Bienvenue à Shtokman

Well, as we discussed on this blog a few days ago, Gazprom has announced its selection of the first partner for the development of the Shtokman natural gas field in the Barents Sea: Total of France. The French company will take on a 25% stake in the new $20 billion project, while Gazprom retains the remaining 75% stake. More partners will likely be welcomed in at a future date.


I recommend that observers maintain healthy skepticism before proclaiming the Shtokman project to be a genuine exception to the trend of Russia’s resource nationalism. These announcements are very often more show than reality, and Total’s invitation to Shtokman may signal that Gazprom’s “compromise” on foreign investment in energy production means that oil and gas majors will have to get used to operating in Russia just as glorified service companies. This ¼ stake is in an infrastructure and planning company – the production license is still 100% owned by Gazprom, and there are no indications that Total will ever get direct participation in production (in fact, the experienced Norwegians still seem the most likely to eventually help develop the field). It is my view that the selection of the Shtokman partners has a great deal to do with political leverage more than the technical expertise and competitiveness of the bids (although certainly all the majors who bid on the project bring impressive experience to the table). In this regard, the announcement reveals a small part of Moscow’s strategic thinking. Russia is desperately seeking a stronger foothold in France as an insurance policy for their influence in the German government (Merkel is currently constrained by pending agreements on the Nord Stream), and bringing a French national champion into a capital intensive investment in Russia, at least symbolically, could help erode support for Nicolas Sarkozy’s promised hard line on Russia (for example, Sarkozy has supported Georgia, Kosovo, and shown no hesitation to criticize human rights abuses). Norway is somewhat miffed that they were passed over for the first cooperation announcement, but they don’t offer much sway as non-EU members (and the Norwegian government is already quite docile to Russia). Unlike the Germans or the Italians, who have 30-year-long relationships with Gazprom as strategic partners, Total is going to have to be very careful with this deal. As long as your main business partner is one of the most corrupt companies in the world, your share of the profits will always be capped, and your burden of risk always disproportionate. There’s a well established pattern of Gazprom’s broken deals and violated contracts, and getting into this project Christophe de Margerie knows that the company will be made to dance on the head of pin to a political tune that changes by the day.


A political or energy deal? “I’m happy about this and I am very proud of this fact,” said French Ambassador to Russia Stanislas de Laboulaye in an interview with Ekho Moskvy. “Total-Gazprom relations are very friendly and Gazprom executives trust Total.”

France is clearly not unaware of how the state interferes in the energy sector in Russia, having narrowly escaped a seizure of their stake in the Kharyaga oil field under allegations of “environmental” infractions. Just this January, the Russian government had decided that it no longer liked that a foreign company had a 50% stake in a production asset, and Sergei Stepashin accused them of not producing enough government revenue. In a highly unusual turn of events, Total was able to get off lightly and just pay a few fines, which has led some to speculate that their selection for Shtokman involved a backroom deal to pass over majority control of Kharyaga to the government. Maybe the Kremlin is learning how to expropriate assets under less outrageously public tactics as used to steal from Yukos, Royal Dutch Shell, and BP, but I’m sure we haven’t heard the last from Kharyaga. There is of course nothing wrong with Russia seeking the best terms possible for the development of the Shtokman, and it is natural that the government should drive a hard bargain. What is problematic is this trend of attaching a whole range of geopolitical issues to these kinds of important energy deals and seeking to achieve leverage through these economic commitments. Not only are market distortions created, but also Kremlin Inc.’s tactics are going to increasingly come into conflict with the public interests of the citizens of the countries they do business with (case in point, Italy’s government has cooperated enthusiastically with Russia to drastically diminish their diversity of energy suppliers). I still think the Norwegians will have a role in developing Shtokman in the future, and it wouldn’t surprise me too much if even ConocoPhillips were brought in for a 5% stake as window dressing. But Putin has given the Sarkozy government its first test, and we’ll have to watch closely to see if the discourse softens or if the Chirac-era truly has ended once and for all.