Kate Mackenzie IOCs in Russia: How times have changed

Oil production in Russia is not what it used to be for foreign oil companies. From Reuters:

Ministers will discuss today setting a zero rate for the mineral extraction tax in the initial stages of development of fields in the Black Sea and Sea of Okhotsk, the government said in a statement posted on its Web site late yesterday.

The tax breaks will apply until accumulative output reaches 20 million metric tons at Black Sea fields and 30 million metric tons in the Sea of Okhotsk, off Russia’s Pacific Coast. Alternatively, the zero rate may be applicable for 10 years or 15 years for fields being developed under combined exploration and production licenses, according to the statement.

There has been quite a turnround in Russia’s attitude to foreign oil companies in recent months.  A few weeks ago Putin told Shell it could participate in the Sakhalin 3 and 4 blocks off the island in Russia’s far east. It was a curiously warm welcome, considering that three years ago Shell, under pressure from the Russian government, was forced to halve its 55 per cent stake in the Sakhalin 2 block, allowing state-controlled Gazprom to take a majority share. Sakhalin, incidentally, is in the Sea of Okhotsk, of the regions suggested for tax breaks.

Shell is not alone in having had problems in Russia. For BP’s TNK-BP joint venture, things got so bad the then-chief executive backed by BP, left the country amid visa problems and a ruling that he could not serve as chief executive for two years – which he claimed was the result of bias. Meanwhile US companies were shut out of developing the massive Shtokman gas field in 2006.

But times have changed for Russia and for Gazprom, which is having difficulty maintaining its planned investments. Its output fell 34 per cent year on year to its lowest level in a decade in May due to the drop in worldwide. Last month it warned it may postpone the launch of the Bovanenkovo field in Siberia until the third quarter of 2012 because of lower gas demand, a pipeline to China was delayed, and some analysts predict more announcements like this ahead.

Related links:

Gazprom says demand is recovering (FT Energy Source, 29/06/09)
Gazprom delays China pipeline (FT Energy Source, 17/06/09)
Russia: From rags to riches to rags (FT Alphaville, 02/04/09)