Monthly Archives: August 2007

Warrant out for absent Gutseriev

Gutseriev, by ITAR-TASS, on Gazeta.ruRussian prosecutors have now issued a warrant for embattled ex-head of Russneft, Mikhail Gutseriev, after he has apparently fled the country following the funeral of his 21-year-old son last week. He was confined to house arrest since soon after stepping down as head of the oil company citing undue state pressure (a charge he later recanted). Gutseriev faces up to six years in prison for tax evasion charges.

Prosecutors are now undertaking an international search for Gutseriev, and speculation has emerged over where he might turn up. London, the traditional Russian businessman hotspot, may have become too ladened from continued fallout over the Litvinenko poisoning and soured British-Russian relations. Some have cited Gutseriev’s ties to the Swiss commodities firm Glencore, suggesting he may end up in Switzerland. Others have brought up his Muslim background, saying he could be welcomed in a Middle Eastern country, perhaps where he could put his oil savvy to use.

The warrant adds a further obstacle to the completion of a deal turning the company over to Oleg Deripaska’s “Basic Element” (Bazel). Presumably, Gutseriev’s presence would be needed to finalize the transfer of Russneft shares. Bazel’s application to the Federal Anti-Monoply Service has already run into problems, and was apparently improperly submitted. This has fueled speculation that the deal is being sidelined by Kremlin forces who wish to have Russneft acquired by someone else, namely the government-controlled Rosneft. However, it was already assumed that Deripaska could very well act as a simple stop-over in the fate of Russneft, until the state oil major was able to gather the necessary funds to buy it from him, given his status as a relatively Kremlin-friendly oligarch. Denying Deripaska Russneft would suggest something else in the works.

A further — tragic — wrinkle in the story is the death of Gutseriev’s young son, apparently as a result of a car crash., however, reports that GIBDD (Russia’s State Inspectorate for Traffic Safety) has no record of the accident that killed him. If this was some sort of organized attack on Gutseriev’s family — and this is pure speculation, in the absence of access to any investigations or detailed circumstances — it suggests the involvement of a particularly nasty organized crime or terrorist element, as opposed to simple badgering through state resources and agencies by the Kremlin.

Boris Nemtsov, a member of the liberal Union of Right Forces party, suggests that the situation should not be seen as a parallel of the Yukos affair, but rather a result of tumultuous personal relationships, particularly stemming from Gutseriev’s involvement in the Caucasus region:

Это не новый ЮКОС, это государственный рэкет. Меня удивило, что он отдал бизнес. Должны были отстать от него, по идее, но, видимо, тут уже вмешиваются какие-то личные мотивы. Если они против кого-нибудь ополчатся, то мало не покажется. То, что это достаточно далеко от правосудия, у меня сомнений нет.

[This isn’t a new Yukos, this is a state racket. I am surprised that he gave up his business. They should have left him behind, was the idea, but apparently here already some sort of personal motives are interfering. If they are against someone being up in arms, then little is being shown. That this is far from justice, I have no doubt.]

In other words, something else is going on, besides the usual government methods of involvement.

Perhaps this ties in to some of the recent upswing in conflict from Chechnya and its neighbors, particularly Gutseriev’s native Ingushetia…


Deripaska expands his energy interests

Putin and Deripaska in 2006 - From Despite running into obstacles in his attempt to acquire Mikhail Gutseriev’s Russneft, Oleg Deripaska is continuing to pursue strategic energy assets. Vedomosti is reporting that Deripaska’s Basic Element is planning on bidding for a stake this fall in the electricity holding TGK-1. Gazprom, Viktor Vekselberg, and the Finnish company Fortum had all previously reported interest in the electricity firm, which powers St. Petersburg and was formed in 2005 from the assets of Lenenergo, Kolenergo, an Karelengro.

TGK-1 is currently controlled by Anatoly Chubais’ UES (of which Deripaska owns about 2%), but the electricity giant has been selling off some of its assets in order to raise money to modernize its aging infrastructure. Earlier this year, Fortum was blocked from gaining control of TGK-1 due to the firm’s strategic role of providing power to St. Petersburg. The Finnish company would likely seek to import some Russian power into Finland, since Finnish electricity rates are higher than Russia’s subsidized prices (and Russian energy sources — natural gas, specifically — are much cheaper than what is available in Finland). It seems Russia may allow Fortum to take part in the upcoming auction, so long as a balancing force could be found.

