tonnes a year pipeline from western Siberia to China, which will open up Russia's first eastern-flowing export route.

US firms signed two oil-related deals with Russian companies during the Bush visit. ExxonMobil, operator of the Sakhalin-1 project, awarded a $430m contract to the Amur shipyard, in the far east, to modernise the Orlan rig for use at the $4.3bn Chaivo project, off the northeast of Sakhalin Island.

ChevronTexaco signed a less dramatic, but nonetheless important, accord with Russia's biggest shipping firm, Sovkomflot, to transport oil delivered to Novorossiysk from Kazakhstan through the recently commissioned CPC system. ChevronTexaco will also consider investing in the expansion of Sovkomflot's tanker fleet, which would help boost the flow of Russian oil to world markets.

"This is just the kind of direct foreign investment we are looking for," says Russia's economic development minister, German Gref. But such statements are only mildly encouraging for foreign oil companies, weary of protracted negotiations for big upstream oil and gas deals in Russia.

Western oilmen complain that Russia remains a relatively unfriendly place for investors and are sticking to demands that major oilfield developments should take place within the framework of production-sharing agreement (PSA) legislation. But foreign services companies, including Schlumberger and Halliburton, have thrived in Russia over the past three years and are helping fast-growing firms, such as Yukos and Sibneft, make record production gains.

It is noticeable that the energy dialogue declaration picks out the far east, eastern Siberia and the offshore as areas where foreign investment should be encouraged. These areas have huge potential reserves, but are all challengingly remote, lying beyond the reach of existing infrastructure. Many foreign oil companies have come to believe that PSAs will only take place at so-called "edge projects", such as Sakhalin or the frozen waters of Russia's Arctic seas.

US support

But the partnership with Russia has not dimmed US support for projects that will diminish Russian dominance over Caspian export routes. At the end of June, a BP-led group is expected to sanction the Baku-Ceyhan pipeline, which should, by 2005, be carrying up to 1m barrels a day (b/d) of Caspian crude to the Turkey without crossing Russia. The US government is also encouraging Kazakhstan to diversify export routes by committing oil to the Baku-Ceyhan line.

Although attempts to lure Lukoil into the Baku-Ceyhan group have not yet been successful, US officials detect a softening in Russian opposition to the project. The agreement signed by Bush and Putin contains a reference to both countries' support for multiple export routes—a breakthrough in the view of Steven Mann, US ambassador for Caspian region energy developments.

Mann denies the US government plans to use US troops—recently deployed to control insurgents in Georgia's Pankisi Gorge—to guard oil and gas lines crossing the Caucasus to the Black Sea and Turkey. Russian acceptance of the arrival of the US army in Georgia points to the more pragmatic approach in Moscow to Caspian geopolitics.

For geographical reasons alone, Europe will remain a more important energy partner for Russia than the US. Most of Russia's 3m b/d of oil exports and all of its 130bn cubic meters a year of gas exports flow to Europe. Russia signed an energy dialogue agreement with the European Union in 2000, although, so far that agreement has resulted in more talk than action.

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