Mar. 11, 2005
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Italy's ERG and Shell to Develop LNG Terminal
Construction of the 8 bcm capacity LNG regasification terminal in Sicily is scheduled to begin in 2007 and be operational in 2010.

02.03.2005, 18:56

Roxar, TNK-BP Sign Deal
TNK-BP buys Roxar reservoir management and production optimization software for engineering R&D.;

02.03.2005, 18:45

ChevronTexaco Announces First Condensate
ChevronTexaco Corp. has announced first condensate production from the Sanha Field in Angola.

02.03.2005, 18:33

ExxonMobil Sells Sinopec Stake
ExxonMobil has completed the sale of its 3.7 percent stake in China Petroleum and Chemical Corporation(Sinopec.)

02.03.2005, 18:25

BJ Services Wins Cementing Contract
Marathon Petrolum Company has contracted with BJ Services for cementing services for a number of its wells offshore Norway.

02.03.2005, 18:19
2 March 2005 BJ Services

News archive

How does your company rate the attractiveness of the Russian market?

Not so hot!



Big Deals Spark Knock-On Effect in Direct Foreign Invesment

Ivetta Gerasimchuk

Foreign investors in the Russian oil and gas sector are no longer few and far between. Their presence is in fact very much felt. During 2004, foreign companies purchased controlling blocks of shares in a number of Russian concerns (see table, “Largest acquisitions in the Russian oil and gas industry in 2004”.) Major players such as Shell and BP – who invested in Russia years ago – are intensifying investment into their own assets in both the European and Asian parts of Russia. Oil&Gas; Eurasia quotes the official statistics in the sidebar, “Viewing Investment As A Two-Way Street”, but in Russia, official figures seldom tell the whole story. This is because a number of larger investments are registered offshore, not in Russia. Thus, Russia’s official statistics indicate that these investments contribute to the economies of the Virgin Islands and other offshore locations, though quite obviously, the investment is being put to good use in Russia.

Given this background, Russia’s Interfax news agency and the U.K.’s Royal Institute for International Affairs focused in their autumn conference in Moscow, (named appropriately, “Investing in Russia’s Future: New Markets and Opportunities”) on the following: economic logic suggests that given the growth of investment in Russia (from both foreign and domestic sources) it is time to stop discussing the necessity of investment and start discussing a much more interesting and salient point – how to channel investment flows so as to optimize their yield. Thus, the conference drew serious interest both from investors and investment projects, as well as from Russia’s federal and regional seats of power.

The conference once again underscored the theory that foreign investors (just as any investor working under market conditions) move with as herds or flocks and are easily frightened, although they also have extremely short memories. And although they prefer to nest on “islands of stability”, their natural habitat in Russia is – in the first place – within the frontiers of her oil and gas fields.

Birds of a Feather Flock Together
Conference participants asked why it is that investment in Russia is still on the rise despite the “YUKOS factor.” Three reasons were given..

First, all participants agreed that rising world oil prices were an important factor driving investment into Russia’s oil and gas sector. This is based on Russia’s enormous potential for increasing hydrocarbon production.

Second, in the past few years, Russia has become “a predictable market” across a whole host of indicators, as the EBRD’s Jean Lemierre underscored in his own presentation, saying “this is an important factor for investors, and Russia should guard this resource.” Other evidence of growing stability is Moody’s rating, which was changed to “positive” on Oct. 6, 2004.

Third, it is already quite obvious that foreign investors are paying little attention to the “YUKOS factor”. Moreover, expert opinions on the direction of the related trends seem to differ. Assistant to the Russian President, Igor Shuvalov, told the conference that however Russia comes out of the YUKOS affair, the effect will be negative effect because Russia’s image is at stake. But Russia’s former Economics Minister, Alexander Shokhin, who currently presides over the committee that co-ordinates Russia’s unions of entrepreneurs, countered that a graceful exit may be possible. As he put it, “the government, courts and companies can exit this affair in such a way as to affect a positive response from the market.” Of course successful investment depends upon the ability to risk wisely; over-caution only leads investors to miss the boat, so a short memory may be the best way forward and it won’t be surprising if in a couple of years some investors can’t remember who Mikhail Khodorkovsky is – a singer or a brand of vodka.
Aside from these three reasons, there is another factor that (while not discussed at the conference) nonetheless, carries significant weight. Specialists in economics and international relations understand well that investors exhibit a “herd mentality”. The term popped up in presentations at the European Business Club in Russia and is found in current use in economic parlance, in general. Thus, it is possible to predict that in the nearest future a chain of smaller companies will continue to follow larger players like ÂÐ, Shell, ExxonMobil, ConocoPhilips and Total, in concluding smaller investment deals.

