On Saturday, Rosneft and BP signed an agreement to jointly explore hard-to-recover oil in Russia in the first major energy deal after the West imposed sanctions on Russia following its annexation of Crimea from Ukraine. The deal will see Rosneft holding 51 percent of the joint venture with BP owning the remaining 49 per cent.
Warnings from the US government and oil companies, advising western energy companies to boycott the St.Petersburg International Economic Forum seemed to have fallen on deaf ears with major energy players including Royal Dutch Shell, Eni, Total, ExxonMobil, and BP, all turning up to the event, which took place last week.
“Our country has a goal not only to sustain and improve positions of one of the leading energy suppliers but to become one of the leaders of starting transformation of the global energy,” Russia’s President, Vladimir Putin told the forum on Saturday.
With 285 trillion cubic feet of shale gas reserves and 75 billion barrels of shale oil (the largest deposits in the world), Russia is hoping to repeat the U.S. shale oil boom, which changed the global energy landscape and pushed other producers like Russia to forge closer business ties with Asia.
“We are clearing away the administrative barriers to [shale] exploration. This is the urgent challenge we are now facing,” said Kirill Molodtsov, the deputy energy minister.
Andrey Kuzyaev, head of Lukoil Overseas, said Russia had drifted badly and woken up to a changed world. “We’re lagging by 10 years. Our traditional reserves are being exhausted. This is the reality for our country and it’s a threat,” he told the St Petersburg Economic Forum.
As a latecomer to the shale energy party, Russia will benefit from technological advances developed by the Americans, but it lacks infrastructure, the right tax incentives, and a robust wildcat culture that drives the American shale revolution.
“In Russia a horizontal well–bore of 1.5km costs $15m to $20m (£9m to £12m). In the US the costs have gone down from $8m to $3.5m for the same length of well. It’s simply not possible to transplant technologies from the US and transport them to East Siberia or the Volga. There are no standard solutions. I hope it won’t take 20 years to fulfil the shale revolution in Russia,” Mr Kuzyaev added.
This is why Russia badly needs foreign investment that will bring the required skills and innovation to explore the country’s rich deposits. BP has experienced mixed fortunes in Russia in the past. In 2003, BP invested in TNK, forming TNK-BP, one of country’s major oil producers. However, in 2012 and 2013, TNK-BP partnership was dissolved, and BP divested its assets in Russia, with the state-run Rosneft acquiring nearly all of TNK-BP’s assets. On Saturday in St Petersburg, however, the difficult history seemed to have been forgotten.
“We are very pleased to be a part of Russian energy complex,” Bob Dudley, chief executive with BP, told the forum.
“President [Putin] has urged us today to invest into shale oil … There are so many natural resources in Russia, the openness and partnerships Russia has with companies from all over the world is a good thing for energy,” Dudley said Saturday after meeting Putin in private along with other energy executives.
Rosneft has previously also reached agreements with ExxonMobil of the U.S. and Norway’s Statoil to explore for hard-to-recover oil.
Total’s Christophe de Margerie, who signed a deal with Lukoil to explore for unconventional oil during the forum, said: “My message to Russia is simple — business as usual.”
Asked about why energy companies see it fit to conduct business with Rosneft’s chief executive Igor Sechin – a close ally of President Putin and a person targeted by U.S. sanctions – an executive from a western oil major explained: “We checked with compliance [department] all the nuances regarding Russia. What we cannot do is to deal with Sechin as an individual but we can deal with him as president of Rosneft.”
BP’s chief executive Bob Dudley was more outspoken, saying: “We work in a world today where politicians all too often only can look 18 months out before the next election, and there are countries like Russia in agreements with China that are looking out 25, 40, or even 50 years.”
“That’s what we have to do as companies. These kinds of relationships that we have with Russia and Rosneft are not transactional, they are strategic partnerships based on mutual benefit and trust,” he said.
Earlier this week, Russia signed a $400 billion gas contract with China, in a bid to secure markets for Russian gas in the wake of the Ukrainian crisis.
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