07MOSCOW980, RUSSIAN ENERGY: PROSPECTS FOR DEALS IN THE SECTOR

WikiLeaks Link

To understand the justification used for the classification of each cable, please use this WikiSource article as reference.
Discussing cables
If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #07MOSCOW980.
Reference ID Created Released Classification Origin
07MOSCOW980 2007-03-09 03:55 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO0448
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0980/01 0680355
ZNY CCCCC ZZH
O 090355Z MAR 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8059
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000980 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR DAS KRAMER AND EUR/RUS WARLICK 
DEPT FOR EB DAS SIMONS AND EB/ESC/IEC GALLOGLY/GARVERICK 
DOE FOR HARBERT/EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR KLECHESKI AND MCKIBBEN 
 
E.O. 12958: DECL: 03/07/2017 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: PROSPECTS FOR DEALS IN THE SECTOR 
 
REF: A. 03/05/07 GUHA - EMBASSY MOSCOW EMAIL 
 
     B. MOSCOW 875 
 
Classified By: Amb. William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) Summary.  Despite increased GOR control over the 
sector, U.S. majors are involved in several high-profile 
deals and below-the-radar deals are becoming more common as 
well.  Russia will need western expertise -- most urgently on 
the gas side -- as it moves to exploit the offshore and the 
eastern half of the country.  Shtokman is once again in play 
as well.  The way forward will be bumpy, of course -- CPC 
expansion remains elusive and Gazprom's muscling into 
Sakhalin-2 worried many.  Nevertheless, our companies tell us 
that they can work within the new "rules" governing the 
sector -- minority stakes with Gazprom or Rosneft holding the 
keys to the kingdom.  They note that Russia is a long-term 
play and they believe patience will pay off.  End Summary 
. 
MORE THAN A TOEHOLD 
------------------- 
. 
2. (C) While certainly not fulfilling the promise that 
existed just four years ago, foreign investment in the 
Russian energy sector is still significant.  All three U.S. 
majors have made or inked sizable investments here.  The two 
billion dollars ExxonMobil put into Sakhalin-1 brought the 
company to its targeted 250,000 b/d two months ago.  (NB: 
This project accounts for nearly all of the increase in 
Russian oil output in recent months.)  Chevron says its 
recently signed JV with GazpromNeft is doing well and that 
they intend to partner on more than just the current one or 
two licenses in West Siberia.  ConocoPhillips has by now 
invested $8 billion in Lukoil.  The two companies' JV is also 
quite active in the Timan-Pechora region and is looking to 
expand refining and third country cooperation.  Smaller 
companies like Amerada Hess (with an active and growing 
investment) and Harvest Natural Resources (with a putative 
gas deal in the offing) are finding that working 
"below-the-radar" pays off. 
. 
THE FUTURE 
---------- 
. 
3. (C) Russia presents an opportunity for our companies as 
the country struggles to find new sources of gas (Ref B). 
Gazprom is already relying more heavily on independent gas 
producers and Russian oil companies' to meet demand, and 
foreign companies are being brought into the mix as well. 
The planned Harvest deal, which involves providing gas to an 
area near Volgograd, may be a model for future western 
participation in Russian domestic gas supply.  Gazprom has 
also acknowledged that it needs Shell's expertise in Sakhalin 
2 and western technology in the offshore. 
 
4. (C) The same promise holds true on the oil side because of 
the uninviting geography -- and consequent high capital costs 
-- of some of the newest basins in East Siberia and offshore. 
 Often lost in the shuffle is the land-office business 
service companies like Halliburton and Schlumberger are doing 
here.  They will likely be among the main beneficiaries of 
Russia's foray into regions that require ever more 
sophisticated recovery techniques.  Growing production is 
still state policy, and by continuing to fiddle with 
improvements to taxation, licensing, and transportation 
routes the GOR may at least keep enough in investment 
pipeline to prevent oil production from falling -- and as 
long as investment flows, our service companies stand to 
benefit. 
. 
SHTOKMAN IS BACK 
----------------- 
. 
5. (C) Shtokman appears to have resurfaced within Gazprom as 
an urgent priority.  Chevron's Russia chief Ian MacDonald 
told EUR/RUS (Ref A) that Gazprom invited the "short-list" 
companies to bid by April 1 on a re-vamped project to develop 
Shtokman.  ConocoPhillips' CEO Mulva confirmed to the 
Ambassador March 7 that they had received a similar 
invitation.  Gazprom intends to announce the composition of 
the consortium as early as May 1.  The field would initially 
produce 23 bcm/year, with half of the flow going into the 
Nord Stream pipeline to Germany and the other half to an LNG 
 
MOSCOW 00000980  002 OF 002 
 
 
facility in Murmansk.  Companies complain that the structure 
of the deal leaves them with significant price and corporate 
management risks, and both firms will decide whether to bid 
over the next week.  Mulva told the Ambassador Gazprom is 
negotiating much more professionally this time around and 
offering terms much like a PSA that will result in some 
version of "bookable" value. 
. 
PROBLEMS REMAIN 
--------------- 
. 
6. (C) Concerns, of course, persist about doing business 
here.  The stalled negotiations over
CPC expansion shows how 
entrenched interests can affect important projects.  Shell's 
run-in with Gazprom on Sakhalin-2, especially the use of 
environmental regulations to muscle the Russian firm into the 
project, is the other prominent example in the energy sector. 
 Further, the long-stalled Subsoil Law (both a new law and 
amendments to the existing one) mean that Russia is no closer 
to creating something that resembles a clarified and 
graft-free licensing regime.  High tax rates on oil (in the 
face of climbing costs) have led many companies to pour money 
into refining instead of upstream growth. 
. 
STILL IN IT FOR THE LONG HAUL 
----------------------------- 
. 
7. (C) Nevertheless, company reps consistently tell us that 
they are here for the long-haul and are willing to play under 
the Russian "ground rules."  They know that they will be 
consigned to a minority stake (albeit in huge projects) but 
are comfortable with that as long as they have a check on 
important corporate governance decisions such as budgeting 
and contracting.  Some have told us that the Russians seem 
willing to allow such a "dual key" system as long as the 
Russian company "owns/controls" the reserves.  Also, they 
also recognize that either Gazprom or Rosneft are the 
gatekeepers to the sector now and all are actively 
cultivating these two state-controlled companies. 
. 
COMMENT 
------- 
. 
8. (C) Patience and perseverance are the watchwords for our 
companies.  They recognize that Russia is a long-term play 
and one that cannot be ignored.  Some companies have decided 
to fly under the radar (Amerada, Harvest, and likely others 
soon), while others (the supermajors) have adjusted to the 
new realities of doing big deals here.  The Russian oil and 
gas sector will need tens of billions of dollars over the 
next decades (some have estimated it at $150-200 billion). 
Our companies are banking on the fact that the GOR and the 
Russian industry will, in time, realize that it simply does 
not have that kind of capital and certainly does not have the 
project management skills to take on what are sure to be some 
of the most difficult development projects anywhere.  Making 
our companies the partners of choice will require our 
continued efforts to encourage an environment in which deals 
can flourish and in which western business best practices and 
ethos slowly permeate Russia. 
BURNS

Wikileaks

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: