Wanted: Investors in Russian Energy (XOM, RDS.A, BP)

December 10, 2008 by Douglas A. McIntyre

Falling crude oil prices have hit Russia particularly hard. The country needs a crude price of about $70/b to cover production costs and to fund the government. So, what do they do when the price falls into the $40s?

According to Platts, a vice-president of Gazprom Neft, the giant natural gas company’s oil division, held a press conference and announces that now is a "good time" for foreign oil companies to invest in Russia’s oil and gas sector. The question now is whether or not Big Oil will line up to come to Russia’s rescue.

Back in the wild and woolly 1990s, Russia sold production sharingagreements to vast fields of oil and gas. Then, in late 2004, theystarted taking it all back. First, the government decimated Yukos,Russia’s largest independent producer. Then it pulled back on ExxonMobil (NYSE:XOM), Shell (NYSE:RDS.A), and BP plc (NYSE:BP). Theproduction sharing agreements were torn up and government-controlledcompanies like Gazprom and Rosneft got majority stakes in the fields.

If Russia does open up a bit, it’s very likely that Big Oil will goback in, provided they get a decent split on costs and profits. Russianreserves of oil and gas are enormous, with much of the natural gasstill undeveloped. The catch is that most of the reserves are eitherfar from existing infrastructure or in some of the most forbiddingclimate on earth.

The Russians still need Western technology to get the oil and gas outof the ground. It remains to be seen what the government will give upin return.

Paul Ausick
December 10, 2008