The Punitive Terms of Total’s Shtokman Deal

Sacha Kumaria, a senior adviser to the Center for Energy Studies at Cambridge University, has a very interesting column in the Wall Street Journal today which predicts a dark future for independent oil companies (IOCs) such as Exxon Mobil, Royal Dutch Shell and BP – partly due to the rise of resource nationalism in places like Russia and Venezuela. Illustrative of this trend is the recent deal between France’s Total and Gazprom for the Shtokman Field, which has reduced this IOC to a glorified service firm (something that this blog has been arguing for quite a while now).



However, Gazprom’s monopoly position allowed it to negotiate, aided by a phone call between Presidents Vladimir Putin and Nicolas Sarkozy, a deal that effectively relegated Total to the role of an oil services provider like Schlumberger or Halliburton. These firms are contracted to provide technical assistance to the actual asset owner, usually an oil major. Total received a 25% stake in the special purpose vehicle that owns the infrastructure of the Shtokman operation, and will take 25% of the profits under the terms of their production-sharing agreement. But in order to put the commensurate 25% of Shtokman’s gas onto their assets and liabilities sheet, the French company had to pay Gazprom $800 million. Under a traditional product-sharing agreement, that share of the reserves would have come at no additional cost. In return, Gazprom has gained access to cutting-edge deep-water extraction and gas liquefaction technology. Total, which was competing against Statoil and Chevron for the contract, had little choice but to accept these punitive terms since IOCs’ business models are predicated on developing access to new reserves. Yet paying for the privilege diverts cash away from R&D, an area in which IOCs need to invest heavily if they are to compete with oil services providers. Throughout the postwar period, IOCs have pioneered advances in exploratory and extractive technologies. But their recent underinvestment within a highly cyclical industry means the services providers, funded by huge contracts from newly cash-flush NOCs, are now set to lead the research field. Recent figures suggest that while Exxon Mobil plans to spend $650 million on R&D in 2007, Schlumberger will spend $720 million, further squeezing IOCs’ future technological advantage.