The current impasse can probably be best described as an aftershock of the seismic events of last winter when Gazprom unceremoniously informed selected Former Soviet Republics that they would no longer supply natural gas at the subsidized prices many had been enjoying. Ukraine was outraged, Belarus claimed poverty, but Gazprom played hard-ball by cutting off Ukrainian and Belorussian supplies until their price demands were met. 

Unfortunately, Western European supplies were lost in the maelstrom, as both Belarus and Ukraine hold strategic geographical positions and are transit countries for the natural gas pipelines supplying the EU.

Gazprom and Belarus signed a deal on December 31st 2006 that seemingly put an end to the conflict.   It set the cost of gas at Gazrpom’s asking price of $100 per 1000 cubic meters, but allowed Belarus to defer 45% of that price until July 23rd, by which time Belarus had to pay the remainder and start paying the full cost. However, Belarus defaulted, Gazprom threatened to cut off the gas, and the two countries descended into a fresh crisis.

First Belorussian representatives traveled to Gazprom’s Moscow headquarters to try to negotiate a loan.   When they arrived, though, Gazprom offered loan terms derided by Belorussian president Alexander Lukashenko as “unacceptable”.    He called the trips to Moscow “humiliating” and claimed that the Kremlin was trying to privatize “the entire economy”, insinuating that the real motive behind Gazprom’s belligerence was its wish to up its stake in Belorussian state run company Beltransgaz to a controlling share.

Instead, Lukashenko – and you couldn’t make it up – negotiated a deal with fellow member of the current US persona non grata list, Hugo Chavez, to loan Belarus money at favorable rates.   Although the loan has not been confirmed in the media, Forbes quoted the Venezuelan foreign ministry as confirming the negotiations were taking place.   At the very least, Venezuela has acted as a guarantor, stepping in at the 11th hour and allowing Lukashenko to dip into his national reserves in order to pay the debt.

Much as Gazprom is criticized for their rough-housing around Eastern European negotiating tables, a private company doesn’t have to subsidize anybody. Why should Belarus kick up a fuss about having to pay $100 when Western European customers pay $240? Gazprom certainly has a right to seek market rates for its product.

But perhaps the way they’ve gone about getting higher revenues has lost some friends – and, in the long term, perhaps even customers. Europe has intensified its effort to identify alternative suppliers of natural gas.   In the best case scenario, it sees potential for more disputes between Gazprom and the ‘transit countries’ through which currently travel the gas pipelines that supply Europe’s gas.

More sinisterly, the EU can hardly have failed to have read the conjecture from some analysts that the timing of the conflicts was unlikely to have been coincidence.   A pro-Kremlin government is replaced by a pro-West government in Ukraine and the gas price goes up; Gazprom would rather like to grab control of Beltransgaz, and the gas price goes up. Gazprom, critics argue, is being used as leverage to help Russia get what it wants.   Europe is concerned that as it becomes increasingly reliant on Russia for its energy needs, it may be faced with the same predicament as Belarus: give them what they want, or don’t get the gas you need.

But how likely is that? Gazprom is just as reliant on Europe as Europe is on Gazprom. What would happen to Gazprom’s business if EU (Gazprom’ biggest customer) suddenly stopped buying gas? It’s for this reason that the EU’s reaction to Gazprom’s tactics has probably caused as much alarm in Moscow as Gazprom’s various disputes did in Brussels. Looking at your biggest customer – and the customer with by far the largest revenue potential – searching for alternative places to buy your product can’t make for pleasant viewing.

Nord Stream, which will take gas directly from Russia to Germany by way of the Baltic sea, thus bypassing transit countries, will ease the tension.   And comments from both sides at this summer’s Moscow based Petroleum and Gas Congress held alongside the MIOGE certainly struck the right note. Eventually, both sides will realize that co-operation and mutual trust is the only way forward and put the words into action.  And much as some sectors of the media would have us believe that Gazprom will cut off supplies  at a moment’s notice,  Gazprom’s revenue is far too dependent on EU money for that to happen.

The list includes 38 hydrocarbon fields, with estimated reserves of around 100 million metric tons of oil and 500 billion cubic meters of gas.

There are also 55 fields with diamond and gold reserves of 40 million carats and more than 400 tons respectively.

