It is a measure of how fast Russian energy is moving up Europe's political agenda that Alexei Miller, the head of Gazprom, has been invited to this weekend's meeting of European Union energy ministers in Pamplona. The ministers will want to quiz him on how far Europe can rely on Russia, the holder of a quarter of the world's gas reserves. Europe's oil majors are already clear on Russia's rising importance. On Wednesday, TotalFinaElf said it was negotiating to buy a majority stake in the licence for the Vankor field from Anglo- Siberian Oil, a small UK-listed company. It is considering investing up to $2.5bn in the west Siberian field, providing it gets a production sharing arrangement. Other oil majors are placing even bigger bets on Russia. Shell is close to finalising a $1.5bn joint venture with Gazprom on the Zapolyarnoye gas field. And BP said last week it had spent $375m to raise its stake in Sidanco and so end what had been a bitter wrangle over this medium sized Siberian oil producer with other shareholders. Lord Browne, chief executive of BP, said that the move underscored BP's “confidence in Russia and its improving business environment”. Alex Knaster, chief executive of Alfa Bank and general director of Sidanco, predicted that BP's move would “make a lot of other oil companies take notice and seriously consider a more aggressive investment policy towards Russia”. There is an eerie parallel in all this to the ill fated moves by BP and Shell only five years ago. In 1997, Shell announced a “strategic partnership” with Gazprom that evaporated in Russia's financial collapse a year later. In the same year, BP paid $484m for ten per cent in Sidanco - compared with the $375m it paid last week for an extra 15 per cent only to see most of Sidanco's assets disappear for a time into the hands of shareholders of the Tyumen Oil company (TNK). BP has made up with TNK and the two are in apparently harmonious partnership in the Kovykta gas field as well as Sidanco. But it has now acquired a blocking minority in Sidanco, 25 per cent plus one share, to prevent anyone walking off with its investment once again. One reason why big western companies are prepared to risk a return to Russia is the oil price. Diving to $10 a barrel in 1998, it climbed steadily thereafter and, despite a downward dip after September 11th, is now buoyed up by Middle East tensions. Those tensions are also a reminder to western governments and companies of the usefulness of non OPEC alternatives to Middle East oil. The Russian government and Lukoil, the largest Russian oil company, which owns the Getty chain of petrol stations in the US, have talked of increasing oil exports to the US, thereby easing its dependence on the Organisation of Petroleum Exporting Countries. But a bigger influence on western oil companies' attitudes to Russia lies in changes inside the country itself. Boris Yeltsin proved a far better destroyer of communism than architect of a stable successor regime. Vladimir Putin has introduced order and, crucially for foreign investors, bolstered property rights. The direct beneficiaries are the oligarchs who carved up the Soviet oil industry and, in the process, each other and foreign partners. “The oligarchs have been relieved of the threat of expropriation by a revanchist successor to the Yeltsin administration, and incentivised to develop their businesses,” says Stephen O'Sullivan of the Moscow based United Financial Group. With higher oil prices and better corporate governance and treatment of minority shareholders, Russia's oil barons have found they can make more money by investing in their companies and pumping oil than they did by stripping the assets and salting them away in tax havens. Indirectly, this better behaviour by the local companies inevitably benefits foreign partners. Furthermore, some large Russian investors are now ready to sell. Some that have diversified portfolios beyond the oil sector are prepared to retreat, if the price is sufficiently attractive. They include Access/Renova and Alfa, the shareholders behind TNK, which sold part of its Sidanco stake to BP last week. TNK was acquired during the later phase of state sell offs at a relatively high price. One consequence of a more stable business environment in Russia is that production-sharing arrangements (PSAs) have become less vital for western oil companies. PSAs, in which all financial arrangements are settled in advance and payable in oil, are often demanded by oil companies operating in developing countries to protect their projects from the hazards of frequent fiscal or legal changes. Unfortunately for the foreign companies, only three PSAs were fully approved in the mid 1990s before the Duma, or Russian parliament, started complaining that they gave undue preference to foreign companies. Two of them relate to consortia led by Shell and ExxonMobil that are developing the offshore Sakhalin projects in Russia's far east. Sheltered by their PSAs, the ExxonMobil group is ready to spend up to $15bn on its Sakhalin project; and the Shell consortium $9bn. The third PSA is linked to TotalFinaElf's Kharyaga project in west Siberia, a fact that smoothed the French oil major's entry into Russia. But it faces a rockier road. While there is a list of PSAs for 26 more projects, they can only be effective if they are formally exempted from the tax code. And such exemptions seem increasingly unlikely. "No one wants to create a double standard between Russian and foreign companies," says one Russian oil analyst, noting that the foreigners' case for PSAs is now weakened "because the tax legislation is proving stable". The alternative is for western companies to throw in their lot with Russian enterprises. Mikhail Khodorkovsky, head of Yukos, Russia's second biggest company, which has struck a close working relationship with TotalFinaElf, says foreign companies can do better by allying themselves in this way. Jim Henderson, a Moscow-based analyst with Renaissance Capital, says that the best way for western companies to “get access to big reserves and fields” lies through corporate alliances or equity investments, such as that of BP with Sidanco. Moscow analysts do not even rule out the possibility of a western oil major fully taking over a Russian oil company, such as TNK or Sibneft. Such a move would reflect Russia's huge untapped hydrocarbon reserves and the undervaluation, by international standards, of its oil companies. For their part, Russian companies are becoming more open to western finance and expertise as they expand abroad. In the longer run, Russia's significance to Europe and the world energy market may lie less in its oil, of which it holds five per cent of worlds known reserves, than in its gas. Russia is the Saudi Arabia of gas and may one day be Europe's prime supplier. But Russia sees the European Union's latest moves to liberalise its gas market as undermining the long-term sales contracts that have been the financial underpinning of the multi-billion-dollar pipelines carrying Siberian gas to western Europe. Gazprom in particular is angry that the EU has gone ahead with deregulation without consulting its most important outside supplier. As a result Shell has found its efforts to revive its strategic partnership with Gazprom stymied by this uncertainty about the future of long-term gas contracts. EU ministers hope to narrow their differences in discussions with Mr Miller of Gazprom in Pamplona this weekend. If Mr Putin can continue to provide fiscal and legal certainty for foreign oil companies, and if EU energy deregulators can find a way of accommodating Moscow's desire for a stable market for its gas, this should not prove another false dawn for western energy investment in Russia. Since the fall of the Berlin Wall, Europe has been trying to strike a special energy relationship with Russia. That could now be within its grasp.
As November 4 approaches (on this day, Russia and Belarus are to sign union programs), disputes between supporters and opponents of the integration become increasingly heated