Russia tightens grip on energy reserves

Kremlin pushes out foreign developers as it seeks control over oil, natural gas

January 14, 2007|By Alex Rodriguez | Alex Rodriguez,Chicago Tribune

MOSCOW -- Russian authorities have never been known for their eco-friendliness, but late last year inspectors swooped down on the vast Kovykta natural gas field in east Siberia and came away with a long list of alleged misdeeds, including excavation violations and illegal logging.

Few in Russia, however, believe that the government has suddenly gone green.

Kovykta is Russia's largest natural gas field, storing enough natural gas to keep the world's largest energy consumer, the U.S., supplied for two years.

And while its 1.9 trillion cubic meters of gas are being developed by joint venture involving British Petroleum, Kovykta is seen as the Kremlin's next move in a methodical campaign to elbow foreign oil majors aside and commandeer the country's energy sector.

A consortium led by Royal Dutch Shell once oversaw the world's largest oil and natural gas development project, an energy venture called Sakhalin 2 in the Russian Far East. But after relentless pressure from Russian authorities that included a series of environmental inspections and a permit revocation, the consortium buckled and sold a majority stake to Russia's state-owned natural gas monopoly, Gazprom, for $7.45 billion.

The Dec. 21 sale was viewed as a milestone in the Kremlin's quest for energy sector dominance and a sobering message to foreign oil companies that their role in developing Russia's vast energy wealth will be second-tier.

Analysts say Kovykta, being developed by BP and its Russian partner, TNK, is next in line. Russian environmental inspectors have asked prosecutors to begin acting on their findings, and a Russian agency that governs subsoil natural resources licensing will decide this year whether to revoke TNK-BP's license on the grounds that it isn't producing the levels of natural gas it initially promised.

"TNK-BP is in a situation where they just don't have much of a choice," says Nadezhda Kazakova an analyst with MDM Bank in Moscow. "With energy sector revenue now linked to the state, it's hard to see how the state will let [Kovykta] go."

Russia once desperately sought the involvement of foreign oil majors in its energy sector. After the breakup of the Soviet Union in 1991, Russia's shaky economic outlook forced the Kremlin to bring in international oil giants like Shell to develop difficult-to-reach oil and natural gas deposits.

As an enticement, the Kremlin under Boris N. Yeltsin signed so-called production sharing agreements that set restrictions on how much of the profit would be set aside for the state.

Under President Vladimir V. Putin, the Kremlin has adopted a radically different energy strategy that calls for state dominance over oil and natural gas, collectively the engine behind the Russian economy. Putin's approach allows foreign oil majors to bring their capital and technical know-how to Russia, but their holdings in Russian energy ventures should be limited to minority stakes.

With Sakhalin 2 firmly in the Kremlin's grip, observers say, authorities are turning their attention toward Kovykta.

Rosprirodnadzor, Russia's environmental watchdog agency, has accused TNK-BP of illegally piling mounds of fill onto the banks of the Lena River and unauthorized logging. The agency has asked Russian prosecutors to take up the case.

TNK-BP faces an even bigger problem from Rosnedra, Russia's subsoil licensing agency. TNK-BP's license requires the company to produce 9 billion cubic meters of natural gas from Kovykta by this year. That mark is attainable, TNK-BP officials say, but should be amended since the local market for gas, the Irkutsk region, requires only 2 billion cubic meters.

To comply with the 9 billion cubic meter requirement, TNK-BP would have to burn off what the local market doesn't consume.

Kovykta's full potential could be realized if TNK-BP were allowed to export natural gas to energy-hungry China to the south. However, Gazprom, which under Russian law is the only entity permitted to export natural gas, has balked at the idea, saying gas exports from Kovykta shouldn't begin until 2015.

"We are talking right now with both Gazprom and with Russian officials," said TNK-BP spokeswoman Maria Drachova. "We never give up hope."

Industry observers warn that Russia's strategy could backfire. Russia's energy sector still needs participation from Western majors to realize its potential. State-owned giants like Gazprom continue to be hamstrung by stifling inefficiency, and lack of infrastructure investment that impedes growth of Russia's energy sector.

Reducing foreign developers to the role of minor players, said William Ramsey, deputy executive director of the International Energy Agency, is only going to further discourage those companies from doing business in Russia.

Alex Rodriguez writes for the Chicago Tribune.

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