Wed, Oct 18, 2006 - Page 9 News List

Russian oil and gas rights are the weapons of a new Cold War

By Oliver Morgan  /  THE OBSERVER , LONDON

If there were any doubt about the ruthlessness with which Russia is executing its new nationalist energy policy, it was smashed last week.

In an almost cursory announcement, Alexey Miller, chairman of the management committee of the massive Russian energy group Gazprom, told TV channel Russia Today that the state-controlled company would develop the "supergiant" Shtokman gas field in the Arctic by itself and would not be inviting Western companies to join in.

At a stroke, Miller cut off five hopeful Western oil majors -- Conoco and Chevron of the US, Statoil and Norsk Hydro of Norway, and France's Total, from taking a stake in the US$18.6 billion project to develop the world's third largest gas field, with 3.2 trillion cubic meters of reserves.

At the same time, Gazprom said it was abandoning plans to use Shtokman, which lies 500km north of the port city of Murmansk, to provide liquefied natural gas for transport by ship to the US, in favor of selling the gas into Europe by pipeline. The move could not have been a firmer snub to the US. It not only cut out two US oil companies from access to precious reserves, but deprived the US of a valuable resource from a country that until recently appeared to be a reliable and stable ally.

"There is an emerging demand/supply gap in the US which means that these developments will be seen negatively by US energy policymakers. Liquefied natural gas was going to be a magic bullet and Shtokman was an important part of that," said Andrew Neff, energy analyst at Global Insight in Washington.

The Shtokman decision does not stand on its own. It comes in a year that has already seen Gazprom cut supplies to Ukraine, while government ministers have more recently cast doubt over investments by Western companies in other areas. Shell's involvement in the US$20.4 billion Sakhalin-2 oil and gas project off Russia's east coast was thrown up in the air last month, as was US giant Exxon's in sister project Sakhalin-1.

Meanwhile, there have been concerns over BP's rights to develop the 1.9 trillion cubic metre Kovykta field in Eastern Siberia, and Total has had similar problems in the Arctic. The main commercial benefactors of these moves are the mighty Gazprom and Rosneft, the state-controlled oil group.

Gazprom's reserves are bigger than those of any country in the world except Saudi Arabia and Iran. Production last year increased by 138 percent, its profits by 169 percent. The company is enmeshed into Russian life -- it has huge influence over the towns in which it operates, running schools and health services, even operating leisure centers.

It is woven into the political fabric too. Gazprom chairman Dmitry Medvedev is also deputy prime minister in Putin's government, and board director German Gref is minister for economic development and trade. Miller, who took over the company in 2001, owes his position to Putin's patronage. It should come as little surprise that decisions affecting the company's future are driven as much by political factors as commercial.

"The major decisions with these companies -- as happens with, for example, the United Aircraft Corporation -- are taken in the Kremlin. That is because they have been identified as national champions. They combine an important economic role with a geopolitical one," said Chris Weafer, head of strategy at Moscow-based Alfa Bank.

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