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. Last Updated: 07/27/2016

Western Eyes On Putin

Ten years ago Russia was the place to be for foreign oil companies. By the end of the 1980s, most of the world's proven oil fields had been snapped up. Oil majors sat up with a start when the Soviet Union's demise opened up the prospect of tapping into Russia's oil fields.

A decade later, foreign oil firms have little to show for the $5 billion that brokerage United Financial Group estimates they have invested here.

"I don't think Russia gets a very favorable showing in the boardrooms of the world," says Stephen O'Sullivan, oil analyst with UFG. "After 10 years in Russia they realize what a tough place it is to do business and earn money."

However, oil executives are hopeful that President Vladimir Putin will reduce the risks of doing business here. They are also excited at the prospect that long-awaited legislation on Production Sharing Agreements — which would grant tax breaks to particular projects — is inching toward realization.

"In the whole, there are indications that the investment climate is heading in the right direction," says Maxim Shoob, public and government relations manager at Shell Exploration and Production Services in Moscow. "We do believe that the new government is eager to take the steps necessary [to that end]."

Oil giant Royal Dutch/Shell, of which Shell Exploration and Production Services is a subsidiary, earlier this month raised its investment in the oil sector. The company snapped up a 37.5 percent stake in the far eastern Sakhalin 2 oil and gas exploration project from U.S. firm Marathon Oil Co., increasing its stake to 62.5 percent. The deal is worth an estimated $300 million to $400 million and will require Shell to invest some $6 billion.

Excluding Sakhalin 2, Shell has invested just over $500 million into upstream operations in Russia, Shoob says.

Another large investor, BP Amoco, is cautiously upbeat even after a tough fight last year to protect its initial $571 million investment — since written down to $370 million — in oil company Sidanko.

"We are encouraged by the interest shown by the new government in attracting investment," says Howard Chase, director of external affairs at BP Amoco in Moscow. "But much of our experience has been frustrating and we continue to take a cautious view."

BP bought a 10 percent stake for $571 million in Sidanko in 1997. Sidanko was later declared bankrupt, and BP entered a bitter battle to prevent the stripping of the company's assets by Russian major Tyumen Oil Co., or TNK.

As part of Sidanko's bankruptcy proceedings, the company's main asset, oil production arm Chernogorneft, was sold for a mere $176 million auction to Tyumen Oil. BP and Tyumen entered a war of words that led to the freezing of a multimillion-dollar U.S. loan to the Russian company. Earlier this year the two sides signed a deal under which Tyumen agreed to return Chernogorneft to Sidanko at an unspecified date in exchange for a 25 percent plus one share blocking stake in Sidanko. For now, Chernogorneft remains in TNK's hands.

Analysts praise BP Amoco for not just writing off its investment in Sidanko, as it might well have been tempted to do. A number of other oil companies have paraded through Russia's doors, including Occidental Petroleum Corp., Marathon, Repson and even Amoco before its merger with BP. Many of the companies that packed up did so after proposed projects fell apart, and a handful suffered losses mounting into the millions of dollars. One major disappointment was the Timan Pechora Co., set up by Texaco, Exxon and Norway's Norsk Hydro in the early 1990s to explore the Timan region. After almost a decade and an estimated $400 million, the company got nowhere and closed up.

"Some companies have recovered from deep losses and there is a light at the end of the tunnel for them, but others that have not invested in Russia yet are not in a hurry to start investments now," said Dmitry Avdeyev, oil analyst at UFG.

Much depends on the government. Unless it convinces them to do otherwise, oil companies will go on doing what they have been doing for several years — looking for projects in countries with more workable rules.

"Russia is not the only game in town," says O'Sullivan at UFG. "Ten years ago people were looking for elephant fields, those large fields where you could find reserves, and Russia looked promising. Now with the Middle East and Latin America opening up there are opportunities in other countries."