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The Times: Why Gazprom has spurned its foreign lovers (*first rate analysis )

October 11, 2006
European Briefing by Carl Mortishead
I WANT to be alone, said the boss of Gazprom. Alexei Miller, the Gazprom chairman, is no Greta Garbo, but his declaration that the Shtokman gasfield would be developed solo has deeply disappointed at least five international suitors. The admirers were rich and good looking — American companies, such as Chevron and ConocoPhillips, two Nordic blondes, Norsk Hydro and Statoil, and a Latin lover, Total, of France.

Still, Miller was unmoved. They didn’t offer enough, he said, and, for good measure, he ground his heel into the faces of the Yankee boys to show contempt for their fat wallets. Shtokman’s gas will not be shipped in cryogenic tanks to the United States but piped into Europe.
It is tempting to think of all this as more sulks from the Baltic. There is a pattern of behaviour: attempts to evict Shell and ExxonMobil from their positions on Sakhalin Island, bully tactics in the gas-price negotiations with Ukraine and Gazprom’s not very subtle hints that it would like to take a majority position in BP’s Russian joint venture.

There is another way of looking at it. Perhaps Gazprom really does want to be alone. If the utility giant can develop its gas export business without foreign help, then the world of big energy is about to change in a very fundamental way. When Shell, BP and ExxonMobil marched into Siberia half a decade ago, they waved their chequebooks and boasted about their skills. It was assumed that old Soviet oil in fur hats would be supplanted by Texan engineering in tractor caps.

The experience has been less than glorious for the multinationals. Budgets have been busted wide open in Sakhalin, project management skills have been shown to be a sham, exposing Shell and Exxon to humiliating critiques from Russian auditors. Meanwhile, the extraordinary buoyancy of the oil price has left Gazprom and the Kremlin with an embarrassment of riches. There is money in the kitty; why go begging to the Texans?

Oil nationalism is resurgent. It is almost a rerun of the late 1970s, when the Seven Sisters were expelled from the Gulf. Expropriation and punitive taxation of foreign investors is the popular political tune in Caracas and La Paz. In part, it’s about money. The oil majors roll their eyes in exasperation — none of this would be happening if the oil price was $20 per barrel instead of $60, they say. President Hugo Chávez can afford to be belligerent. Would Gazprom be so confident if its coffers were not swollen to bursting?

But the new swagger of the national energy companies is not just about money. This time it’s about technology and it exposes the terrible mistake made by Western oil multinationals: they gave away their skills. In the late 1990s, under pressure from a collapsing oil price, BP, Shell and ExxonMobil pruned and sacked and sacked and pruned. Their engineers were put out to grass, research was abandoned.

The oil service companies hired the best of the technicians and continued the work. Other than very deepwater drilling, there is little technical expertise that cannot be outsourced or purchased for a price. If money can buy technology, what do BP and ExxonMobil have left to sell? This is a frightening watershed for big oil. In the end, Gazprom may bring in Norsk Hydro or Statoil as minority partners, offering them a few per cent in exchange for their offshore skills. It will be a small victory for smallish companies from a small nation. For the old imperialist oil tycoons, there won’t even be crumbs.

Saudis fill the vacuum in Europe

WHILE the multinationals fret over the capricious behaviour of the princess from the Baltic, the Saudis are buying up old and discarded bits of petrochemical kit in Western Europe. Sabic Europe is a subsidiary of Saudi Basic Industries, the petrochemical arm of the Kingdom’s vast oil and gas enterprise. Last month, Sabic bought a chemical plant on Teesside, paying £700 million for an olefins business that once belonged to ICI and later was taken over by Huntsman, the chemical firm established by Jon Huntsman, the Mormon philanthropist. The elderly Huntsman had decided to sell up and Sabic is interested in expanding upstream in the European chemicals chain.

The key is ethylene, a volatile gas that is the building block for a variety of bulk chemicals. Within Europe, it is becoming more scarce. For Sabic, big oil’s retreat from chemicals is a huge opportunity.

The Saudi firm had intended to build its own ethylene cracker to ensure it had raw material to supply its plastics business in Europe. The Teesside plant ensures the supply and avoids the expense of new-build. More importantly, it keeps Europe short of ethylene and the Saudis in pole position.

Sabic is not the first company from the developing world to move aggressively into an empty European space and it won’t be the last.

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