Russia Dangles the Shtokman Field, Again

First the Russian government invited all the oil majors to submit bids to jointly develop the Shtokman Field, a vast natural gas field in the Barents Sea, and then, deep into the selection process, they rejected all the bids and announced that they would go it alone. Now, once again the government is dangling the opportunity before the hungry eyes of multinational energy companies. What are we meant to think of all this?


Image: Gazprom

First, it’s clear from yesterday’s IEA report that the pressures on oil and gas companies to secure direct access to the world’s diminishing production assets are rapidly increasing – and as I have argued in the past, these pressures will increasingly result in greater political risk and an unfavorable environment for the improvement of human rights and the deepening of democracy.

Second, the open invitation for Shtokman clearly flies in the face of the most recent resource nationalist moves in Russia against Yukos, Shell, and BP, or comparatively the further pressure put on by Hugo Chavez in Venezuela. However, I’m reluctant to rush to celebrate this change of attitude on Shtokman investment so prematurely as some in the media are. We have to recognize that Russia really doesn’t have much choice but to invite in some serious equity partners, as the complicated technology and enormous capital required to successfully develop the field is only available from the other super-majors (it is truly an astonishingly difficult project – 500 km offshore, and 350 metres underwater). Also, the oil and gas majors are willfully ignoring two robust trends – that Moscow has long dangled the Shtokman opportunity to leverage concessions for Gazprom in other markets (my blog readers may also recall the political character of Shtokman – when Gazprom said it would reject any US bid following Dick Cheney’s “oil weapon” comments), and that the regulators and courts usually only attack a foreign investor after they have sunk their money into a capital-intensive project.

For a quick case study in how to get the most political mileage out of an energy investment project, one need only visit the Norwegian website of the Shtokman Field project and review the absurd series of headlines under the news section.

A few examples:

May 2, 2006 – Gazprom to pick Shtokman partners “within days”

May 18, 2006 – Gazprom Delays Shtokman Choice Again

May 19, 2006 – Kremlin threatens to block US role in giant gas project

July 13, 2006 – U.S. energy firms pull for Russian WTO deal

August 8, 2006 – No Shtokman Deal Expected This Year

October 11, 2006 – Gazprom to develop Shtokman field alone

October 30, 2006 – Shtokman Could Signal the End of Stability (shockwaves sent through investment community)

May 15, 2007 – Statoil: Gazprom needs foreign companies on shelf

July 4, 2007 – Shtokman start signalled for 2013

July 9, 2007 – Gazprom to invite foreign partners on Shtokman natural gas project

As can be casually observed from this wild rollercoaster ride of announcements, the Russians have been extremely successful in using the Shtokman project to advance their interests, even turning American firms like ConocoPhillips and Chevron into advocates for Russia’s entrance into the WTO (Chevron has subsequently withdrawn its interest in Shtokman). The established pattern of unreliable information coming from Gazprom and the Kremlin on the Shtokman Field leaves an extremely depleted reservoir of trust for investors, accompanied a continued enthusiasm to inject capital into Russia. Why should anyone take Gazprom seriously now, when so many times in the past they have had to play politics with the project? Is this new “openness” to foreign investors, coming right on the heels of an unbelievably soft meeting with George Bush at Kennebunkport, really something to get excited about?

One reporter from Forbes can’t contain his disbelief at the sector’s continued appetite for Russian risk: “Could European and American energy companies have a minor case of Stockholm syndrome? No matter how shoddily they or their rivals get treated in the country, they just can’t get enough of Russian natural gas projects.” Certainly I am raising more questions than I can adequately seek to answer in this one post, but we should continue to follow this project closely.

My early guess would be that Statoil and Norsk Hydro will become the biggest winners here with the lion’s share of the project among the minority stakeholders. Norway’s national champions “earned” this position through years of political loyalty to Moscow’s requests, and a particularly tight-lipped refusal to criticize recent developments in Russia. For example, Prime Minister Jens Stoltenberg has come out in defense of Russia and attacked US plans for a missile shield, and is counted among Moscow’s closest allies (the newspapers call Stoltenberg “The Peaceful Viking.” (That said, a few years ago Stoltenberg also signed a declaration denouncing the unfair criminal persecution of political dissidents such as Igor Sutyagin and Mikhail Khodorkovsky.)

Also, as a competing energy exporter, Moscow has worked hard to cultivate close relations with Norway to increasingly coordinate markets rather than compete. Nevertheless, Gazprom needs a lot of technology and experience to take on this risky project, and I wouldn’t be surprised to see Total and ConocoPhillips allowed in for small, minority stakes so long as the Russians continue to control at least 51% of the project.

For now it is too soon to tell if Gazprom really is telling the truth this time, or if foreign investors can trust the Russian government not to use regulators and tax authorities to wrestle away their stakes in the project once it goes online. What is certain is that the weak rule of law that currently reigns in Russia offers little protection for businesses, and foreign investors and governments appear to be unable and/or unwilling to implement any incentives to help improve it.