Russian resurgence

March 3, 2003
The Russian government is showing increasing confidence that it can rely on domestic oil companies to expand the country's role as a key world exporter. The most recent evidence of that came last month when Prime Minister Mikhail M. Kasyanov proposed that his country limit future production-sharing agreements and related tax guarantees with foreign investors to large, capital-intensive projects.

Maureen Lorenzetti, Washington, DC / [email protected]

The Russian government is showing increasing confidence that it can rely on domestic oil companies to expand the country's role as a key world exporter. The most recent evidence of that came last month when Prime Minister Mikhail M. Kasyanov proposed that his country limit future production-sharing agreements and related tax guarantees with foreign investors to large, capital-intensive projects.

By all accounts, the proposal is still far from becoming law. It must be voted on by the Russian legislature, a process that could take months or years. By then the world oil supply picture may have dramatically changed; one big factor is the fate of Iraq, a country with much larger and more easily recoverable oil resources than Russia.

US investors cautious

Foreign investors are carefully watching what the Russian government will do next. US-based companies want the Kremlin to preserve PSAs for large projects.

"Foreign investors maintain that the PSA framework is a proven model for making multibillion-dollar projects economically viable, due to the stability and predictability investors receive in return for their long-term capital commitments," the Washington, DC-based US-Russian Business Council said.

"It's extremely important that the legislative framework be completed with respect to the tax code so that those PSA projects already operational off Sakhalin Island can reach their full potential."

Russia has proven oil reserves of 48.6 billion bbl, with numerous identified deposits in Western Siberia, Timan-Pechora, East Siberia, the north Caspian Sea, and Sakhalin Island, according to the US Energy Information Administration. There are also many remote regions that may contain oil; Russian oil companies maintain that once companies start actively exploring, the country's hydrocarbon reserve base will be much higher than previously thought. EIA says that, at 7.05 million b/d, Russia is the world's second largest crude oil producer, behind Saudi Arabia. Current estimates show Russia to be ranked eighth in crude reserves, but it holds the world's largest natural gas reserves.

Foreign and domestic

Russian and non-Russian oil companies agree that substantial investments will be needed over the next decade to maintain Russia's current rate of oil and natural gas production and expand exports to new markets.

But some Russian-based companies feel they already have the leverage they need to forego PSAs. They say a $6.75 billion deal between BP PLC and Russian interests to create the third largest oil company in Russia is a clear example that PSAs are not needed. BP will have a 50% stake, while Russian partners Alfa Group and Access-Renova will share a 50% stake.

"BP's announcement shows that large international oil companies are willing to work in Russia under the present situation," said Mikhail B. Khodorkovsky chairman and CEO of OAO Yukos Feb. 11, speaking before Cambridge Energy Research Associates' annual energy conference in Houston (OGJ, Feb. 18, 2003, p 34).

BP's action is "a symbolic signal" that major international oil companies are willing to invest in Russia "under the present (tax) system," he said.