Companies interested must apply to the Federal Subsoil Agency, Rosnedra, the ministry said.

Under current legislation, if a company is successful in preliminary exploration at a particular field, it can automatically obtain a license for further exploration, the news agency RIA-Novosti reported.

The memorandum contained an agreement that BP, TNK-BP and Gazprom will form a strategic partnership to identify worldwide investment opportunities, work together on long term energy projects and swap assets around the world.

In Oil and Gas Eurasia’s view, this change in attitude and revised approach to the Russian energy market is a sensible move by BP and TNK-BP, and is an approach other multi-national energy giants would do well to replicate.

It has been clear for some time that the Russian government is keen to roll back the sweet deals foreign companies were handed after the collapse of communism when Russia was financially on its knees and desperate for foreign capital.  Rosneft and Gazprom have used hard-ball tactics with tacit but strong support from the Kremlin to achieve their aims in these matters. International energy majors like BP and Shell have found out to their cost that Rosneft and Gazprom always get their way in the end.

Perhaps BP is the first to realise that the best motto for dealing in Russia is “if you can’t beat ‘em, join ‘em”?

Rosneft, and especially Gazprom, have for a long time sought to cast their net beyond Russian borders by exchanging foreign companies’ involvement in Russian energy projects for Russian involvement in international projects.

By singing form Gazprom’s hymn sheet on this matter, TNK-BP is more likely to be able to forge better relations with the state controlled leviathans of the Russian energy market. And their willingness to investigate international investment opportunities on a partnership basis, enter into joint ventures in the Russian market, and swap assets to guarantee involvement in lucrative Russian projects surely bodes well to their future access to Russia’s vast oil and gas resources.

To be sure, modern Russia is not a liberal utopia radiating benevolence and enlightenment to the rest of the world; and it’s fair to say that there are aspects of contemporary Russia that should concern the diplomats, realpolotik acolytes and liberal advocates alike. But we at Oil and Gas Eurasia believe the ‘New Cold War’ is more lazy journalism than real danger. Pat Davis Symczak tells us why in this excellent article.

If you aspire to be a great writer and you have a great editor, you both know to keep cliché out of your narratives. So please, hit the “delete ” key when those voices in your head urge you to type the phrase “New Cold War ” in that next story about Russia. As a reader, I ’m ready to throw up!

This week, The Guardian newspaper, in writing about Britain ’s expulsion of Russian diplomats over the murder of Alexander Litvinenko made the observation: “Emotions are bubbling, the temperature is rising and people are already talking about a return to the Cold War.” How often do we read or hear this from reporters on both sides of the Atlantic these days?

I have a university degree in International Relations. But I don ’t think you need one to understand that today ’s world is different from what it was during the Cold War. The Cold War was a bloodless continuation of the Second World War. Nazism fell, then Communism. The Bipolar, predictable world we lived in 20 years ago is no more. Today, a Superpower stands alone in the world and we all live with more uncertainty than we care to admit. So, since we ’re helpless to understand what is going on around us, let alone able to do anything about it, we conjure up ghosts of past systems that give us comfort. We understand those ghosts and they ’re friendly.

Today, we live in a “Post 911 World” (sorry for the cliché but if you have to use one, it ’s more accurate.) The West doesn’t know who its enemies and neither does Russia (which incidentally is thought of as more of a Western country than an Eastern country, despite its blending of both cultures.) Terrorism is the enemy today and terrorist attacks may come not just from the outside but also from within, perpetrated by even the “native born”, as Britons and Russians especially understand. Economic competition comes from out of Asia, and in particular China.

Yes, Russia is scary. It controls the largest natural gas reserves in the world, the largest offshore Arctic hydrocarbon deposits, and in terms of oil it, out produces Saudi Arabia. But in a fight,that ’s someone you want on your side – as we had in both world wars in the first half of the 20th century.

What gets the West so angry these days is that Russia is now in a position to demand a partnership of equals, and the West doesn’t like the back talk. The West was overly condescending in the wake of the Soviet breakup and now it has to show humility. That ’s embarrassing. So what do you do if you can ’t get your way by negotiation? You punch the other guy in the nose! Or if you ’re a country, you cancel the visas of a few of the other side ’s diplomats and escort them to the airport, or you declare war.