Gazprom already invested heavily into Mosenergo, the electricity firm that powers Moscow, and has about a 10% stake in UES. The electricity firm relies on natural gas (i.e. Gazprom) for about 70% of its power generation needs, and Gazprom views its investment in UES as a way to coordinate with its largest domestic customer on sales, modernization, and diversification. (Converting power plants to coal frees up more gas for the lucrative export market, for example.)

According to the Vedomosti article, Deripaska has been pursuing power generating assets in areas surrounding his aluminum plants, suggesting he is seeking control over a further extension of his industrial base. Pursuing TGK-1, however, has more strategic–and visceral–reach, due to its importance to St. Petersburg, which is Putin’s city. Some of his top aids in the energy sector were involved in Lenenergo early on, and it is doubtful he’d agree to have the firm passed into unqualified hands.

It will be interesting to see how Deripaska’s attempt to acquire TGK-1 will play out, especially concerning “competition” from Gazprom and Vekselburg (not to mention the foreign Fortum). Deripaska is already seemingly running into problems with Rosneft over the fate of Russneft — it would likely be tough for him to butt heads with Gazprom at the same time. One thing to look out for is whether Deripaska would be willing to cede control over Russneft in order to secure access to TGK-1.

Kovykta delay

As I was wrote, it looks like the development of Shtokman — despite reaching a deal with Total — will remain a ways off into the future and will not be promoted to a top priority for Gazprom’s investment plan. Indeed, funds for the project in this year’s investment budget were cut, making room for other moves.

Earlier this year, Gazprom managed to take over control over the operation of the giant Siberian gas field Kovykta. It appears that a similar lack of urgency has overtaken the company with regard to this field, which had been under development by BP’s Russian joint venture, TNK-BP. In MinPromEnergo’s latest report on the development of Eastern energy projects, Kovykta has been pushed back to 2017.

While it was unlikely any significant gas exports would have been flowing until at least 2013 (despite past hopes that Gazprom would be exporting to China by 2011 or 2012), pushing the date back to 2017 is a significant delay. Even more so given the industry’s propensity for time overruns.

Kovykta’s position — near Lake Baikal in Eastern Siberia — suggests slating the field for export to the east, rather than connection the UGSS for export to Europe or LNG. However, Gazprom was not getting very good cooperation from the Chinese side of the bargaining table, and they have been unable to come up with a firm pipeline route. The Chinese shot down the most obvious path — straight south, through Mongolia — and were instead aiming for a longer pipe that would drop down into eastern China nearer to Korea.

However, it is unclear that the Chinese market is prepared for the kind of large scale imports from Russia that the expensive pipeline would necessitate. Chinese infrastructure is not geared towards gas consumption, with China currently relaying on oil and coal for a majority of their energy needs (coal: 69%; oil: 22%; natural gas: 3%). The country produces about 40 bcm per year and has about 1.5 Tcm of gas reserves. The Kovykta pipeline would likely have to transport around 10 bcm per year to be viable, so there just wouldn’t be a market for it in China alone without including Korean or LNG export routes.

Perhaps in 10 years, Chinese demand will change, leading to a more viable situation. But until then, Gazprom will be content to sit on the 1.5 Tcm Kovykta field.

Shtokman is more suited to pipeline export westward, as suggested by Gazprom’s goal of eventually routing the field’s gas production towards the Nordstream pipeline. Gazprom also envisages extending the undersea route further, eventually reaching Britain, which has recently switched from becoming a net gas exporter to a net importer due to declining North Sea production. This ambitious aim would need much more of a resource base than the 300 bcm Yuzhno-Russkoye field currently slated as a source. Shtokman has a much more solid predicted demand than Kovykta, thus bumping the Siberian field down the time line.

Gazprom may be now attempting to shore up production numbers by concentrating on some smaller developments before tackling either of the major super-giant fields, accounting for the shifting demand. At least, that could be a possibility, but in reality, the company spent much of the increased investment budget on capital, rather than infrastructure, pursuits — stakes in Sakhalin-II, Belarus’ Beltransgaz, and Mosenergo. It remains to be seen how these investments effect Gazprom’s future medium term production levels.

