Analysis: Foreign investment in Russia amid BP-TNK dispute
As the disagreements between the Russian and British shareholders of TNK-BP increase, questions arise regarding not only the security, but also the role of foreign investors in the oil and gas industry in Russia.
TNK-BP shareholder interest mismatch
Regarding TNK-BP, Sergei Glaser of Vostok Nafta pointed to the fact that neither side had actually accused the other of breach of the shareholders’ agreement, so the crux of the matter was in its interpretation. “The shareholders’ interests, which dovetailed well when the initial agreement to form TNK-BP was signed five or six years ago, have now changed” he said. At that time the Russian partners forming the Alfa-Access-Renova Group were entering a ground-breaking deal with a global player of BP’s significance. By doing so they bought a measure of insurance against the strengthening powers of the Kremlin in the real economy. While many international oil companies had to downgrade their reserves figures over a period of years, BP year after year reported increasing reserves thanks to the TNK-BP joint venture.”
Glaser continued “Six years ago oil prices were at $25-$30/bbl, now we are looking at $130-$140/bbl. Russian oil and gas companies are cash-rich and looking for somewhere to put their money. Majors like Lukoil and Gazprom are expanding their activities globally, and the Russian owners of TNK-BP are also increasingly keen to do that – which is one of the factors at the root of the conflict. Evidently global expansion is not a part of BP’s strategy regarding their Russian JV as it would inevitably compete with BP abroad.”
What Glaser did not say was that Alfa-Access-Renova is a huge industrial group which will certainly carry great influence with the Russian government. Without such influence the Russian government may not have been quite so ready to block the visas of workers brought into TNK-BP by BP. There is much speculation in and outside Russia as to what will happen to TNK-BP and one view is that Gazprom and/or Gazprom’s oil affiliate, Gazprom Neft’ will have an interest.
TNK-BP’s main gas production interests are the 1.9 trillion cubic metre (Tm3) Kovykta field and the gas producer, Rospan. Gazprom already owns 62.8% of Rusiya Petroleum, the licence holder of the 1.9 Gm3 Kovykta field. Kovykta, though large, is beset by problems.
It has a high helium content and is a slow output deposit requiring expensive technical solutions such as horizontal drilling. The main problem though is location – Kovykta is in an isolated position far from the main Russian gas grid. There has been talk of sending the gas to China but the field is also far from the main centres of Chinese gas consumption and it would require huge pipeline investment to transport it to such areas. The main value of Kovykta to Gazprom would probably be the same as its value to BP - to increase reserves figures.
Rospan produces gas in the Novo Urengoy and East Urengoy fields, where its proven and possible reserves are estimated at 350 billion cubic metres (Gm3). The company had expected this year to produce around 3.4 Gm3, but its pipeline access has been restricted by Gazprom to 1.5-1.2 Gm3 (Gazprom also restricted pipeline access to Rospan last year).
When Gazprom has blocked pipeline access to independents in past – such as Itera at Beregovoye or Northgas at North Urengoy – this has generally presaged Gazprom’s taking control of the producer concerned. The current disagreement with TNK-BP may bring that a step nearer for Rospan.
Gazprom’s other European relationships
Gazprom’s relations with foreign investors Wintershall and Eni have gone much better than BP’s with TNK-BP. Generally Gazprom is most interested in getting access to European markets through its partnerships with European companies, or in technical expertise. As far as its own production investment is concerned, Gazprom last July announced an increase in its investment program to speed up the development of a number of fields, but particularly the Bovanenkoye field and Shtokman. Gazprom’s planned capital investment in 2008 was to rise by RUB 51.778 billion from the original plan to RUB 531.2 billion.
A need for foreign capital investment?
Does Gazprom need foreign investors to fulfil its production investment plans? Mikhail Korchemkin of East European Gas Analysis thought not. “The government of the Russian Federation has been continually raising domestic gas prices and European prices are very high, so Gazprom has enough cash to finance necessary production and pipeline investment”. He added: “That would include both Russian gas production and planned Gazprom expenditure in Turkmenistan for the refurbishment of existing transit pipelines, the construction of a new gas line and the bringing on stream of new production. Expenditure on all this in Turkmenistan could total $4-6 billion.”
“With the price of Turkmen gas now approaching European levels minus transit costs, Yamal gas will be much cheaper than gas originating in Turkmenistan. The ‘European netback’ price of gas at the Turkmen border is around $300/ thousand (K) m3 while the cost of transporting Turkmen gas to the European border is around $70/Km3.”
