State-Sponsored Robberies

Two decades of Pax Americana are coming to a screeching hold. Starting with Ronald Reagan, the end of the Cold War and the collapse of the Soviet Union and its empire, the world was supposed to enter a new era of democracy, freedom and free enterprise, as far away from what everybody thought was the stifling state control.

Fat chance.

What started it all were very low oil prices, precipitated by Ronald Reagan in the mid 1980’s by persuading Saudi Arabia to flood the market. This caused the internal fractures of the Soviet Union, whose economy was then entirely dependent on oil and gas for any hard currency, to crash. The same oil and gas prices have now made a full circle, giving Russia and others, a newly found bravado, enough to again cover their other deficiencies.

It is also a historical characteristic of the West, headed by the United States, to take a lot longer to understand the emerging threat to its economy and power. In a bygone era, recent actions by Russia and others such as Venezuela, would bring out a lot more dynamic responses.

The signs of trouble are everywhere. Just last week, BP was the latest victim of Russian sponsored robbery en route to complete control of oil resources, that Boris Yeltsin, a decade ago, auctioned off, in need of any cash he could get his hands on.

The only reason why BP ever started its multibillion dollar joint venture with Russia’s Tyumen Oil Company (TNK) disappeared unceremoniously. The company thought that by partnering up with a local company, by becoming a good Russian corporate citizen and not British would be shielded by the vulture-like appetite of the Vladimir Putin government, feasting at the carcass of private energy companies.

No such luck and for most seasoned observers of Russian energy it was not really surprising. TNK-BP lost decisively its uneven battle with Gazprom, Russia’s gas monopoly and the battering ram of Putin’s assault, for control of the Kovykta field in East Siberia. The field is the largest proven natural gas reservoir in Russia with more than 2 trillion cubic meters (70 Tcf) of reserves. Conservatively worth in the tens of billions of dollars, the field was taken over by Gazprom for an unconfirmed $600 million. TNK-BP owned 62.8 percent in Rusia Petroleum, until now the operator of the Kovykta license.

The event did not lack symbolism and the connections were not hard to make, happening during the state visit in Moscow by Venezuelan firebrand Hugo Ch??¡vez. Both Russia and Venezuela, riding sky-high oil price, under Putin and Ch??¡vez are usurping in not so subtle ways their indigenous energy companies and, as of late, the largest multinational oil companies. Just exactly at the time of the BP “transaction” two of America’s largest companies, ExxonMobil and ConocoPhillips, announced their unwillingness to play along with Ch??¡vez recent re-nationalization. Their exit from Venezuela is all but assured.

Just a few weeks ago, another giant oil company, Shell lost its stake in the massive Sakhalin-2 project after investing billions of dollars in exploration and early stages, the most critical parts of the project. ExxonMobil is not far behind, really the only major foreign oil company still in control of a Russian energy project. They are under enormous risk of losing their share in Sakhalin-1 project.

The Kovykta case is so bizarre that even the fig leaves were done away with.

Obtained in 1997, the license for the Kovykta field obligated the operator to produce as much as 9 billion cubic meters a year to supply gas to the local settlements in the Irkutsk region. Originally, Sidanko, under a joint venture between Sidanko and BP and eventually TNK-BP made a lot of efforts to get the giant gas project up and running. But their failure was custom-built in the project plan from the start. Any company which would have started producing the entire 9 billion cubic meters in the area would be bound to cut back the production, because the entire Irkutsk region and the neighboring regions could not even come close to absorb so much gas. Besides, any gas produced for that market would replace the entire coal production in the region, which is one of the largest employers. It was doomed.

The only way for the project to have a go would be to export gas from Kovykta to China, an obviously hungry and imposing market but this could not happen without the building of a pipeline. Such construction, involving several thousand miles of pipeline would not be cheap even in the best of circumstances. But more to the point, export of Russian gas is, under the monopoly of, guess who, Gazprom.

Although the Putin administration at various instances talked about the possibility, Gazprom, sensing the obvious, was not nearly inclined to build such pipeline to give TNK-BP a venue. Instead, Gazprom was intentionally withholding any pipeline construction until “at least 2010”. So, in perhaps the most obvious Catch-22 in recent business memory, there was no way for TNK-BP to meet its license commitments.

As if the entire situation was not dire enough, a new Russian weapon was unleashed on the company, exactly as was used on Shell in the Sakhalin-2 project. Russian environmental watchdog agencies, as preposterous as that may sound, and special prosecutors opened a series of investigations. Among others, a new theory was offered according to which the Kovykta was the world’s largest pool of Helium (!). Rusia Petroleum was cited as severely violating its license commitments for not producing what it promised and the Ministry of Natural Resources threatened to retrieve the license. Top level negotiations between President Putin and ex-BP CEO John Brown, to resolve the impasse failed. Soon after the resignation of Brown many felt that the days of the Kovykta in TNK-BP’s hands were numbered.

Once the inevitable was forthcoming, attempts by TNK-BP to sell part of its stake to Gazprom were not even considered. Gazprom wanted to have it all and could. The pay was a paltry $600 to $900 million for 62.8% share in the project. The exact amount of the deal is still not clear. Miraculously, the day following the announcement the Russian deputy minister of Natural Resources said that his ministry no longer planned to recall the Kovykta license. Not convincingly to anybody, BP tried to put on the best possible face, saying that it gave up the battle and “looks forward” for “future cooperation” with Gazprom on other projects.