Total, Gazprom and Shtokman — a new investment rubrik?

In July, the French oil firm Total reached an agreement with Gazprom on the development of the giant Shtokman gas field in the Barents Sea. In an op-ed in the Financial Times last week, Pierre Noël labeled the agreement a herald of things to come, as reserve-strapped international oil companies (IOCs) are forced to reach agreements with the national oil companies (NOCs) who now control the majority of the world’s remaining recoverable hydrocarbon resources.

Shtokman also illustrates the new environment in which global oil companies compete for resources. In a world of empowered resource-holder governments and high oil prices, contractual arrangements have to accommodate governments’ economic, political and increasingly symbolic demands.

The emphasis on stability and investors’ rights protection, typical of the 1980s and 1990s, has to give way to a new equilibrium between the economics of the project and the government’s demand for retaining “full control”. In the Shtokman deal, the licence is fully owned by Gazprom but Total has 25 per cent of a distinct company that owns and operates the infrastructure (itself under contract with the licence owner).

Paul Domjan of the Stockholm Network responded in a letter to the FT yesterday, railing on those terms and what it means for the future of IOCs and the global market:

These terms are perhaps the worst a foreign oil company has ever accepted in Russia. Gazprom will retain both full ownership of the gas field and the production licence, and gain access to Total’s liquefied natural gas expertise – an emerging global market Gazprom is desperate to compete in.

Total, by contrast, own only 25 per cent of the special purpose vehicle (Gazprom retain 75 per cent) set up to manage the extraction operation.

Such terms, which may not allow Total to book the reserves – a key market indicator of long-term economic health – effectively relegate Total to the role of oil service provider, competing with companies such as Halliburton and Schlumberger.

In the meantime, Gazprom has suggested that it may bring on additional foreign partners for help in the challenging project. Gazprom’s latest investment plan for the next year, which was recently adjusted, saw funds allocated for the development of Shtokman slashed from 17.1 billion rubles to 8.6 billion rubles ($34 million). Gazprom already committed to other capital-intensive pursuits such as entering into the Sakhalin and Kovykta projects, as well as investing into Mosenergo, thus necessitating the drop in the far afield Shtokman project. Total costs for the project will likely run to $15 billion.

So yes, Total will own a stake in the company that will run the extraction of Shtokman gas, which is seen as a center piece for the French firm’s future portfolio. To Gazprom, however, it’s on the back burner.

Congratulations, Total, you are the proud partner in a company that will only be able to specialize in dodging icebergs for the next decade — it doesn’t look like you’ll be doing much else in the Barents Sea anytime soon.

Quips aside, this suits Gazprom fine. They can concentrate on continuing its buying spree, or perhaps developing the more accessible Yuzhno-Russkoye to eventually feed the Nordstream pipeline — another high priority (and high visibility) investment. Not to say that project isn’t facing its own problems now, including a 50% projected cost increase (up to $6 billion now), a year-long hold-up due to delays in securing infrastructure tenders, and conflict with neighboring countries on the undersea route.

The $30 billion figure approved for investment by Gazprom’s board is nonetheless impressive, at least superficially. In a January 2007 interview with the Wall Street Journal, Gazpromexport head Alexander Medvedev assured that the company would invest at least $20 billion, attempting to silence critics who claimed that the company lacked a viable (or even an existing) investment plan.

The problem, of course, is in the distribution of that money and the range that “investment” can cover. The company has to prioritize, and that is where the critics come in. With the declining super-giant fields in West Siberia looming, Gazprom has opened only one new substantial field in the past 5 years (Beregovoe), and the next round of “replacement” giants–Shtokman, Kovykta, Yamal–remain 10 to 20 years out in the future. Meanwhile, in-place infrastructure is getting older and in more and more need of replacement, but those repairs take a back seat to dumping more money into the prestigious projects (Nordstream, Sakhalin-II and LNG export, Monsenergo, etc.).

More later with some figures, and how Total and the Shotkman deal fit into all this.

Continued tribulations for Russneft

Putin and Deripaska in 2006 - From Despite news of the sale of Russneft to Oleg Deripaska’s Basic Element, Mikhail Gutseriyev’s embattled oil company is facing increasing difficulties from state regulators.

