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. Last Updated: 07/27/2016

The State Has Spoken

bloombergAn all-terrain vehicle passing an oil storage tank at Rosneft's Vankor field. Acquisitions from Yukos allowed Rosneft to jump from being the eighth-biggest oil firm to the largest in less than three years.
As a Kremlin official and doctoral candidate in 1997, President Vladimir Putin crafted a strategy to rebuild the country's global power through state control of its natural resources.

A decade later, the Russian president can look back on a second term marked by high oil prices and a significantly boosted state presence as he prepares to leave office in March 2008.

"It's more than just high oil prices -- it's a true part of the government's belief system," said Clifford Kupchan, a senior analyst at Eurasia Group, a political risk consultancy.

The sale on Friday to Gazprom of TNK-BP's 63 percent stake in Kovykta after the Natural Resources Ministry's repeated threats to withdraw its license to develop the field marked the latest state entry into a once private and largely foreign-run project.

The sale, at a knockdown price of $700 million to $900 million, transfers a key field in the potentially lucrative East Siberia region into the hands of the state-run gas monopoly, which is already the world's largest gas producer by far.


Ivan Zhuravlyov / Itar-Tass
Rosneft CEO Sergei Bogdanchikov
With an estimated 1.9 trillion cubic meters of gas, Kovykta has about the same reserves as Canada, the world's third-largest gas producer.

The long-awaited sale seals what analysts call the rules of the game, giving state-linked companies a majority stake in all major oil and gas projects.

"It's the reestablishment of a balance that became distorted in the 1990s," said Joseph Stanislaw, an independent adviser to Deloitte & Touche. "They're re-establishing the game under clearly Russian government-led rules."

Putin has criticized the 1990s as an era in which foreign and private Russian companies illegally acquired key assets on the cheap.

The legal onslaught against Mikhail Khodorkovsky's Yukos empire, started in 2003 and concluded just last month with the final auction of the bankrupt company's assets, was the beginning of the Kremlin's strategy.

All three of Yukos' main oil production units -- Yuganskneftegaz, Tomskneft and Samaraneftegaz -- landed in the hands of state-controlled Rosneft through auctions that critics say were highly orchestrated.


Alexander Natruskin / Reuters
Germans and Russians signing a segment of the Nord Stream pipeline in 2005.
Those acquisitions allowed the firm, chaired by Kremlin deputy chief of staff Igor Sechin, to jump from being the country's eighth-biggest oil firm to the largest in less than three years.

The company acquired Yuganskneftegaz for $9.4 billion via a forced auction in December 2004, tripling its production overnight. It paid a further $13.2 billion for Samaraneftegaz and Tomskneft at auctions earlier this month, bringing its production to 2.1 billion barrels per day.

The sale of Yuganskneftegaz transferred about 11 percent of the country's oil output into state hands. The state's share rose even further in September 2005, when Gazprom bought Sibneft, now called Gazprom Neft, from Roman Abramovich for $13.1 billion.

Gazprom, meanwhile, has also benefited from a second branch of the approach, as the Kremlin seeks to renegotiate the status of foreign oil firms in the country.


Mikhail Fomichyov / ITAR-TASS
Gazprom CEO Alexei Miller
In October, the gas monopoly said it would retain 100 percent ownership of Shtokman, a giant undeveloped gas field above the Arctic Circle, after years of negotiations with potential foreign partners.

Two months later it bought a 51 percent stake in Sakhalin-2, after months of pressure from environmental authorities against project leader Shell that mirrored TNK-BP's experience at Kovykta.

"One of the areas that has given rise to a lot of confusion and risk perception is that the government very rarely, if ever, clearly states what its strategy is," said Chris Weafer, chief strategist at Alfa Bank. "It's made the strategy clear instead after a series of events that fit a certain pattern."

The State Duma is expected to debate a new subsoil law limiting foreign investment in so-called strategic sectors to 49 percent by the end of the year.

With oil prices hovering between $60 and $70 per barrel, the country fits into a larger trend of resource nationalism around the world not seen on such a scale since countries around the Middle East booted out mainly American and British firms in the middle of the last century.

"The difference between the OPEC countries and Russia is Russia wants to have a much greater global presence in energy, including a greater role for both Rosneft and Gazprom, whereas the OPEC countries just wanted to control domestic production and exports," Weafer said.

He said he expected the state to maintain 51 percent of all major oil and gas projects, while the remaining 49 percent would likely be split between several, often foreign, companies, with a globally integrated firm such as BP or Shell exercising operational control.

"To play according to the rules of the country you're operating in, whether you like them or not, is important," Stanislaw said.

Beyond the headlines about Kovykta and Sakhalin-2, the state has grabbed ever more control of energy projects through quieter joint ventures often led by Gazprom's oil arm, Gazprom Neft.

Last week, Gazprom Neft president Alexander Dyukov said the firm would raise its stake in a joint venture with U.S. oil major Chevron to 75 percent later this year.

Gazprom Neft currently holds 30 percent of the Northern Taiga Neftegas venture, set up late last year aim of exploring reserves in western Siberia. The original agreement called for Gazprom Neft to eventually boost its stake to 50 percent.

In May, Gazprom Neft set up a joint venture with privately held LUKoil to develop new projects in Russia and abroad. Yet U.S. major ConocoPhillips, which holds a 20 percent stake in LUKoil, may be excluded from the venture.

"We can't say for sure that Conoco will take part," said LUKoil spokesman Vladimir Semakov. "Only time will tell."

Analysts say several energy projects likely remain to be renegotiated before the state is satisfied with its hold over the sector.

The market has long swirled with speculation that Surgutneftegaz, sitting on a $16 billion cash pile, is ripe for takeover. And the state has expressed its displeasure with the ExxonMobil-led Sakhalin-1 project, in which Rosneft maintains a minority 20 percent stake.

And changes could still be in store for TNK-BP. Gazprom has said it would be keen to buy out the company's three Russian shareholders -- Mikhail Fridman's Alfa Group, Viktor Vekselberg's Renova and Len Blavatnik's Access Industries, who together hold 50 percent of TNK-BP -- when their option to sell opens at the end of this year.

TNK-BP and BP both deny any talks are going on.

Any such sale would also boost Gazprom's share in small oil concern Slavneft to a controlling stake. Gazprom's acquisition of Sibneft handed it 50 percent of shares in Slavneft, with the other 50 percent held by TNK-BP.

"There is no question that a higher [oil] price makes the government feel more comfortable, more powerful," Stanislaw said. "[But higher oil prices] have accelerated a process that would have happened anyhow."