Royal Dutch Shell Plc .com: Russia’s Energy Policy Doesn’t Match Its G-8 Talk

FROM THE WALL STREET JOURNAL
By GUY CHAZAN and GREGORY L. WHITE
July 6, 2006; Page A4

MOSCOW — When President Vladimir Putin hosts the Group of Eight leading nations in St. Petersburg next week, he is expected to sign an energy action plan bristling with pro-market rhetoric about improving the investment climate, encouraging competition and increasing access to energy markets.

But in recent months, Moscow has imposed strict restrictions on foreign investment in its oil and gas fields while entrenching the dominance of big state-owned monopolies like natural-gas giant OAO Gazprom.

Russia passed a law yesterday enshrining Gazprom’s exclusive right to export Russian gas, weeks after the European Union called for Moscow to open its pipeline network.

The disconnect shows how differently Russia and other G-8 members view energy security — a topic Mr. Putin has put at the top of the summit’s agenda.

“Call it the Sinatra approach,” said Marc Franco, head of the European Commission delegation to Russia, in an interview. “The Russians have assured us they’ll work on issues [like market access], but they’ll do it their own way.”

Though it causes alarm for some governments, the Russian approach hasn’t fazed many of the major international energy companies desperate for access to Russia’s vast reserves.

Big oil companies from Asia and Europe are showing strong interest in buying shares in the initial public offering of state oil company OAO Rosneft. The IPO could be valued at as much as $12 billion but has found mixed reactions among Western investment funds that consider the company’s price target to be high.

“The only way you’re going to get access to…resources in Russia is if you have good relationships with” Rosneft and Gazprom, said one Western oil executive. By participating in the Rosneft offering, “you’re buying a ticket,” he added.

People close to the situation said BP PLC and Royal Dutch Shell PLC have expressed interest in participating, as have China National Petroleum Corp. and Malaysia’s Petroliam Nasional Bhd., or Petronas. Each could buy $1 billion or more in stock, with industry buyers potentially taking more than half of the shares on offer, these people said. Final terms won’t be decided until the offering is priced July 13, however. Other European and Asian companies also might participate.

For BP, which invested $7 billion in a joint venture in Russia in 2003 and joined with Rosneft in a project in Russia’s far east, ensuring good relations with the Russian state company is a big motivation for participating in the share offering, people close to the deal said. BP is looking at potentially investing around $2 billion, one person familiar with the matter said.

Also undecided is Royal Dutch Shell, which is negotiating over a potential investment in Rosneft that could be around $1 billion, according to a person familiar with the matter.

CNPC is offering to invest as much as $3 billion in the IPO if Rosneft will give it commitments on oil supplies and participation in projects in Russia, said people close to the Chinese company.

Rosneft, however, is resisting calls for special treatment for the big oil companies, insisting that they participate in the IPO on the same terms as other potential buyers.

Russia’s presidency of the G-8 comes at a time of growing jitters in the West about energy supply and surging prices. Russia, which already supplies a quarter of Europe’s gas and is the world’s second-biggest exporter of oil, after Saudi Arabia, has sought to leverage its resources into greater global clout.

A draft law would limit foreign companies to minority stakes in all but the smallest oil and gas fields. There are no such limitations now, and the law would not apply to past deals.

Kremlin officials admit Russia and the other G-8 members don’t see eye-to-eye. “Our partners understand energy security to be complete control of our pipeline system and our energy resources,” Vladislav Surkov, a top Putin aide, said last week. “We understand it to be something different, and we have a right to.”

In Europe, fears are growing that Gazprom isn’t investing enough in new fields to ensure adequate production growth. The EU expects to double natural-gas imports to 535 billion cubic meters annually by 2030 from 275 billion cubic meters. Russia’s gas exports haven’t grown significantly since the early 1990s and total about 160 billion cubic meters.

“The main worry is whether Russia will be able to continue to satisfy increased demand for gas in Europe,” says Mr. Franco.

Gazprom insists it has plenty of gas and is making the investments needed to meet rising demand.

Russian officials accuse Europe of double standards, saying they want liberalization in Russia but are reluctant to allow Russian companies into their markets. “When we invest huge amounts upstream, we need to know that there will be no obstacles put up by governments to us selling what we produce,” said Igor Shuvalov, a Putin aide. “We don’t feel that G-8 governments and companies are completely ready yet to open up their jurisdictions to allow Russian companies to invest.”

— Alistair MacDonald in London, Kate Linebaugh in Hong Kong and Bhushan Bahree in New York contributed to this article.

Write to Guy Chazan at [email protected] and Gregory L. White at [email protected]