On Wednesday last week, a Russian court froze Russneft’s assets and claimed 100% of the company’s shares in light of the pending criminal investigation into Gutseriyev’s economic history. Then on Friday, a Moscow arbitration court ruled to uphold a $670 million tax evasion lawsuit against the company. As a result, Russneft’s aggregate debt has risen to over 20 billion rubles ($785 million). Russneft also still owes its creditors–including the Swiss trading firm Glencore–about $3 billion in loans.

The market value of Russneft is estimated to be between $6 and $9 billion, and money to repay the tax suit and associated fines could likely be found. However, the effect of this continued economic beating on the company will likely sour Deripaska’s enthusiasm over taking control of the oil company. There has been no word suggesting Deripaska will pull out of the deal to buy Russneft, however, approval of which is pending before the Federal Anti-Monopoly Agency.

Gutseriyev announced his resignation following news of Russneft’s sale, and, in a letter briefly posted on his company website, went on to condemn the manner in which he left. Gutseriyev claimed essentially to have been forced out following a series of coordinated attacks through the use of state regulators and officials. He later withdrew his comments, saying that the decision to sell and for him to leave was a normal procedure approved by the company’s board after careful deliberation.

It was expected that the attacks on Russneft would quiet once Gutseriyev left the scene. However, the incendiary letter (despite the hasty retraction) may very well have prolonged the company’s travails, while seriously denting the price he may get for the company.

The events also suggest that more than one faction is involved in the process, each with slightly different aims. One faction likely had a personal issue with Gutseriyev and wanted him out, another may be coveting his oil assets, and still another (represented by Deripaska himself) is seeking to further cement its place within the Kremlin, Inc hierarchy (that is, the network formed between the Russian government, political leadership, key business figures, and strategic economic sectors).

From “Russia Profile:”

All Russian media, including Kremlin-loyal outlets covering the affair confirm that a group of siloviki (high-placed officials affiliated with security services and police with a hand in business) had a role to play in Gutseriyev’s removal. It should be noted that the news of the stock-freezing came at the moment when Gutseriyev was finalizing the sale of Russneft to Oleg Deripaska, owner of the Basic Element conglomerate, and one of Russia’s richest men.

Russian business and information daily Vremya Novostei, citing sources inside Russneft, claims that the arrest of Russneft’s stock could be an action of a “third party,“ which, unlike Deripaska and Gutseriyev, “strives to transfer the property of Russneft to the state.” This third party, in the Russian newspaper’s opinion, is acting in the interests of Russia’s biggest state-owned oil major Rosneft, as well as in the interests of those behind the destruction of YUKOS.

Analyzing the situation, Moscow-based Vremya Novostei points to the fact that Russneft can be bought by Deripaska only when the court lifts the freeze on the company’s shares. The court can only do so when Russneft’s new owner pays for the unlicensed extraction of oil in Ulyanovsk. If the state does receive due compensation for the over-extraction, it can renationalize Russneft’s shares. This seems to be the scenario most preferable to the siloviki.

This obviously would not be the preferable route for Deripaska, nor what he was expecting when he agreed to pursue Russneft, a decision which likely required the Kremlin’s approval (or was perhaps done at the Kremlin’s request).

In an article in the Novaya Gazeta (site currently down, article accessed from the JRL) from August 13th, Yulia Latynina labels Deripaska as a “white knight” from the annals of Russian folklore:

A white knight, Russia-style, is the person who helps you fight off your enemies, then takes away whatever the enemies were trying to take away from you. Deripaska has also acted as an intermediary: his interview with the Financial Times, where he said he is prepared to give all his assets to the state, came out just as the Russneft negotiations were at their height — and this comment appeared to be about Russneft.

She also adds a further rationale behind the attack on Gutseriyev (beyond the oft-quoted unapproved pursuit of Yukos assets):

Gutseriev is an ethnic Ingush; and president Murat Zyazikov of Ingushetia, whose region is being swept by a wave of bombings, needs to come up with some sort of explanation to present to the Kremlin. There are only two possible explanations: either Zyazikov has completely lost control over Ingushetia – or Ingushetia is peaceful and prosperous, but Gutseriev is funding terrorists. The latter explanation is more convenient.