Do Investors Need Preserves?
Considering the enormous difference in the development of various Russian regions, Russia probably seems more like an archipelago of “islands of stability” than a stable country that spans two continents. This is the metaphor – based on Shell’s Sakhalin experience – that Shell’s chief economist, Peter Cornelius,, chose as he told the conference of the need to create islands of stability across Russia. It is logical, therefore, that the more foreign investors come to Russia and the less domestic investors flee, the less the government will have a need to create “preserves” for these investors in the form of PSAs and similar protective agreements. Regional differences will never fully disappear, of course. But given the situation, the question of whether “external” investors will have rights equivalent to those of their domestic counterparts will most likely be of particular significance to foreign companies.
John Barry, president and country chairman of Shell Russia, said at the conference that foreign investors aren’t looking for privileges in Russia, “but neither do we want discrimination; it is unacceptable to have to wait for years to get licenses.” According to Barry, if Russia wants to improve its competitive position and increase its investment it will be important to create “a level playing field” for Russian and foreign investors alike. In answer to a question from OGE, Barry clarified his position, saying that he does not consider PSAs a privilege for foreign investors, as Russian companies also work under PSA conditions. Like TNK-BP, Shell also works under the national tax policy on the Salym fields and in West Siberia. PSAs, says Barry, “are a way of attracting investments to the areas that would not get it under the existing fiscal (tax regime) way. Whether they are the right way for the future is for the government to decide, because there are currently other ways for differentiating taxation.” He added that Russia needs to find reserves to replace those currently being produced. Thus, it needs to encourage investment in new areas such as the Arctic shelf, East Siberia, and Far East frontier areas, where there are no pipelines. Currently, Russia is producing faster than it is replacing reserves.

Viewing Investment as Two-Way Street
According to Russia’s Federal Statistics agency, Rosstat, direct foreign investment in Russia was $3.43 bln in the first half of 2004, or 35.3 percent more than in the same period in 2003. A total of $19 bln in foreign investment (direct, portfolio and other) flowed into Russia during the first half of 2004, representing an increase of 49.9 percent over the same period in 2003. In the period, January-June 2004, the largest chunk of foreign money was invested in the industrial sector, which accounted for 54 percent of all investment. In the first six months of this year, industrial investment reached $10.25 bln, exceeding by 2.4 times the figures posted in the same period in 2003. Within this investment volume, the investment into the fuel sector grew by a factor of over five times. As a result, its share in total industrial investment increased from 24.3 percent in the first half of 2003 to 52 percent in the first half of 2004. It is notable that investment into oil and gas production under the Sakhalin-I and especially the Sakhalin-II projects in 2003-2004 have changed the regional structure of foreign investment in Russia, with Sakhalin now coming in third place after Moscow and the Moscow region.
At the same time, the flow of capital out of Russia also increased in 2004. According to federal statistics, in the first half of 2004, capital flow out of Russia was $15.3 bln, or 56.9 percent more than in the same period for 2003. Russia’s largest investment is in the U.K. at $6.04 bln, followed by the United States – $1.33 bln, Cyprus – $1 bln and the Virgin Islands – $520 mln.

Linking the Islands of Opportunity
Russian Minister for Economic Development and Trade, German Gref, said the government does see its goal as “contouring the playing field” for investors, with special attention to state investment to develop Russia’s business and transport infrastructures. And truly, to join Russia’s isolated “islands of stability”, it will be necessary to lay trade routes that will carry energy sources, personnel and capital. Today Russia’s domestic market (despite the country’s enormous energy reserves) endures shortages of electric power and of natural gas. According to Gref, government each month deals with the problem of “direct foreign investors in Russia not receiving their gas quotas. We’re negotiating with Gazprom, so that these companies can – as an exception – be hooked up and start their production.”

After all, if such companies come to Russia – especially to work within the existing tax regime – then there may appear from this generation of hybrid Russian/foreign companies further generations of healthy descendents, which will do their part in helping the Russian market to become a stable, contiguous whole.

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