The Guardian was “man enough” to actually admit the obvious in print. And while I began this tirade with a kick at their use of the phrase “Cold War”, I’d like to quote what else they wrote in their July 16,2007 article headlined “A Radioactive Relationship” found at http://commmentisfree.guardian.co.uk:
“Our own rhetoric is misjudged too. We accuse the Russians of playing politics with energy and pipelines, as if the Americans had never prevented Western oil companies from building pipelines through Iran. We deplore President Putin’s moratorium on the Treaty on Conventional Armed Forces in Europe (although the West has not ratified it), as though the Americans had not first denounced the Anti-Ballistic Missile Agreement. We deplore the Russian refusal to extradite Andrei Lugovoi, the alleged perpetrator of the crime, even though their constitution does not permit it. At the same time, we tell them that we cannot extradite Boris Berezovsky, the former Russian businessman now living in London, because our courts won ’t allow it. The Russians call all that double standards. They have a point.”

I thought the same thing when Russia suggested the use of Soviet era radar systems in Azerbaijan to protect against missile attacks from Iran and elsewhere to the South.
Azerbaijan is an independent country, it is perceived to be friendly to the West. It ’s no secret that Azerbaijan has occasionally hinted that it would like to be a part of NATO. It ’s oil and gas assets are being developed for the most part by BP. So, why have our (I say “our” speaking as a Westerner) defensive hardware in Poland and Czech Republic? It sure looks like we think that Russia is the enemy. But since I’m from Chicago, I’m thinking there is a less dramatic reason – money! Open your dictionary of American Political Life and look under the letter “P” for “Pork Barrel”.

A “Pork Barrel Project” is a reward for political loyalty. It is a government-funded project that creates jobs and fosters economic development. This makes politicians popular with voters and the politicians stay in office. I think I may be expelled from Chicago’s Polish neighborhood next time I visit my hometown, but I can’t help but seeing this all as nothing but a big “pork roast” that will go over well with the aging political constituency that thrives on Cold War nostalgia.

Even The Guardian agrees that ultimately we all “follow the money.” Consider the closing paragraph of the article I quoted earlier: “David Milliband says he does not want to damage the broader relationship: we (British) and the Russians have too many interests in common. He is right. But there will be storms ahead for some months before we get back to business as usual, as we always do.” (Underline added by OGE.)

Originally posted on http://www.oilandgaseurasia.com/articles/p/38/article/371/

The Iraqi Minister for Oil, Hussain al-Shahristani, told Reuters, “There will be no specific talks with any company over any particular field. What will happen is that Iraq will announce the development of certain fields and all qualified oil companies can come and compete,” adding he hoped the parliament would pass new legislation opening the way for an open tender process when it returned from holiday in September.

Speculation has abounded among more cynical analysts that Lukoil was unlikely to have any joy in rekindling its old Saddam-era contract given Russia’s failure to support the US-led invasion of Iraq. While the US was attempting to economically isolate the Hussein regime, US companies were prevented from trading with Iraq.  However, that didn’t stop others, like Lukoil, from doing so, and the US energy giants certainly lost ground to their international competitors during this period. 

It is a commonly held view among commentators, journalists and analysts from the left leaning and liberal press that the latest Iraq war is little more than the US scrambling to control increasingly scarce hydrocarbon resources.  If following this theory, a “resetting of the oil table” was always likely to take place, whereby US companies that had lost ground by complying with the US led economic embargo would find themselves on equal footing with those companies who had made good during this time – contracts in place or not.

Despite the appeal of such a tidy theory, things aren’t so simple.  First, Iraq claims the contract was nullified long before the US-British invasion of Iraq. Shahristani, again speaking to Reuters, claimed: “This deal was signed and scrapped by the previous regime. There are documents in the ministry’s archive saying that the contract is terminated because its terms are not met.”  Lukoil, according to Shahristani, has done nothing to develop the field since the deal was signed in 1997, meaning the contract is effectively null and void.

Second, Lukoil might not be as dead in the water as the conspiracy theorists assume: even if we accept their view that the Iraq was less about ridding the world of a dangerous tyrant and more about Oil money, American oil company ConocoPhillips owns a 20% stake in Lukoil and this, along with the $10billion dollar debt the Iraq government owes the Russian government from arms sold to Saddam by the Soviets may yet leave Lukoil with a foot in the door.

