Home

Joint ventures in the Russian oil sector: rocky marriages?

Jan. 25, 1999

The principal vehicle of foreign participation in Russia's oil industry has been joint ventures among Western oil companies, service companies, and Russian producers. Despite a lack of reliable production-sharing agreement legislation, an unsure investment climate, and domestic political opposition, Western companies have entered into JVs within Russia based primarily on the promise of the vast hydrocarbon reserve base in Russia.

An Update On Joint Venture In Russia

The principal vehicle of foreign participation in Russia's oil industry has been joint ventures among Western oil companies, service companies, and Russian producers.

Despite a lack of reliable production-sharing agreement legislation, an unsure investment climate, and domestic political opposition, Western companies have entered into JVs within Russia based primarily on the promise of the vast hydrocarbon reserve base in Russia. JVs have been allowed in Russia ever since the waning days of the Soviet Union, when the government recognized the value of foreign investment in Russia's oil sector. However, despite early interest, many JVs and alliances are now facing uncertain times for the following reasons:

Low oil prices have forced Western oil companies to cut capital budgets, especially on projects in difficult geopolitical regions.
The credit crunch faced by Russian oil companies has caused Russian alliance partners to default on their spending obligations.
The Western oil partners have often been hit by a reality bite (after the formalization of a JV agreement) of the misrepresentation of reserve estimates and financial solvency of their Russian partners.
Russia's heavy tax burden, lack of access to export pipelines, and lack of progress in establishing democratic institutions have frustrated many Western partners.

About 100 JVs are currently located in Russia, with the most successful ones dealing with the application of new technology to old fields in order to increase production. Some of the major JV projects in recent years are listed in the accompanying table.

Outside of the Caspian basin, the major investments in Russian oil are Conoco's Polar Lights, JV projects covering Sakhalin Island fields and prospects (Phases I-VI), and the Timan-Pechora fields development.