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Nov 09, 2012 01:11 PM IST | Source:

Russia tightens bearhug on oil and gas

Meeting foreign experts at his Moscow residence last month, Russian president Vladimir Putin tried to distance the Kremlin from Rosneft's multibillion-dollar takeover of TNK-BP.

Meeting foreign experts at his Moscow residence last month, Russian president Vladimir Putin tried to distance the Kremlin from Rosneft's multibillion-dollar takeover of TNK-BP.

Mr Putin had "mixed feelings", he said, about a move that went against the "trend" of reducing state involvement in the economy. He had agreed largely in order to help extricate BP from a conflict with its oligarch partners that often involved "fighting with their bare hands".

Yet it strains credibility that Mr Putin would allow Russia's national oil champion to spend $55bn - half of it going to the oligarchs - simply to help a foreign investor swap a turbulent private alliance for one with state-owned Rosneft.

The suggestion that it goes against the trend is also disingenuous. Russia's government does indeed want to reduce the state's role in the economy more broadly. But the movement in the oil industry in the Putin years has been almost entirely the other way.

After a final privatisation in 2002, of Slavneft, the proportion of Russian oil output from state-controlled companies fell to 10 per cent. The Rosneft deal will take the state's share back above 50 per cent.

The acquisition fits Mr Putin's vision of Russia as an "energy superpower", and his view in a 1990s doctoral thesis that big public-private corporations exploiting its natural resources should lead Russia's economic revival.

But taking on billions of dollars in debt simply to control assets that were, despite TNK-BP's shareholder squabbles, efficient and well-managed, looks misguided when Russia faces huge investment needs to replace declining Siberian oilfields. Former finance minister Alexei Kudrin characterised the deal in a tweet this week as: "Inefficient company takes over efficient one."

The hope for Rosneft - articulated, indeed, by Mr Putin - is that BP's near-20 per cent stake and two board seats will give it scope to improve how it is run, as at TNK-BP. But it is unclear how that will work; BP had 50 per cent of the TNK venture and for four years its man, Bob Dudley, was chief executive.

The world's largest quoted oil producer will, by contrast, be headed by Igor Sechin. For all his administrative and political skills, Mr Sechin is a long-time bureaucrat with zero direct industry experience beyond previously being deputy premier responsible for energy, and chairing Rosneft's supervisory board.

The bigger danger is that a super-Rosneft unbalances and distorts Russia's oil sector. Favoured politically - though also vulnerable to being used as a political tool - it could dominate competition for everything from the best acreage to oilfield services. Experience within and outside Russia suggests the most dynamic hydrocarbon markets are those with vibrant competition between many participants.

Small companies have proven adept at squeezing the last drops out of North Sea oilfields, for example - a similar challenge to Russia's in west Siberia. They have also played a central role in the boom in shale gas, and now shale oil, in North America.

Some experts suggest Russia may have similarly vast "unconventional" reserves that could be exploited more cheaply than challenging offshore Arctic fields, if Russia created the right conditions.

Yet it is often difficult in Russia to determine whether events are being driven by ideology, or by shifts in power balances in the ruling elite - or a combination. The rise of Rosneft seems intimately linked with that of Mr Sechin personally.

Hence it already appears that Russia's energy strategy will not boil down to a clear two "pillars" - a national oil champion, Rosneft, and gas champion, Gazprom. Mr Sechin has big ambitions in gas, too. The Rosneft chief told investors in London last month the company planned to produce 100bn cubic metres of gas annually by 2020, equivalent to about a fifth of Russia's current output.

Competition to the lumbering Gazprom may be a welcome development, though not necessarily from another state-controlled group - or at the expense of Novatek, an independent producer.

Even Novatek has a friend of Mr Putin, Gennady Timchenko, as a big shareholder. But it is well-regarded by investors and appeared to be enjoying official favour in recent years as a vehicle for introducing at least some competition into the gas market. This changed last week, when Rosneft won an estimated $80bn, 25-year contract to supply gas to Inter RAO, a state power group, from 2016 - replacing Novatek, the main supplier until 2015.

Whatever is ultimately driving it, the sweeping reconsolidation of hydrocarbon assets under state control is bad news for Russia's oil industry and, by extension, its economy. The worse news is that it appears to be far from over.

Neil Buckley is the Financial Times' Eastern Europe Editor

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