Developments last week in two multibillion-dollar, international deals show that the biggest oil companies remain willing to pursue opportunities in countries that can be difficult places in which to do business. The countries are Russia and India. In both places, different as they are, difficulties flow from a welcome to foreign capital constrained by governments reluctant to yield control.
Since 2003, Moscow has systematically frustrated hopes that collapse of the Soviet Union 12 years earlier meant the eventual liberalization of the oil and gas industry. Reversing earlier privatization moves, the government has reclaimed control, now allowing only as much investment from outside the country as it decides it needs. Its methods are heavy-handed. It has jailed politically disfavored oil company executives, retroactively changed terms of participation by foreign firms, and limited investment by outsiders in Russian oil and gas companies to minority stakes. It has used trumped-up environmental complaints to force contract adjustments unfavorable to international operators. Its tax regime changes frequently.
Political risk
From the investor's perspective, a domineering government has raised the political risk of ventures inside Russia, the world's top producer of crude oil, to levels daunting to all but the largest international companies. But the potential rewards are among the largest available anywhere.
India's geological prospects are much more modest than Russia's. The country nevertheless remains underexplored and in recent years has yielded world-class gas discoveries in deep water and been shown to possess unconventional hydrocarbon resources, still mostly untested. The populous country's rapidly growing energy demand makes reliance on imported oil and gas chronic and maximum development of indigenous resources imperative.
The government has responded—to a degree. It has partly privatized the Indian oil industry, granted state-owned companies measured autonomy in investment decisions, allowed private Indian companies to invest in oil and gas projects, and opened exploration and production licensing to international operators. The result has been a spurt of activity, upstream and downstream. But Indian companies have dominated the new investment. Response by outside companies to the country's licensing rounds has been cautious. The evident wariness outside India results partly from the strong control over industry affairs retained by the Indian government, which foreign operators suspect of tilting licensing procedures to favor their state-owned competitors. So India also presents political risks, however different they may be from Russia's.
Apparently, though, risk doesn't outweigh perceived potential in either country.
ExxonMobil Corp. took a large new step into Russia last week through a strategic cooperation agreement with state-owned Rosneft covering joint exploration in the Arctic and Black Sea, Arctic research, and the chance for the Russian company to participate in technically challenging US plays to gain expertise. Having worked for the past 15 years as operator of the Sakahlin-1 project in far eastern Russia, ExxonMobil understands the risks. As a Rosneft Arctic partner, it replaces BP, which had a differently structured agreement with the big Russian company that fell victim earlier this year to opposition by Russian partners in the TNK-BP venture.
BP in India
BP is the new big player in India. Last week it and privately owned Reliance Industries Ltd. of Mumbai reported completion of an alliance covering 21 offshore blocks. BP acquires 30% interests in the blocks, which are operated by RIL and include the world-class KG D6 gas discoveries in deep water off the eastern coast. RIL has come under pressure from the government to accelerate drilling on the KG D6 block, where production is below levels specified in development plans. The agreement was to have involved 23 blocks, but two of them remain under dispute between RIL and the government.
India and Russia are different countries offering different investment potential and different sets of risk. Yet they share the need for outside capital and technology. In both cases, it's worth wondering how much better prospects would be if their governments didn't make so many decisions—and take so much time making them.
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