Oil Sees End of Sweet Deals

LONDON — The terms of a Russian contract to develop one of the world’s largest untapped natural-gas fields reveal the lengths to which Western oil companies will go these days to gain a foothold in the dwindling pool of new hydrocarbon resources.

In Russia’s sector of the Barents Sea, the Shtokman field is hundreds of miles offshore in Arctic, iceberg-strewn waters. But despite the immense technical and investment challenges it poses, its 3.8 trillion cubic meters of gas has proven a huge draw for oil companies desperate for new reserves.

Last year, Russia’s natural-gas giant OAO Gazprom finally chose two Western energy firms — Total SA of France and Norway’s StatoilHydro ASA — to help it develop Shtokman, after years of negotiations. But the terms are unusual for the oil industry, and unfavorable for Gazprom’s partners. The consortium developing the field — early estimates of costs top $20 billion — won’t own the gas in the ground and will have to sell all that is produced to Gazprom.

“In most cases … the starting point is that we want to market the gas ourselves,” Helge Lund, chief executive of StatoilHydro, said in an interview. With Shtokman, “the companies involved are basically taking a risk on future gas prices.”

Some analysts wonder what exactly Total and StatoilHydro will get out of their involvement in Shtokman if they can’t own and freely sell its gas.

The situation reflects the bind major oil companies find themselves in. Much of the world’s hydrocarbon resources are in places like the Middle East that are largely off-limits to foreign investors. In countries that haven’t completely slammed the door, reserves are often in the hands of state-run companies like Gazprom that are becoming more assertive in their dealings with foreigners.

In the past, Western companies owned the oil and gas in the ground, merely paying taxes and royalties to the host countries. But those arrangements are becoming outmoded. Some in the industry think the future lies in the kind of technical-service contracts in which oil-field-service companies like Halliburton Co. and Schlumberger Ltd. specialize. Under such deals, major oil companies would be unable to book energy reserves, even though reserve growth is still one of the key metrics analysts and shareholders use to evaluate an oil company’s performance.

Some companies have strongly resisted the move to service contracts. But a few acknowledge the need for a rethink. Tony Hayward, chief executive of BP PLC, told a conference in Madrid recently that the oil industry needed to “move beyond the historical model that requires ownership of reserves and production.” He called for a new era of “reciprocity,” where the majors form partnerships with national oil companies and help them expand internationally.

Shtokman reflects that new reality. Total said it will be able to book the field’s reserves — but it won’t own them. Gazprom insisted on retaining sole ownership of the Shtokman license and will also take a 51% stake in Shtokman Development Co., which will finance and build the infrastructure at the field. Total has 25% and StatoilHydro 24%.

The contract only relates to a third of the Shtokman license area, though initial talks suggested it would cover the whole field. Negotiations on Shtokman began in earnest in 2006, after five companies were shortlisted: Total, Statoil, Norsk Hydro (which later merged to become StatoilHydro), ConocoPhillips and Chevron Corp. BP and Royal Dutch Shell PLC had taken a look at the project but decided it wasn’t worth it. Then in October of that year, Gazprom said foreign companies could still take part, but only as contractors. Chevron said the terms were unacceptable and dropped out.

A year later, after inconclusive talks with contractors, it changed its mind again. Gazprom wanted to produce liquefied natural gas at Shtokman and export it to the U.S., and to do that it needed the help of a company like Total, a world leader in LNG. Also, StatoilHydro was one of the few companies experienced at operating in the Arctic. But this time, the terms being offered to Western oil majors were much tougher.

Foreign companies would own the infrastructure but would have no equity in the gas in the ground.

Gazprom ditched the original approach of developing Shtokman under a production-sharing agreement, a type of contract common in the oil industry. Under PSAs, companies shoulder all investment costs but can recover them from the sale of oil or gas before having to share much revenue with the government. But Russia had soured on PSAs, which it felt were too favorable to the oil companies.

Total had in the interim softened its opposition to Gazprom taking a majority stake in the Shtokman consortium. It accepted the principle that the development company would sell Gazprom all Shtokman’s natural gas, as long as the price wasn’t fixed but reflected current world gas prices.

For Total, the upside of establishing a foothold in Russia outweighed the disadvantages of the contract.

Write to Guy Chazan at [email protected]

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