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The Herald (Scotland): West caught in a great big Russian bear hug

ALF YOUNG September 21 2006
BIG Oil – or rather Big Western Oil – is in increasingly big trouble. So far this week, Royal Dutch Shell and its Japanese minority partners have been plunged into a tense stand-off with the Russian government over the fate of the consortium’s $20bn Sakhalin-2 project.

BP has revealed further delays to production from its hurricane-damaged Thunder Horse installation in the Gulf of Mexico, and ExxonMobil has been lambasted by Britain’s Royal Society for funding lobby groups in the US which, the scientists claim, have “misrepresented the science of climate change in outright denial of the evidence”.

Shell’s woes on Sakhalin island in the north-west Pacific, where government authorities have revoked a key environmental permit, stem from Moscow’s determination to squeeze a better deal out of the consortium than the one signed in 1993. Then, Russia itself faced financial meltdown and the price of crude was heading towards a $10-a-barrel low.

Now resource-rich Russia holds the supply whip hand for Europe and much of Asia and the oil price, while 20% down from recent peaks, is still hovering around $60 a barrel.

Moscow wants its share of that lucrative bounty by introducing state-owned monopoly Gazprom to the party and thinks Shell is stalling on the deal by jacking up its front-end costs of the project.

Moscow’s strong-arm tactics have already triggered protests from Japanese premier-elect Shinzo Abe and from the European Commission. Britain’s ambassador to Russia is “deeply concerned”. But it’s not at all clear what they or Shell – still recovering from the 2004 corporate fiasco of its vanishing reserves – can do about it.

BP’s Thunder Horse travails – oil will not now flow again until mid-2008 because of suspect welds in the flagship platform’s sub-sea infrastructure – are just the latest in a string of environmental and safety set-backs the group has suffered across the United States. The March 2005 fire at its Texas City refinery, which killed 15 and injured 170, and two successive spillages at its Prudhoe bay oilfield in Alaska have severely dented BP’s reputation across the Atlantic.

But BP also faces its own Russian challenges. Its TNK-BP venture, which hopes to sell gas from the huge Kovykta field in eastern Siberia to China and South Korea, was sold to shareholders as a deal built on mutual trust. But there are reports that regional prosecutors are asking the government to suspend the exploration licence for Kovykta.

In any case, BP’s partners – three Russian oligarchs – will soon be free to sell on their interest in the venture, and the most likely buyer is Gazprom. That might help BP unlock its supply chain to China. It will also bring the group into the embrace of Russian state power, keen to maximise its energy supply strengths.

As well as outraging scientific opinion in the UK over climate change, ExxonMobil also faces another Russian headache. It leads the Sakhalin-1 project in which it is joined by 20% partner Rosneft. The presence of the state-controlled Russian oil group, which listed its shares on the London market in July, ought, on the face of it, to imply some influence in the Kremlin.

But even the presence of Rosneft hasn’t allowed Exxon to crack the question of how it gets its gas to China, where Gazprom is trying to control access. And with costs rising on its Sakhalin investment, delaying payment of royalties to Moscow promised under the original agreement, there’s a growing risk that it too could face pressure to renegotiate its terms.

That same threat looms over French oil major Total, which has another 1990s production-sharing deal covering the Kharyaga field in the Arctic Circle. Russia’s Natural Resources Ministry confirmed last night it is reviewing Total’s compliance with the original agreement.

The two sides have been at loggerheads for years over the pace of production. If this latest clash leads to the Total licence being cancelled, it will be the clearest signal yet that Moscow has decided to play hardball on a series of contracts that fail to reflect Russia’s current strength in oil and gas, or the price that valuable resource commands in world markets.

Big Western Oil now finds itself in a big Russian bear hug. Two of the four players – Shell and BP – might have wished they were in a more resilient corporate state to respond. But even if they were in rudest health, they would have found this challenge daunting. Moscow holds, by far, the stronger strategic hand.

It could overplay it. It risks damaging its credibility as a market-facing economy, open to western investment and keen to do business with the rest of the world. But it has vast oil and gas reserves, while the West faces a significant supply crunch. What’s up for grabs here is not just the terms under which Big Western Oil does business in Russia. It’s really about who will ultimately control all our energy futures. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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