Russia's Gazprom Sends Its Western Partners Packing

The chief executive of Russia's state-owned OAO Gazprom yesterday said the company would retain complete ownership of the giant Shtokman natural gas field in the Barents Sea, dropping earlier plans to give a 49 percent interest in the field to all or some of five Western firms on a short list of potential partners.

Gazprom's chief executive Alexei Miller said in a Russian television interview that the company did not need "international participation" despite the intense technical challenges of developing the Shtokman field, which lies 350 miles from shore and in rough icy waters more than 1,100 feet deep.

Miller also said Gazprom would abandon plans to export liquefied natural gas to the United States, which is expected to rely increasingly on LNG imports. Instead, he said, gas would be shipped through a pipeline being built to Germany. LNG exports to the United States would have diversified U.S. suppliers, now mostly in the Middle East, Africa and Trinidad and Tobago, and Russia's own list of natural gas customers.

The decision was the latest in a series of blows to Western oil companies trying to do business in Russia. Gazprom has been trying to increase its stake in an oil development project on Sakhalin Island near Japan, where Royal Dutch Shell PLC has been impeded by environmental permit issues. And Gazprom has been impeding efforts by a venture partly owned by BP PLC to export natural gas from Siberia to China.

The move was widely seen as having political dimensions as well as corporate ones. "The government continues to assert its position as a global energy power," said Fadel Gheit, oil analyst for Oppenheimer & Co. "Increased government control, limited access to resources, and red tape make conducting business in Russia more difficult."

Some analysts also saw the Gazprom decision as being related to Russia's frustrations over negotiations about its admission to the World Trade Organization. "The Kremlin has tied Shtokman and the two U.S. companies' participation to U.S. acceptance of [Russia's] WTO entry," said Anders Aslund, a senior fellow and Russia expert at Institute of International Economics. But, Aslund noted, it is now unlikely that Congress will consider the WTO matter until February if not later.

The Shtokman field has been an important prize for the oil industry. Foreign firms, backed by governments lobbying on their behalf, competed intensely for a piece of it. Discovered in 1988 east of Murmansk, the field is believed to hold about 32 trillion cubic feet of natural gas and was widely expected to cost $20 billion to develop.

In September 2005, Gazprom announced a short list of five companies it might include in the project: ConocoPhillips, Chevron Corp., Total SA of France, and two Norwegian companies, Statoil ASA and Norsk Hydro ASA.

The companies said they had not been officially notified by Gazprom, and they responded cautiously to the news reports. "Hydro has a lot to offer in terms of technology, competence and project execution," said Cecilie Ditlev-Simonsen, a spokesman for Norsk Hydro.

Chevron issued a statement saying that it considered the Shtokman project "one of the most complex and challenging energy projects in the world." It said that "Chevron has not been formally notified of any decision on this project, but whatever the decision on Shtokman, Chevron looks forward to continuing to work on energy projects with Gazprom."

But some observers said that Gazprom, flush with earnings from high oil prices over the past three years, apparently decided it did not need foreign help. "A much broader range of activities can be internally financed in Russia now as opposed to five years ago," said James C. Langdon Jr., a lawyer with Akin Gump Strauss Hauer & Feld LLP who has advised energy companies doing business in Russia. "Or as a lot of my friends in West Texas used to say, you get a lot smarter when your bank account goes up."

Other observers said Gazprom was simply unsatisfied with the terms offered by foreign companies. "My sense is that Gazprom just wanted to slow down the train and re-group," said Jonathan Elkind, a principal with EastLink Consulting LLC.

But Gazprom has been seeking greater control over gas projects all over Russia. The company has also been trying to elbow its way into the Sakhalin-2 project, which is owned 55 percent by Shell and is 80 percent complete. The two sides were close to an agreement in which Shell would have given a 25 percent stake in Sakhalin-2 to Gazprom in return for a 50 percent interest in an undeveloped Siberian gas field.

Negotiations were thrown off course in part because Shell doubled its estimate of development costs, to $22 billion through 2014, angering the Russian government, which would not begin to collect until costs are paid off. Then environmental objections raised by Russian non-governmental organizations -- mostly over the Western gray whale and crossings over rivers where salmon spawn -- got more government attention. The Russian government threatened last month to delay the project.

"It is difficult to see anything in this other than a very crude attempt to alter the terms of the negotiating bargain under which Gazprom would enter into the Sakhalin energy consortium," Elkind said, adding, "This is not to say that there are no environmental issues around the Sakhalin 2 project."

Elkind, who worked in the Clinton administration and sat in talks when Russia was desperate for foreign oil company investment, said that the current Russian government might not like the Sakhalin contracts but that they were made between "consenting adults."

Recently, Gazprom has also been trying to muscle its way into a stake in the Kovykta natural gas field owned largely by BP through its TNK-BP venture in Russia. TNK-BP has said it is willing to admit Gazprom on commercial terms, but sources familiar with the talks say that Gazprom wants to join on "Gazprom terms." Gazprom has insisted that the venture supply local consumers, but there aren't enough of them to consume the field's production. TNK-BP wants to export to China or South Korea.