Russian, US interests pledge cooperation on energy sector Oil and Gas Journal Maureen Lorenzetti Washington Editor WASHINGTON, DC, Oct. 1 -- At an energy summit in St. Petersburg late last month, Russian and US oil companies assured each other the two countries still have a bright economic future together. But nagging concerns over tax structure and related laws quelled expectations that new major equity deals could be imminent. "Don't hold your breath," said Dick Matzke, former vice-chairman of ChevronTexaco Corp. and now a board member of OAO Lukoil. Wall Street analysts had been anticipating that both ChevronTexaco and ExxonMobil Corp. would submit initial bids for a 25% stake in the embryonic Russian megamajor Yukos-Sibneft—the product of a merger of OAO Yukos and OAO Sibneft (OGJ Online, Sept 19, 2003). No such offers materialized, although the parties are still speaking informally, according to industry sources. Lingering doubts US companies continue to be concerned about whether Russian President Vladimir Putin will initiate another round of power struggles with Yukos and other powerful Russian "oligarchs." Also unsettling to US companies is the pace of Russian judicial and banking reforms. Speaking at a conference held by the Eurasia Group in New York City late last month, Matzke said the recent exchanges between industry and government officials in St. Petersburg and Washington were "good opportunities to hold conversations on issues and concerns," but key issues remain unresolved. Matzke added that Russia has the potential to be an important oil supplier to the US but does not have any interest in supplanting Saudi Arabia's role as a swing producer to international oil markets. Rather, what Russia wants is balance between its subsidized domestic market and its foreign customers, he said. And in any case, constrained pipeline infrastructure will control volumes for the foreseeable future, he said, not reserves or productive capacity. Future still promising Although short-term expectations to push forward in the Russian oil sector may be on hold, diplomats, industry officials, and analysts remain confident the two countries have a promising future together. Sec. of Energy Spencer Abraham called the St. Petersburg talks a "productive session." "Presidents Bush and Putin agreed that there were certain common imperatives in our energy relationship: investment, market access, small and medium- enterprise development, and commercial partnerships," Abraham said. At this latest summit, US and Russian officials discussed the development of an oil pipeline to Murmansk. Building that pipeline would give Russian and potentially US companies the ability to ship large amounts of crude oil to an all- year port where tankers could deliver crude to US markets. Summit participants also discussed possible Russian LNG projects. At the summit, US officials also announced $130 million in loan guarantees from its Overseas Private Investment Corp. to help build a new OAO Lukoil storage and loading terminal on the Baltic Sea Long-term hopes Although there were no big deals announced at the recent summit, America's scramble for Russia's oil is still on, according to Hoover Institution Research Fellow William Ratliff. In a recent study called "Russia's Oil in America's Future," Ratliff said that American investments in Russian oil could reach "tens of billions of dollars, including technology and expertise." Nevertheless, a lot of hard work is ahead before those deals come to pass, noted analysts from Rice University's Baker Institute for Public Policy and the Carnegie Endowment for International Peace. At a June seminar cosponsored by the institute, Amy Myers Jaffe, the Wallace Wilson Fellow for Energy Studies at the Baker Institute, noted that many investors feel the business climate is still tenuous in the short term. "Low-hanging fruit has borne strong returns to the Russian industry in recent years, but a stable investment environment that gives an incentive to major long-term investment in new, large greenfield projects is sorely needed if Russia is to become the global energy power it has the natural endowment to be," Jaffe said. This applies not just to American investment in Russia but also to Russian businesses, she noted: "Russia's private firms will be equally tempted to invest elsewhere if Russia's investment climate does not offer stable returns." She added that virtually all seminar participants agreed that improved cooperation on energy issues is in both US and Russian interests, but differences still must be bridged for a sustained partnership to develop. Reliable supplier Helping to drive home the message that Russia wants to strengthen its energy ties to the US, Putin and Sen. Charles Schumer (D-NY) joined Lukoil Pres. Vagit Alekperov at one of the company's service stations in New York City Sept. 26. Lukoil acquired Getty Petroleum Marketing Inc. and its 1,300 gasoline stations in November 2000. The acquisition marked the first time that a Russian oil company had purchased a publicly traded company listed on the New York Stock Exchange. A Lukoil statement said the changeover to the Lukoil brand "marks the introduction of a world-class international brand providing US consumers with high-quality fuels that meet or exceed all US specifications." "This is an important occasion, not only for [Lukoil] but also for US-Russian relations as a whole," said Alekperov. Earlier in the day Putin told the NYSE his country may supply more than 10% of US oil imports within 7 years. Other relationships Russia has also made clear that it considers itself to be a key geopolitical player in energy markets and that it expects to be part of efforts to rebuild and expand Iraq's war-torn oil infrastructure. "We are interested in rebuilding infrastructure, pipelines, railroads, things like that. Our companies can be helpful," said Mikhail Margelov, chairman, Committee for Foreign Affairs Council, Russian Federation (Upper House of Russian Parliament). "Iraqi engineers know Russian engineers." Russia is one of Iraq's largest creditors, and Moscow has made clear it expects to be given some way to recoup its investments if oil deals cut under the Saddam Hussein regime are not honored. Lukoil, for example, still wants to develop Iraq's West Qurna oil field, estimated to contain 15 billion bbl. Russia is also working to repair a neglected relationship with Saudi Arabia, Margelov told investors at the Eurasia conference. The two countries on Sept. 3 announced a 5-year oil and natural gas cooperation agreement that the Russians said could lead to deals totaling as much as $25 billion, notably investments in Russia's oil and gas sector (Market Hotline, OGJ Online, Sept. 5, 2003). But it is too soon to say whether that means Russian and Saudi energy interests want to cut any specific deals. "There is a long distance between declaration and investment," Margelov said. The two countries also agreed last month to "maintain stability in the global oil market," but Russia did not agree to cut production in line with Nov. 1 quota cuts agreed to by the Organization of Petroleum Exporting Countries at its Sept. 24 ministerial meeting in Vienna. Find this article at: http://ogj.pennnet.com/articles/web_article_display.cfm?ARTICLE_ID=188635