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Kremlin reasserts control of oil, gas

Russia, the world's second-largest oil producer, sees energy as a key foreign policy tool.

By Correspondent of The Christian Science Monitor / December 28, 2005


Call it PetroKremlin. A vast state-run energy conglomerate has been assembled over the past year, some experts say, to fuel Russia's bid to revive Soviet-style great power status.

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To date, the Kremlin has effectively renationalized almost a third of the formerly private oil-and-gas sector. Other developments also point to growing state ambitions:

• A $15-billion Siberian pipeline, due to begin pumping in 2008, will shift Russian crude exports to Asia, particularly China, where Moscow is cultivating fresh strategic relationships.

• A 737-mile gas line being laid under the Baltic Sea will cut out middlemen Ukraine and Poland, whose relations with Moscow have recently soured, while locking in Russia as Western Europe's key energy supplier.

• State-run Gazprom has teamed up with several foreign partners to develop a vast Barents Sea gas field whose production, converted to liquefied natural gas (LNG), could begin supplying the US market by 2010.

• A long-delayed law on subsoil resources, to be passed by the Duma next year, is expected to ban foreign-owned companies from exploring or developing Russian oil fields and other key mineral resources.

"Amazing changes are happening swiftly, because Putin has understood that energy is Russia's key card to play at the international table," says Michael Heath, a political analyst with Aton, a Russian brokerage. "Instead of the military force the Soviet Union used to project its power, Russia is using oil as a major tool of foreign policy."

Russia is the world's second-largest producer of petroleum - about 8 million barrels of crude per day - which accounts for nearly 40 percent of the country's GDP. Spiking global oil prices over the past five years have wafted state budgets into the black, fueled a modest economic boom, and enabled the Central Bank to rack up reserves of $170 billion.

But far beyond taxing windfall energy profits, the Kremlin has moved to take over the industry. Russia's third-largest oil firm, Yukos, was dismantled in parallel with the prosecution of its politically defiant owner, Mikhail Khodorkovsky, and its main production units gobbled up by the state oil company Rosneft. Earlier this year, the government took a controlling 51 percent stake in Gazprom, the natural-gas giant that holds a quarter of the world's reserves, and Gazprom paid $13 billion to purchase Russia's fifth-largest oil company, Sibneft.

Sibneft, now effectively state-owned, moved this month to purchase a 25 percent stake in the huge Lopukhov oil field, on Russia's Pacific coast, formerly held by TNK-BP, a Russian-British joint venture.

"Now the state directly controls about 30 percent of petroleum production in Russia and the big question is, how much more will it take?" says Valery Nesterov, an energy expert with Troika Dialogue, a Russian investment bank. "This is a big cause of concern for Russian and foreign oil investors."

In the short run, the Kremlin's oil grab may have damaged Russia's energy prospects, Mr. Nesterov says. Growth in oil production has plunged from an average 9 percent in Putin's early years to just 3 percent this year. Exploration has virtually ground to a halt, as both foreign and domestic investors wait to see what the new rules of the game will be. Inner-Kremlin squabbling appears to have halted a planned merger between Gazprom and Rosneft that would have created a gargantuan state-run petroleum conglomerate.

Tightened state control could prove good news for foreign investors who want a piece of Russia's oil pie but don't insist on controlling rights. Up to 49 percent of Rosneft may soon be sold to outside investors, to raise cash to repay $7.5 billion the state borrowed to acquire a majority stake in Gazprom. Curbs on foreigners seeking to buy shares in Gazprom will also soon be lifted, experts say.

"The new rule is that not less than 50 percent must belong to the state," says Nikolai Nikitin, editor of Neftegazovaya Vertikal, a Russian petroleum industry journal. "No longer will private companies be allowed to get fat from Russia's mineral resources."