Russ Oil-Gas

08.08.2006 - Reuters - The Kremlin's drive for greater control over Russia's energy sector will accelerate but, in contrast to other resource-rich countries, will involve fierce rivalry between two state champions, Rosneft Oil Company and Gazprom gas monopoly, the analysts said. Western oil investors seeking a foothold in Russia have accepted the idea that they will have to partner with either of the two state firms in any big future projects. But they would not dream of pulling out of Russia —- where booking substantial oil reserves or buying minority stakes in sizeable producers is still possible —- unless the Kremlin launches a direct attack on their interests. "It has become clear that it will be increasingly difficult to implement major energy projects in Russia without the involvement of state champions," said Elena Anankina from Standard & Poors. "But where Russia differs from Latin America or Kazakhstan is that it has fierce competition between two state giants, which will most likely become more acute over time." High energy prices have emboldened energy-rich states to change deals with foreign companies to their advantage. This year Ecuador announced plans to take over oilfields operated by U.S. Occidental Petroleum, Bolivia sent troops to occupy its natural gas fields and Venezuela took back two fields from European oil firms ENI and Total. In Russia, the drive began in 2003 with the demise of the country's leading oil firm Yukos, which says the Kremlin acted to punish its politically ambitious owners. Yukos' main oil unit was bought by Rosneft, which has just raised $10 billion in its stock market float. Gazprom last year bought oil firm Sibneft, putting more than a third of Russian oil under Kremlin control. Some critics of the Kremlin say the driving force behind resource nationalism is personal enrichment of different clans around President Vladimir Putin, who steps down in 2008. Others argue it has become a source of funding for social development. "Increasing state control and sharing windfall oil revenues has become the most effective tool for the Kremlin to fund social needs," said Sergei Glazer of Vostok Nafta, a fund which owns $3.3 billion of Gazprom stock. "The key risk would be of Soviet-style super centralization, which would lead to a drop in production," said Glazer. Russia provoked a furious reaction when Gazprom briefly cut gas supplies to Europe in January in a dispute with Ukraine. Moscow toned down its resource nationalism before hosting its first summit of the Group of Eight rich nations in July. But, with the West now paying less attention, the Kremlin has shed some of its inhibitions. Russia has cut oil supplies to Lithuania, blaming a pipeline leak, hitting the Mazeikiu refinery. Yukos sold Mazeikiu to Poland's PKN Orlen after rejecting rival Russian bids. And Moscow has told Royal Dutch/Shell to suspend pipeline construction on the Far Eastern island of Sakhalin at a time when Gazprom is seeking a major stake in the project. "The overall strategy aimed at boosting state control is very clear. But tactically it will depend on which group within the Kremlin wins specific battles," said Glazer. Investors are now looking to see who grabs the leftovers of Yukos, now in liquidation. Also on the radar screens is whether the state will buy out the Russian partners in TNK-BP, a 50/50 venture with BP whose shareholder agreement expires early next year. One of Russia's biggest planned projects is the Shtokman LNG project, in which big energy firms are vying to participate. Some analysts believe U.S. companies may lose out because of rocky Kremlin-U.S. relations. However, difficult relations with the United States have done no harm to U.S. ConocoPhillips's strategic partnership with Russia's top oil firm Lukoil, in which the U.S. company plans to raise its stake to 20 percent. And, via the Rosneft IPO and opening up of Gazprom's 49 percent free float to foreign ownership, the Kremlin is sharing some of the risks and rewards of Russia's energy boom with international investors. "It is hard to take this too negatively. I cannot foresee this happening in Venezuela. They are going the opposite way and are taking everything," said Ron Smith, chief analyst at Alfa Bank.