To read all the quotations and a more in depth analysis, click here

However, in an interesting twist, it seems that Belarus may be saved not by negotiating a large loan with Gazprom, but instead with Venezuela.  Lukashenko, quoted in Interfax, said, “Today I ordered money taken from our reserves and the payment of $460 million. Of course, we are draining our resources, but our good friends, in particular [Venezuelan President] Hugo Chavez, said they are ready to extend a loan at advantageous terms,” adding, according to Interfax, that Western banks were also willing to provide funds.

Despite reassurances from both Gazprom and Beltransgaz that gas supplies to Western Europe, which travel through Belarus, would not be affected as they were during last winter’s crisis between Gazprom and Belarus, the EU was quoted by various news agencies last week as viewing the situation as critical and had urged both Gazprom and Belarus to seek a swift conclusion to the latest dispute.

It seems, however, that Hugo Chavez will be the EU’s unlikely saviour.  It is doubtful that Western banks would offer Belarus a loan at more favourable terms than Gazprom’s offer, if at all.  According to Forbes, Lukashenko said Gazprom offered Belarus a loan at 8.5 percent interest, terms which Lukashenko described as “unfavourable”.

It appears, therefore, that when Lukashenko was quoted in Interfax as saying “Today we pay from our reserves but loans will replenish them within a month. Let them take it and live in peace,” he was referring directly to a loan from Venezuela.

According to Forbes, the Venezuelan Finance Ministry touched on the loan but could not give further details because the loan was “being handled by the Foreign Ministry now”, and the Foreign Ministry would not comment.

What’s for sure is that Belarus and the EU can breath a sigh of relief thanks to Hugo Chavez, a man with, at best, fractius relations with Western democracies.

We at Oil and Gas Eurasia feel it is likely that when Statoil and Norsk Hydro complete their merger in October, a deal between the new Norwegian company and Gazprom will be struck to bring to bear the new company’s deep water and Arctic expertise in the tough Barents Sea conditions of the Shtokman field. 

ConocoPhilips, who, according to their CEO, have already been asked by Gazprom to re-enter talks on the Shtokman project, are another likely candidate due to the access and marketing power they can provide in the US market — the envisaged final destination for Shtokman’s LNG.

RussNeft was established in 2002 and at present finds itself among the 12 leading Russian oil companies –employing over 20,000 people. The company currently comprises 30 production assets, 2 refineries and a petrol station network operating in 22 Russian regions and CIS countries. RussNeft is developing over 170 oilfields with total oil reserves amounting to over 630 million tons. Annual production rose to 17 million tons of crude in 2004.

RussNeft stated it intends to boost its production capacity by … for the full story, click here.

Although TNK-BP CEO, Robert Dudley, told the Moscow Times that TNK-BP and Gazprom have not yet presented each other with asset swap proposals for the new $3 billion project the companies plan to set up to liquefy gas on the Baltic Sea, he told the Moscow daily that TNK-BP will offer Gazprom Rospan International, TNK-BP’s only gas project after the sale of Kovykta.

TNK-BP plans to sell Buguruslanneft, one of its oldest assets in the Orenburg region, Dudley told the Moscow Times, although Marina Dracheva was admitted in the same paper that no price had yet been set.

For Full Story, Click Here

Oil and Gas Eurasia reported recently that Russia wastes $14.22 billion annually through the flaring of associated petroleum gas – the equivalent of the total reserves left in a large gas field.  It seems the Kremlin is now set to toughen up their stance against companies involved in this practice, as Reuters reports that Vladimir Putin has promised to take tough action against companies flaring gas and the Natural Resources Ministry is now working on an enforcement plan.

Although Reuters has revealed that some analysts believe the measure may be designed to help Gazprom cover gas shortages by buying gas captured for oil firms at low process, TNK-BP argue that their program is not politically motivated and is economically viable.

Source: Reuters (http://investing.reuters.co.uk/news/articleinvesting.aspx?type=allBreakingNews&storyID=2007-07-26T130227Z_01_L26829011_RTRIDST_0_TNKBP-GAS-UPDATE-1.XML&pageNumber=0&imageid=&cap=&sz=13&WTModLoc=InvArt-C1-ArticlePage2)