Gazprom Loosens Its Grip

Nine months after stating it would develop the Shtokman field alone, the Russian giant has made a deal with France's Total, and hints at others

A change of heart. That's the first phrase that springs to mind after news that Russia's Gazprom (GAZP.RTS) is once again selecting foreign partners to help it develop Shtokman, a giant gas field beneath the Barents Sea.

On July 13, Gazprom signed a deal with French oil giant Total (TOT) that will leave full ownership of Shtokman in Gazprom's hands but give Total a 25% stake in an operating company that will finance the exploration and build the infrastructure for extracting and transporting gas. It's significant that the unusual structure will allow Total to show a quarter of Shtokman's reserves on its books. Such booked reserves are an important element in investors' valuations of oil and gas companies.

Gazprom has also said that it may offer an additional 24% of the project to other foreign investors. The announcement comes just nine months after Gazprom declared that it would develop Shtokman alone, breaking off years of negotiations with potential foreign participants in the project (see, 10/18/06, "Is Russia Capping the Cooperation Well?").

Breakthrough Technologies Needed

Gazprom's about-face over Shtokman is just the latest reminder of Russia's unpredictable ways—though it's less surprising than the earlier plan to go it alone. Analysts have said all along that Gazprom would need foreign expertise to develop the field, which will require some $20 billion in investment to extract an estimated 3.7 trillion cubic meters of gas.

"It's impossible for Gazprom to commission such a large field, in a very harsh environment, and located offshore, where Russia has very little experience. They need breakthrough technologies," says Valery Nesterov, oil and gas analyst at Troika Dialog, an investment bank in Moscow.

The decision to admit Total into the project is also consistent with the overall pattern now emerging in Russia's energy sector. In recent years the country has re-nationalized much of the industry, squeezing foreign investors out of majority ownership of big projects (see, 4/19/07, "The Kremlin's Big Squeeze"). But it has also signaled a willingness to admit foreigners as junior partners to the two big state energy players, Gazprom and Rosneft (ROSN.RTS).

Shell on the Scene

There's plenty of evidence that major foreign investors are happy to play by the new rules. The Shtokman deal is the third major partnership between a Western energy company and a Russian state corporation announced in as many weeks. On June 22, Gazprom reached a deal with British Petroleum (BP) to settle a long-running dispute over the Kovykta oil and gas field in Siberia, under which Gazprom and BP formed a global partnership to explore joint energy projects (see, 6/22/07, "BP's Russian Deal Oils the Wheels").

Then, on July 9, Shell (RDSA) and Rosneft, Russia's state oil company, announced that they were forming a strategic partnership to develop oil projects in Russia. Shell is already partners with Gazprom in the Sakhalin 2 oil and gas project in the Pacific, after Shell was pressured to sell a controlling interest in the project to Gazprom last December. Shell retained a 25% stake in the project, with a further 24% held by two Japanese companies, Mitsui (MITSY) and Mitsubishi.

Not Angry Anymore

The news that Gazprom is now softening its position over Shtokman is therefore consistent with Russia's strategy elsewhere. "All the recent deals show that Russia is getting tougher on foreign investors, but on the other hand the rules of the game are becoming more transparent and predictable," says Nesterov. It's a model Russia is expected to follow in the future, too, particularly as it moves to develop far-flung offshore fields in the Arctic Ocean and the Pacific, from which much of its future energy growth will come.

For foreign energy companies eager to replace their dwindling reserves, a minority stake in a huge Russian project is a big consolation prize for playing a junior role. Hence the shock last October when Gazprom announced that it would keep Shtokman all to itself. That decision appears to have been prompted in part by pique over the refusal of European governments to support Russia's ambitions to increase its stake in EADS (EAD.PA), the pan-European aerospace concern.

It's a reminder, also, of the extent to which big investments in Russian energy are tied into international politics—one reason the rules of the game are never likely to be 100% clear for foreign investors, even though the broad outlines of Russia's energy policy are becoming more apparent. Some commentators have attributed the decision to invite Total into the Shtokman project to personal talks between Putin and new French President Nikolas Sarkozy.

What About the U.S.?

Putin may have figured that the election of a new French leader was a good chance to mend fences with a major European country at a time when Russia's foreign relations have become strained with the West. "Company managements don't often know themselves what's going to happen, because the end decision might have more of a political element to it than a commercial one," says Chris Weafer, chief strategist at Russia's Alfa Bank.

In particular, it's still not clear whether Russia's change of heart also extends to U.S. companies Chevron (CVX) and ConocoPhilips (COP) that also had been negotiating for inclusion in the Shtokman project. Originally they seemed destined for major roles, with Russia eager to ship Shtokman's gas, in liquid form, to the East Coast of the U.S.

Yet last year, amid disagreements with the U.S. over Russia's bid to join the World Trade Organization, Russia abruptly changed its plans and announced that it would ship all of Shtokman's gas to Europe. Gazprom's latest announcement hints that a liquefied natural gas project may once again be back on the agenda, but the details are still sketchy.

The recent deals suggest that European companies may have a head start when it comes to developing relationships with Russia's expanding state energy companies. Strained political relations between Russia and the U.S. mean that U.S. investors may not receive as warm a welcome.

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