While it’s currently unclear exactly who is driving what, the resolution of this conflict with Russneft and Gutseriyev should give outside observers a better idea about the power struggles and relative weights of potentially competing Kremlin factions. This understanding, of course, comes at a rather high price–especially for Gutseriyev, whose future remains unclear.

Russia and the future of Iraq’s oil

Iraq’s oil minister, Hussain al-Shahristani, visited with Russian oil figures in Moscow on Thursday, discussing the role Russia might play in the development of Iraq’s vast oil reserves.

Al-Shahristani predicted that the Iraqi parliament will pass a long-awaited oil revenue law by September and stressed that Iraq’s national oil company (INOC) will take the lead on all major oil projects.

“As for the oil fields that are allocated to the Iraqi national oil company — and this includes West Qurna — it is up to the Iraqi national oil company to decide how best to develop that field,” he said. “They will decide what kind of contracts will provide the highest return for Iraq. That’s the criteria that has to be met by the law.”

(This policy sounds rather similar to the Kremlin’s own recent reassertion of primacy for national firms.) Lukoil had signed a PSA with Iraq in 1997 covering the development of the large West Qurna-2 field, but al-Shahristani made clear that Saddam-era agreements will not be carried over into this next round of development.

The oil minister did meet with Lukoil CEO Vagit Alekperov to discuss the potential role of the Russian oil company in pending developments. While not explicitly promising future cooperation, he did note that “Lukoil enjoys some advantages in winning tenders” due to its past involvement in Iraq. Some observers have also suggested that the Russian firm could benefit from its cooperation with the US-based Conoco-Phillips, which owns a 20% stake in Lukoil.

While it had been predicted that the issue of debt forgiveness could be leveraged to secure Russian involvement in Iraq’s oil industry — particularly with regards to Lukoil and Qurna-2 — it appears that Russia was unwilling to expressly cement the two issues together. Instead, the Kremlin has agreed to write off $8 billion of past loans to Iraq, in accordance to the 80% / %20 of framework developed by the Paris Club of lending nations, despite not receiving assurances of future Russian involvement.

Russia was a beneficiary of the UN’s corrupt “oil-for-food” program with Iraq, and it will be interesting to see if those past ties will re-assert themselves with the re-opening of Iraq’s oil industry. Yuri Shafaranik, now head of Russia’s Oil and Gas Worker’s Union, met with al-Shahristani as well on Thursday. Shafarnik is one of the Russian officials accused by the CIA of colluding on the plan that funneled $11 billion into Saddam’s government from 1997 to 2003, while amassing around $130 million for those Russian officials involved. Russian oil companies allegedly benefited through vouchers for cheap Iraqi oil, which was then sold at market prices, with a portion of the proceeds returned to the Iraqi government as a kickback. According to a listing in the “al Mada” paper, both Gazprom and Rosneft, among others, took part in this scheme (see Keith Smith’s “Russian Energy POlitics in the Baltics, Poland, and Ukraine” for more info).

Not to be outdone, Ukraine is also currently working on its own plans to utilize the renewed oil output from Iraq. Ukrainian PM Viktor Yanukovich has called for negotiations between Ukraine, Turkey and Iraq in order to develop a plan to send Iraqi oil up to the Black Sea and on up the Odessa-Brody pipeline. This would certainly add geopolitical significance to the long-debated pipeline, especially since it would represent a significant project that would not rely on Russian involvement — a key for a Ukraine that currently depends heavily on Russia for nearly all energy issues. Interest from the other two parties, however, is a bit tough to gage. We’ll see how things turn out.

Polar expedition follow-up

From - Ntv Television Image Via Associated PressPresident Putin praised the Russian polar expedition as it returned to Moscow yesterday having succeeded in both collecting scientific samples and symbolically placing a Russian flag and other memorabilia on the ocean floor, a mission steeped in geopolitical maneuvering that I wrote about last week.

The Washington Post has an article touching on effect the expedition has on other nations attempting to lay claim to territory around the North Pole — and the resources that are becoming more accessible there. Russia’s actions have caused increased posturing from Canadian politicians seeking to bolster the country’s northern presence:

In the view of opposition leader Jack Layton, head of the New Democratic Party, the government has responded with little more than rhetoric to threats to Canadian sovereignty in its frozen backyard. “Canada must move quickly and make immediate, strategic investments in its Arctic,” Layton said Sunday.