Valery Nesterov of the Troika Dialog asset management company agreed that Gazprom could finance its own production, adding that this was partly because the company had a high level of debt and external finance. He said: “The problem is not so much whether sufficient finance is available, as whether the finance will be used effectively. If Gazprom uses Russian subcontractors the supply of services may be insufficient for its production needs. However Gazprom has in recent years significantly increased its investment in exploration, from RUB 14.9 billion in 2005 to RUB 59.2 billion in 2008. There are uncertainties though regarding whether the company can adhere to its start-up schedule for fields in the Yamal peninsula and Shtokman”. [Bovanenkoye in the Yamal peninsula has been scheduled for commissioning in 2011 with Shtokman to come on stream in 2013].
Still a need for foreign technical expertise
While Nesterov believed that Gazprom was in a position to finance necessary production investment, he did not think Gazprom could go it alone in difficult and unfamiliar environments and needed foreign companies to provide technical expertise for areas where production (or gas transport) became difficult, such as the deep horizons of existing fields, offshore production, underwater pipelines and LNG in general.
Gazprom’s longest relationship with a foreign partner has been its 17-year long joint venture with BASF-affiliate, Wintershall. That relationship has endured because the formation of the Wingas joint venture (initially 65% Wintershall and 35% Gazprom) gave Gazprom its first opportunity to market gas in Europe both through Wingas and such Wingas/Gazprom affiliates, as Wieh and Wiee. Gazprom increased its share of Wingas this year to 50% minus one share as part of an asset swap in which Wingas acquired a 25% stake in the 700 Gm3 South Russian field (Wingas is actually to get 35% of the income from the field). Gazprom and Wintershall’s other production joint venture in Russia, Achimgaz (50% Wintershall/50% Gazprom) is developing the deeper horizons of Gazprom’s depleting Urengoy field.
Wintershall’s acquisition of a participation in Achimgaz and the South Russian field represented “a logical extension of the downstream relationship into the upstream”, according to Wintershall spokesman Stefan Leunig. He said that total investment in the Achimgaz project would reach over Euro 1 billion, while that in the South Russian field was expected to come to Euro 1.9 billion. Wintershall’s financial contribution would reflect its share in each project, Leunig added, “At the Achimgaz project Gazprom provided the know-how for the permafrost aspect of production while we provided the technical expertise on drilling difficult horizons at a depth of 3600-3800 metres.
The expertise was based, amongst other things, on the horizontal drilling experience we obtained at our Mittelplate offshore field in Germany.” According to Leunig, technical expertise was not so necessary to Gazprom at the South Russian field because its Cenomanian horizons were relatively straightforward to develop.
Gazprom’s latest joint venture with foreign companies is the special purpose vehicle Shtokman Development AG, comprising Statoil Hydro (25%), Total (25%) and Gazprom 50%. This company will own the infrastructure of the first phase of Shtokman development for 25 years.
The cost of the first phase at Shtokman was estimated at $15 billion, according to Total spokesman, Kevin Church, which would include both the cost of development of piped gas production and LNG but not seagoing vessels He told ICIS Heren that in addition to its financial contribution Total would be contributing expertise in subsea production, including underwater separating systems for oil and gas (based on the company’s experience in Angola). Total was a major player in the worldwide LNG market and Gazprom was interested in this know-how for Shtokman. Total would help Gazprom market LNG if requested to do so, according to Church. Total itself would be getting a share of production and reserves during the project.
Statoil-Hydro’s contribution to Shtokman would be crucial as it would bring with it technologies applied at the Norwegian company’s Snohvit field, where the Arctic operating environment is very similar to Shtokman. The final investment decision regarding Shtokman has not yet been taken – that is scheduled for 2009.
Eni’s good relationship with Gazprom has been based both on its provision of technical expertise and market access. Eni has 50% in the Blue Stream pipeline which gave Gazprom direct access to the Turkish market and the company is an equal partner with Gazprom in the South Stream project. It has also recently given Gazprom direct access for the supply of around 3 Gm3/yr to Italian gas distributors.
Gazprom and Eni signed a strategic agreement in 2006 giving the Russian monopoly access to the Italian downstream market from 2007. Eni gained upstream assets in Russia and elsewhere, including 20% of Sibneft (Sibneft’ is now Gazprom Neft’). As part of the agreement Gazprom was given a two-year option to acquire a 51% interest Arcticgaz, Urengoil and Neftegaztechnologia (all ex-Yukos assets). Eni also gave Gazprom a two-year option on the Italian company’s 20% shareholding in Gazprom Neft’.
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