Russia oil and gas: business as usual?
“We will continue to pursue a policy of openness to foreign investment in energy, a strategic sector for Russia,” President Putin told the International Economic Forum in 2012. But what does an open strategic sector look like in Russia? The only other examples of what the Russian government sees as strategic sectors are defense, state monopolies, and the media, none of which appear particularly open.
Investors only had to wait until the first quarter this year for an answer. In March, a deal signed by Rosneft reshaped the Russian oil industry and significantly bulked up Russia’s top oil producer. Rosneft’s acquisition of the BP joint venture TNK-BP, in exchange for BP gaining 20% of Rosneft’s shares, effectively consolidated Russia’s first and third largest oil producers. At $55 billion, it was the largest deal ever signed in Russia and as a consequence, Rosneft even knocked ExxonMobil off the podium for the world’s largest oil producer with 4.5 million bpd production.
The state share of Russia’s oil production increased from 20% in the early 2000s to 56% today, removing any illusions that Putin was mixing the idea of openness with liberalization. Indeed, the state already controls the gas sector through the world’s largest gas company, Gazprom, and now it has a much greater share of the oil industry through the world’s largest oil company, Rosneft.
For BP this deal marked a new strategic partnership in Russia and presumably a fresh start after years of turbulent internal legal battles at TNK-BP. “We hope to help Rosneft to deliver synergies through its acquisition of TNK-BP and to grow production and reserves through brownfield, greenfield and unconventional opportunities as Rosneft strengthens its position among the world’s leading global energy companies,” said BP’s Chief Executive Bob Dudley.
By granting a 20% stake in Rosneft to BP, the Russian government appeared to define openness in the strategic energy sector as a form of foreign ownership with state control. In a market already restricted in the number of major oil companies, the relevance of the state to oil industry stakeholders has now risen. Rosneft’s growth into the undisputed oil-producing champion has begun to change the landscape of the Russian industry. However, aside from these high-profile deals, many would argue that it is still business as usual in Russia for oil and gas companies and service providers.
FOREIGN SPARRING PARTNERS
The Russian government believes that it needs investment of more than $280 billion to maintain oil production at the current level until 2020, and indeed, a number of high profile deals have shown that there is interest in investing in Russia. Rosneft has been leading the effort to attract foreign partners, signing a joint venture agreement in 2012 with Norway’s Statoil for exploring frontier areas in the Sea of Okhotsky and the Barents Sea as well as another JV with Japan’s Inpex for exploration off Russia’s Pacific coast. The state giant also concluded a joint venture with China’s CNPC for a USD5 billion Eastern Petrochemical venture. Andrey Goltsblat, managing partner of law firm Goltsblat BLP, confirms that Russia has become a primary market for many large global players, who have realized that the country offers more growth perspectives than many other markets.
Yet, according Fernando Martinez-Fresneda, Repsol’s General Manager for Russia and the former Soviet Union, investing in Russia is not a simple process. “Repsol brings in its global technology and international best practices gained in the 25 countries we operate in,” he says. “However, companies in Russia operate in the way that they are accustomed to, and as a foreign company it is not easy to tell them that sometimes they have to change their approach in order to be more efficient.”
It took time for the Spanish company to develop its business in Russia after acquiring a 10% holding in West Siberian fields. “We have been analyzing and screening the market for five years; some opportunities failed and others were considered too high risk,” Martinez-Fresneda says. He believes that it was important to take the time to do this before Repsol concluded its joint venture with Alliance Oil, which included an agreement to take over Russian gas development company Eurotek.
In 2012, after 20 years in the Russian market, Wintershall concluded an asset swap with Gazprom in which the German company received a 25% stake in blocks IV and V of the Achimov formation. In return, Gazprom obtained shares in Wintershall’s natural gas trading and storage business. Mario Mehren, a member of Wintershall’s Board of Executive Directors, explains that Germany’s largest crude oil and natural gas producer and Gazprom are starting to share expertise: “We are working on a project to bridge the way from the North Sea to the Barents Sea, which is interesting for both parties. Gazprom is interested in the development of shallow waters on the Russian continental shelf. This is exactly where in the North Sea our Dutch colleagues are incredibly experienced. In return, Wintershall will completely transfer the currently jointly operated natural gas trading and storage business to Gazprom.
Dimitry Bolotnik, General Manager Russia & CIS of Roxar, summed up the situation: “Companies entering Russia should approach the market with a long-term vision: be patient and do not expect quick profits. Roxar is today bearing fruits of agreements concluded five years ago. The right level of cooperation is important: Russian oil and gas companies are looking for long-term partners.”