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Invisiblezorbman
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Putin cronyism shrinking Russia's oil and gas output
    #7480664 - 10/03/07 11:49 AM (16 years, 3 months ago)

Warning on output levels
By Catherine Belton

Published: October 2, 2007

Soon after Gazprom finally announced this summer that it had chosen France's Total as a foreign partner to help develop the vast Shtokman gas field, the Russian gas giant chose a St Petersburg shipyard, owned by the son of a businessman close to President Vladimir Putin, to supply rigs.

Gazprom denies its decision on the $2.3bn contract had anything to do with the Vyborg plant's ownership. But critics say giving the contract to a yard that had been at a standstill for 10 years was typical of a growing trend in Russian oil and gas, in which most significant assets - and deals - are concentrated in the hands of a small group of officials close to the president.

Russia's energy sector in the past seven years has undergone a massive transformation from its diverse and largely private ownership under President Boris Yeltsin in the 1990s in the hands of competing "oligarchs".

"This is Mr Putin's personal sphere," says Vladimir Milov, head of Moscow's Institute of Energy Policy.

While Rosneft, Russia's number one oil major, is chaired by Mr Putin's deputy chief of staff, Igor Sechin, the country's gas monopoly Gazprom is chaired by another Putin ally from St Petersburg, Dmitry Medvedev, first deputy prime minister.

Oil and gas has been the source of Russia's unprecedented wealth under Mr Putin. But analysts warn that output growth is slowing.

Giving the contract to the Vyborg plant did not bode well for the likely speed of development of the longdelayed Shtokman field, which is crucial for supplying future European energy needs, says Mr Milov.

"The big projects are getting pushed back more and more," says Frank Kuijlaars, head of oil and gas at ABN Amro, a leading lender in Russia's oil and gas sector, in particular to Rosneft.

Even the oil men most loyal to the Kremlin are warning against the state's growing role. Last week, Vladimir Bogdanov, president of Russia's number 4 oil major Surgutneftegaz, warned "monopolism" by the state would lead to a fall in production, while Lukoil president Vagit Alekperov earlier expressed his concern at the state' growing might.

Bankers and analysts, however, predict that state-run companies are set to make further private-sector takeovers in coming months. Rosneft is believed to be eyeing Surgutneftegas, though both companies deny that a deal is under way. Gazprom, meanwhile, is still negotiating to buy out the Russian billionaire owners of TNK- BP, the oil venture with BP.

In the oil sector, output growth was only 2.8 per in 2005, and 2.2 percent in 2006, compared with an average 8.5 percent between 2000 and 2004,

The International Energy Agency says it will see only "restricted" growth because of the uncertain investment climate. Gas production is already declining.

Russia's high energy taxes are exacerbating the slowdown, analysts say. Russian oil companies do not see any of the windfall gains from $80 oil prices because state taxes take any revenues higher than $27 per barrel.

Leonid Fedun, vice-president of privately owned Lukoil, warned at an investment conference this year that insufficient investment could lead to a shortage of oil in Russia in a few years.

He said at least $300bn of investment was required even to keep Russia's oil production at existing levels over the next eight to nine years. Existing fields in western Siberia are starting to peter out and development of new oil provinces in remote regions such as east Siberia and the Arctic is becoming necessary.

"It is very possible we will see a fall in production if we don't see a change in the tax burden," said Ivan Mazalov, a fund manager at Prosperity Capital Management

But the redistribution of property in the sector is the single most important factor holding back growth, Mr Milov contends. "Funds are being used to finance these deals and not to develop western and eastern Siberia," Mr Milov said.

State-run Rosneft has taken on $22bn in debt to finance its takeover of Yukos, once the nation's biggest oil producer, sold off in a series of forced bankruptcy auctions this year.

Gazprom meanwhile announced it was cutting capital expenditure next year, by 11 per cent to $12.3bn, while raising long- term financial investments to $17.1bn. This is to fund a spending spree that has seen it expand into the electricity sector, nuclear energy and take over TNK-BP's flagship Kovykta gas field this summer and Shell's operations at Sakhalin-2. And the development of big gas fields at Shtokman, the Yamal Peninsula and Sakhalin-1, 3 and 4 are all being delayed.

The trend of further state consolidation and high tax take is likely to continue. Viktor Zubkov, Russia's new prime minister, pledged last month to raise more government cash from natural resources. And Mr Putin's energy policies are unlikely to be much affected by the arrival of a new president.

"Putin after 2008 will still lead the oil and gas sector," says Mr Milov. "Very little will change."

Copyright The Financial Times Limited 2007

http://www.ft.com/cms/s/0/deb091cc-7082-11dc-a6d1-0000779fd2ac.html


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“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”  -- Rudiger Dornbusch


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