Russia re-energized by its natural resources

Posted in Russia | 10-Apr-06 | Author: Andrew E. Kramer| Source: International Herald Tribune

Gazprom's headquarters in Moscow.
MOSCOW So many Western energy companies are in talks this spring with Gazprom, the Russian state-owned natural gas monopoly, that executives were lined up across the lobby of the headquarters on a recent afternoon. Fiddling with scarves and hats, representatives of a U.S.-based international oil company and a large German bank waited impatiently at the coat check amid the crowd.

Gazprom is in talks with at least five Western companies and the governments of China, Israel and the United States as it expands beyond its traditional market in Europe to become a worldwide energy supplier.

In Moscow on Feb. 12, President Vladimir Putin pulled the U.S. Treasury secretary, John Snow, from a finance ministers' meeting, to tell him Russia aspired to be the third-largest energy exporter to the United States by 2010.

In the frenzy of deal-making with Asian, European and North American companies, analysts see a broader ambition by half a dozen state and private operators to leverage Siberia's oil and natural gas riches to win assets overseas - and a wider role for Moscow as a power broker in world energy markets.

"There's the spirit that it is morning again in Russia," Thane Gustafson, a senior analyst at Cambridge Energy Research Associates, said. "What is the one thing the Russians have in hand as a trump card? They have energy resources and location."

Situated 550 kilometers, or 330 miles, north of Murmansk in the Barents Sea, the Shtokman natural gas field is well positioned for exports to the U.S. eastern seaboard and is expected to be the largest energy deal to close in Russia this year. Gazprom is expected to announce the field's consortium partners this month. Entry will not be cheap: Initial investments are likely to exceed $10 billion.

The prize is a minority stake in a reserve of 3.6 trillion cubic meters, or about 127 trillion cubic feet, of natural gas, equivalent to seven times the annual consumption of EU member states.

In September, Gazprom announced a short list of possible partners, including Chevron and ConocoPhillips of the United States, Norsk Hydro and Statoil of Norway, and Total of France. But the negotiations are not all about money, say bankers and energy executives involved. A chief aim for Gazprom is to use domestic reserves to build its international profile.

For example, Reuters has reported that Total, regarded by analysts as a long-shot contender, is offering to trade Gazprom its stakes in Norwegian offshore fields and the Sabine Pass terminal in the Gulf of Mexico for reconverting liquefied natural gas, in return for a 20 percent stake in the Shtokman project.

And if Shtokman's output is converted to liquefied natural gas, or LNG, for shipment to the United States, Gazprom has said it wants U.S. companies to help it gain access to American pipeline networks. Analysts point to the German model, in which Gazprom operates with local joint ventures to process the gas on its arrival. Gazprom's stated ambition is to become a household name in the United States as Shtokman begins producing in 2012.

Trading Russian reserves for international assets has a precedent in recent deals. A strategic partnership in 2004 between Lukoil and ConocoPhillips, the third-largest U.S. oil operator after ExxonMobil and Chevron, gave Conoco access to reserves in the northern Timan-Pechora Basin in northwestern Russia and to a private terminal on the Barents Sea.

In return, Conoco agreed to help Lukoil retain its production-sharing agreement in the huge West Qurna-2 field in U.S.-occupied Iraq.

Another keenly awaited energy deal this year is the initial public offering of stock in Rosneft, the state-owned oil company. At the same time, Rosneft is also in talks with Chinese companies to open a network of gasoline stations in that country, in exchange for selling a 5 percent to 10 percent stake in Rosneft to the Chinese at a set price during the IPO, said Alex Kormshchikov, an oil and natural gas analyst at UralSib, a brokerage company in Moscow.

Rosneft's capitalization is estimated at about $60 billion, which would value the possible Chinese share at $3 billion to $6 billion.

From Sakhalin Island, Russia plans to become a player in the market for liquefied natural gas in the Pacific Ocean. The Sakhalin-2 liquefied natural gas project, billed as the world's largest LNG plant and led by Shell and Mitsubishi of Japan, is nearing final approval for financing.

The European Bank for Reconstruction and Development is expected to decide this spring on a $300 million loan for the $20 billion development.

Sakhalin-2 has been slowed by concerns over its impact on migrating western gray whales, Steller sea lions and salmon spawning grounds, and the EBRD loan is being closely watched as a test of the project's ecological acceptability, after a declaration by the bank in December that it was environmentally and socially "fit for purpose."

With reserves of 4.5 billion barrels of oil and natural gas, the project could allow Russia to ship liquefied natural gas to regasification plants in Baja California, Mexico, for pipeline transportation to the U.S. West Coast, sidestepping environmental concerns there that are holding up plans for the construction of U.S. ports capable of offloading natural gas.

Indian and Japanese oil companies, meanwhile, are also jostling for Sakhalin's offshore reserves as Russia diversifies its Pacific export markets, while farther north, Rosneft has partnered with South Korea's state oil company for a development on the western shelf of the Kamchatka Peninsula.

China, too, has been prodding Russia into action. When Putin visited China in March, China National Petroleum promised to pay $400 million to Transneft, the Russian state-owned oil pipeline company, for design work on a planned spur from the 1.6 million-barrel-a-day Eastern Siberia-Pacific Ocean pipeline, which received final environmental clearance from the Russian authorities in March. Russia also agreed to build two natural gas pipelines to China with a combined annual capacity of 68 billion cubic meters.

Russia being Russia, however, a dispute remains unresolved between Gazprom, the pipeline operator, and TNK-BP, which controls the Kovytka field near China that would supply the gas for one of the pipes.

Amid the swirl of high-stakes deals, the traffic jam of energy executives in the lobby at Gazprom's headquarters is likely to keep getting worse.

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