True enough, the Kremlin-backed polar expedition has “generated a new source of international tension, seemingly out of the blue,” which is ironic since the vast majority of previous polar scientific missions had been accomplished with key international cooperation.

An email from Kathy Crane of the NOAA in today’s Johnson’s Russia List highlights some of the key past and future examples of cooperation between Russian and Western researchers.

What caught my attention was the tendency of the media to pit one country against another. This reality is different.

During the International Polar Year, many nations will be working together in the Arctic. A notable program will be RUSALCA 2008 (Russian-American Longterm Census of the Arctic) where scientists from many Russian institutions and agencies will join with scientists from many U.S. institutions and agencies to carry out exploration and monitoring of Climate Change in the waters shared by our two countries. There are also plans to incorporate the participation of China, Korea and Canada into a larger program.

It is clear that our future as an Arctic nation lies in collaboration with our neighbors, not in extreme nationalism, for no man lives alone on this planet.

She also notes how the planting of a nation’s flag on the bottom of the ocean floor is a rather meaningless gesture:

Flags have been planted all over the Arctic seafloor… It seems to be something that people like to do…. like climbing Mt. Everest.

For example, one multinational expedition to the Canada Basin in 2002 (partly NOAA funded) left behind the flags of Canada, U.S. China and Japan.. also in international waters. If Russia had been with us on the ship, we would have put that flag down as well.

And while she praises the technical accomplishments of the expedition, she goes on to say that the actual sampling that was accomplished will not be sufficient to back up a Russian claim of territorial continuity:

All marine geologists and international law specialists know that just visiting the seafloor in one small location will not provide enough information to actually go out and claim the territory. The MIRs are actually great submersibles, and provide platforms for a multitude of ocean floor experiments. However, the information needed for an UNCLOS submission, requires seismic exploration to determine the nature of the subjacent crust, the sediment thickness, in addition to high resolution bathymetric data. This information cannot be obtained during a submersible dive.

Pavel Baev at the EDM goes into more of the repercussions of the trip in terms of the oil and gas resources up for grabs, emphasizing Russia’s current lack of investment into hydrocarbon development, and its preference to sit on the major resources it controls:

The hidden feature that might prove to be the most significant in this context is Russia’s proven — but still astounding lack of interest in developing — natural resources. The super-monopoly Gazprom is the main culprit behind this phenomenon, and it has recently announced a reduction of its investment program for 2007-2008, first of all in the new projects such as the Shtokman gas field in the Barents Sea (Nezavisimaya gazeta, July 24).

This reticence for major investment (very likely stemming from the rather large debts that both Gazprom and Rosneft are facing — an issue I hope to write about soon), combined with a lack of technical ability for undertaking any sort of development in the harsh polar conditions suggests that even if Russia gained control of the region, any extraction of the resources there is a long ways off (and could likely be undertaken by outside firms on the Kremlin’s terms).

On the lighter side of the issue, the JRL has an article from the Moscow Times on the “Top 10 Reasons to go to the North Pole if you are a Russian Leader.” Number 10 touches on the point above:

10) If you don’t have the technology to exploit the Shtokman deposits, claiming another large, ice-bound hydrocarbon source will help you learn.

A couple are pretty funny, in an ironic it-could-almost-actually-happen, way:

8 ) If the Russians do not claim the North Pole, Hugo Chavez might beat them to it.

2) Russia’s leaders are determined to diversify the Russian economy and build an information society. Increasing the country’s supply of natural resources is the first step in this process.

One last note–receiving far less press is a recent British-led expedition to the North Pole which should also be commended for its technological achievements. The popular British automotive show “Top Gear” had an episode featuring a race between a dog-sled and a tricked out Toyota pickup to get to the North Pole. In the process, the Brits became the first people to ever drive to the North Pole. Luckily, they went to the magnetic pole, rather than the pole based on the rotational axis of the Earth, thus not interfering with the Russian expedition. Had they met there, it almost certainly would have led to a further deepening of the current Russian-British spat.