Despite the risks, Russian oil is once more where the action is for Western firms, with a spate of high-profile deals inked in the first quarter of 2011.
It’s easy to see why: the country is now the world’s largest oil-producing nation, pumping about 10 million barrels a day. And while new offshore drilling in countries like the United States is currently off limits, the big draw in Russia is its willingness to engage in increased offshore exploration – particularly as easier-to-access onshore reserves around the world get depleted.
Indeed, practically all of Russia's large new deposits are in deepwater offshore or inhospitable environments – or both. As a result, many believe Moscow’s desire to secure the involvement of IOCs is a matter of necessity, claiming Russia lacks the technology to develop such hard-to-reach deposits efficiently itself. “The only option is to cooperate with foreign companies,” said Valery Nesterov, an Analyst at Troika Dialog Bank in Moscow.
Indeed, Western executives are betting that their technical knowledge may help insulate them from Russia’s political and business vagaries. To pull off the massive production shift into regions that are difficult to develop, Russia will need considerable help in oilfield services – everything from seismic and geological to drilling, wellhead operations, well maintenance and workover provisions, and technical support. All are areas in which international firms excel.
Others, however, suggest the motivation goes deeper than that. Andrew Neff, Senior Analyst at IHS Herold, believes the move to open up to the West is born out of a need for influence as much as it is for assistance. “I think the Russian government has a strong desire to take Rosneft to the next level and internationalise the company,” he said. “It’s similar to the strategy that we’ve seen with the Chinese government and the NOCs there. I think the difference here is that the motivation from the Chinese side is greater access to resources, whereas Russia doesn’t need more oil and gas so much as they have a desire for influence in other parts of the world.”
According to Andrew Neff we will see more in the way of asset swap agreements where in order to get access to the Russian market, foreign firms will have to give up some sort of stake in projects elsewhere. In fact, despite investor concerns in the wake of BP’s recent problems, he feels that Russia is increasingly open to foreign businesses.
Shifting balance of control
“I would say that the pendulum is shifting again,” he said. “From 1998 to 2004 it swung in favour of the IOCs; and then after the TNK-BP deal was formed, it swung back towards the Russian firms. I think it’s now coming back towards the middle, where we’re seeing more of a partnership agreement. It’s not necessarily led by the IOCs or by Russian firms, but represents something closer to the middle – albeit slightly tilted towards the domestics.”
The reason, he explains, is born out of necessity; Russia is trying to plug a budget deficit and stem the future decline of oil production in Western Siberia, and cannot do so without opening up access to its offshore reserves to overseas companies. “There’s a feeling now that some of the foreign investment is welcome; it’s not just plundering Russia’s resources,” said Neff, before adding that attitudes are also changing in the West, too. “IOCs are belatedly coming to grips with the fact that Russia has re-established itself and that they’re going to have to work with the NOCs as equal partners – or even take a minority stake –and make their peace with that. The days when IOCs could just come in and act as the project operator – to the virtual exclusion of the local firms – are over.”
Investing in Russia’s oil and gas sector is an issue that will no doubt be on the agenda at the Next Generation Oil & Gas Summit Russia & CIS 2011, which takes place at the Imperial Park Hotel and SPA, Moscow Region, Russia from 5-7 July. This closed-door summit, hosted by GDS International, features other leading voices in the CIS oil and gas sector, including Didier Casimiro, CEO/President of TNK-BP Commerce; Aleksei Bespalov, CIO at Tatneft; and Valeriy Vasilev, Chief Geologist at Vostokgazprom.