On July 13, Gazprom, the Russian state-controlled gas company, and Total, the French oil and gas major, announced they had signed an agreement to co-operate in developing the Shtokman gas field in the Russian waters of the Barents sea.
Some have seen in the deal a victory for Europe over the US, as the gas from Shtokman will be shipped to the continent through the North Stream pipeline instead of to North America as liquefied natural gas, as originally planned by Gazprom. This is an illusion. First, what is known of the deal shows that the first phase will feed both pipeline and LNG exports. Second, the gas market is rapidly globalising as the LNG trade expands, contracts become more flexible and arbitrage possibilities emerge between once isolated regional markets. More Russian gas piped to Europe means less competition between Europe and North America for LNG from the Atlantic basin and the Middle East.
The importance of the deal lies elsewhere. Shtokman is the first significant deal in Russia by a foreign company since President Vladimir Putin brought the era of privatisation and openness to an abrupt close, and launched a systematic campaign to reassert government control on the oil and gas industry. Total announced the deal just days after BP had to accept de-facto expropriation of a large undeveloped Siberian gas field owned by TNK-BP, the joint venture controlled by the British major.
At the end of 2006, Shell conceded defeat in similar circumstances, accepting transfer of control of its giant Sakhalin II project to Gazprom after months of political pressure. In this context, the Total deal appears a major strategic achievement. The significance of the deal goes beyond its impact on Total’s reserves and production profile. It shows that, for all their obsession with control over strategic energy resources, the Russian government and Gazprom are also interested in getting the molecules out of the ground and onto the international market.
Beyond Russia, the Shtokman deal may convince Iran that it is possible to co-operate with oil majors on very large projects without losing control. If that happens, Shtokman could retrospectively be seen as the beginning of a new era, comparable to the emergence of the “50/50” formula in Venezuela, or the signing of the first production-sharing agreement in Indonesia, both in the 1950s.
The Total-Gazprom deal also deflates the idea that international oil companies (IOCs) tend to become redundant in a world of rising national oil companies (NOCs). The large majority of the NOCs are not “rising” at all and some – such as Venezuela’s PDVSA – are in fact sinking. Aggressive new entrants like the Chinese oil companies do not provide resource-holder governments with a credible alternative to working with IOCs.
What is new is the increasing difficulty IOCs have in replacing their reserves in countries where there is no government monopoly over exploration and production. Accordingly, the economic and geopolitical value of the control that NOCs exert on their reserves is increasing. But to develop these reserves, IOCs still present resource-owner governments with unmatched capabilities, especially for large, technologically challenging projects. Gazprom cannot develop Shtokman on its own. There was no alternative to choosing a partner among the IOCs, apart from leaving the gas in the ground.
Shtokman also illustrates the new environment in which global oil companies compete for access to resources. In a world of empowered resource-holder governments and high oil prices, contractual arrangements have to accommodate governments’ economic, political and increasingly symbolic demands.
The emphasis on stability and investor’s rights protection, typical of the 1980s and 1990s, has to give way to a new equilibrium between the economics of the project and the government’s demand for retaining “full control”. In the Shtokman deal, the license is fully owned by Gazprom but Total has 25 per cent of a distinct company that owns and operates the infrastructure (itself under contract with the license-owner). One could argue that exactly the same distribution of risks, costs and control could have been achieved under traditional contractual terms and that the difference is purely symbolic. But that is precisely the point: in the new era, the most difficult barriers to accessing NOC-controlled reserves are symbolic, and accommodating symbolic demands without destroying the economics of a project is the name of the game. Because it has managed to build a strong reputation as a company that respects and understands resource-holder governments, Total may well have an edge over its peer competitors.
(A slightly different version of this article was published by the Financial Times on 10th August 2007)