Russia Woos East and West in Oil Rush

LONDON, 5 October 2003 — Old enemies are learning to love each other as they recognize their mutual economic interests

The US is hugging the Russian Bear pretty tightly these days. ExxonMobil’s rumored $40 billion play for more than 40 percent of Yukos-Sibneft, Russia’s number one oil company, is only the most high-profile example.

Just a week earlier, President Vladimir Putin took an armada of top oil executives to the US. In New York, Vagit Alekperov, head of Lukoil, opened a rebranded petrol station to show off Russia’s keenness to fill the gas tanks of middle America’s sports trucks. His charm offensive was not unconnected to lingering hopes that the US-backed administration in Iraq would honor Lukoil’s claim to the 15 billion-barrel field at West Qurna.

Back in Moscow last Thursday and Friday, the Russians hosted US Big Oil at the World Economic Forum. Lee Raymond, chief executive of ExxonMobil, the world’s biggest oil company, was a witness at the wedding of Yukos to Sibneft, creating the fourth-largest oil company in the world (a quarter-owned by Chelsea owner Roman Abramovich), behind Exxon, BP and Shell. It will have annual revenues of $5 billion, a market value of $35 billion and daily oil output expected at 2.06 million barrels.

Mikhail Khodorkovsky, CEO of Yukos, told the Forum that Russian oil was expensive because of huge transportation costs. “We are still awaiting construction of trunk pipelines. Once this is in place, our next challenge will be the global markets.” By happy coincidence, less than a fortnight ago, leading Exxon executives attended the St. Petersburg US-Russia Energy conference that sought to marry US expertise on ports, pipelines and transportation to Russia’s resources.

Market sources in Moscow and London put Exxon at the head of a fight with US rivals ChevronTexaco for the newly merged Russian major.

The friendship between the old Cold War enemies is flowering in many ways. And it’s no coincidence that it comes within days of the Organization of Petroleum Exporting Countries’ muscle-flexing, with the surprise cut in oil production keeping crude prices high. Russia is large enough to keep OPEC in check and to help fulfill the US strategy of diversifying away from Middle Eastern oil suppliers.

Veteran Russian analysts think the US corporate interest reflects something far simpler. “The majors are going for Russian oil because they can’t really get access to Middle Eastern reserves,” says Stephen O’Sullivan, head of research for United Financial Group in Moscow. Even in US-occupied Iraq, authorities have not opened oil to external ownership.

Exxon’s Raymond said Russia needed to free all restrictions on foreign investment. “If you expect to have a transparent economic system and expect to participate in world markets ... you do not restrict the flow of capital and you do not restrict arbitrarily people who can participate in the flow of capital,” he told his Russian audience last Friday.

Russia’s estimated 150 billion barrels of reserves are open to foreign investment. But there remains a risk of political interference. Leading Moscow bankers believe that the Kremlin does not object to foreign investors, as they are easier to control than the oligarchs.