Kremlin reasserts control of oil, gas

Russia, the world's second-largest oil producer, sees energy as a key foreign policy tool.

Call it PetroKremlin. A vast state-run energy conglomerate has been assembled over the past year, some experts say, to fuel Russia's bid to revive Soviet-style great power status.

To date, the Kremlin has effectively renationalized almost a third of the formerly private oil-and-gas sector. Other developments also point to growing state ambitions:

• A $15-billion Siberian pipeline, due to begin pumping in 2008, will shift Russian crude exports to Asia, particularly China, where Moscow is cultivating fresh strategic relationships.

• A 737-mile gas line being laid under the Baltic Sea will cut out middlemen Ukraine and Poland, whose relations with Moscow have recently soured, while locking in Russia as Western Europe's key energy supplier.

• State-run Gazprom has teamed up with several foreign partners to develop a vast Barents Sea gas field whose production, converted to liquefied natural gas (LNG), could begin supplying the US market by 2010.

• A long-delayed law on subsoil resources, to be passed by the Duma next year, is expected to ban foreign-owned companies from exploring or developing Russian oil fields and other key mineral resources.

"Amazing changes are happening swiftly, because Putin has understood that energy is Russia's key card to play at the international table," says Michael Heath, a political analyst with Aton, a Russian brokerage. "Instead of the military force the Soviet Union used to project its power, Russia is using oil as a major tool of foreign policy."

Russia is the world's second-largest producer of petroleum - about 8 million barrels of crude per day - which accounts for nearly 40 percent of the country's GDP. Spiking global oil prices over the past five years have wafted state budgets into the black, fueled a modest economic boom, and enabled the Central Bank to rack up reserves of $170 billion.

But far beyond taxing windfall energy profits, the Kremlin has moved to take over the industry. Russia's third-largest oil firm, Yukos, was dismantled in parallel with the prosecution of its politically defiant owner, Mikhail Khodorkovsky, and its main production units gobbled up by the state oil company Rosneft. Earlier this year, the government took a controlling 51 percent stake in Gazprom, the natural-gas giant that holds a quarter of the world's reserves, and Gazprom paid $13 billion to purchase Russia's fifth-largest oil company, Sibneft.

Sibneft, now effectively state-owned, moved this month to purchase a 25 percent stake in the huge Lopukhov oil field, on Russia's Pacific coast, formerly held by TNK-BP, a Russian-British joint venture.

"Now the state directly controls about 30 percent of petroleum production in Russia and the big question is, how much more will it take?" says Valery Nesterov, an energy expert with Troika Dialogue, a Russian investment bank. "This is a big cause of concern for Russian and foreign oil investors."

In the short run, the Kremlin's oil grab may have damaged Russia's energy prospects, Mr. Nesterov says. Growth in oil production has plunged from an average 9 percent in Putin's early years to just 3 percent this year. Exploration has virtually ground to a halt, as both foreign and domestic investors wait to see what the new rules of the game will be. Inner-Kremlin squabbling appears to have halted a planned merger between Gazprom and Rosneft that would have created a gargantuan state-run petroleum conglomerate.

Tightened state control could prove good news for foreign investors who want a piece of Russia's oil pie but don't insist on controlling rights. Up to 49 percent of Rosneft may soon be sold to outside investors, to raise cash to repay $7.5 billion the state borrowed to acquire a majority stake in Gazprom. Curbs on foreigners seeking to buy shares in Gazprom will also soon be lifted, experts say.

"The new rule is that not less than 50 percent must belong to the state," says Nikolai Nikitin, editor of Neftegazovaya Vertikal, a Russian petroleum industry journal. "No longer will private companies be allowed to get fat from Russia's mineral resources."

Experts say the Kremlin aims to blunt international criticism of its takeover of the energy sector by offering a few symbolic management positions to prominent foreigners such as former German Chancellor Gerhard Schröder, who has reportedly agreed to head the new North European gas pipeline project, which will carry Russian gas directly to Germany. Earlier this month, Putin personally offered former US Secretary of Commerce Donald Evans the post of Rosneft chairman, a job Mr. Evans turned down.

Putin has appointed some of his top aides to run the Kremlin's newly acquired empire.The daily Nezavisimaya Gazeta estimated earlier this year that seven people from Putin's inner circle now control nine state companies with total assets of $222 billion, which is equal to 40 percent of Russia's GDP.

Some experts argue that the unregulated "oligarchic" capitalism of the 1990s brought on a public backlash and made the state's return to economic intervention necessary. "Many private oil companies were not serving the national interest, and those mistakes had to be corrected," says Nazit Boikov, an expert with the official Institute of World Economy and International Relations in Moscow.

Others allege that a new Kremlin elite is simply helping itself to Russia's riches, much as the oligarchs of the past decade did. "Just ignore all that rhetoric about returning resources to national control," says Stanislav Belkovsky, director of the independent Center for National Strategy. "A certain group of people are using nationalization as a mechanism to enrich themselves; that's the bottom line."

Last week Kremlin economic adviser Andrei Illaryonovslammed what he called the transformation of Russia into a giant corporation. "The main outcome of this year is the formulation of a new corporatist model for political, economic, social, public, and international life," said the outspoken Mr. Illaryonov, who Tuesday offered his resignation. "Until recently, no one put any restrictions on me expressing my point of view. Now the situation has changed," the Associated Press reported him as saying.

While there may be confusion over the long-term domestic impact of Putin's policies, there seems little doubt that direct control over Russia's vast petroleum resources offers the Kremlin substantial foreign-policy clout in an increasingly energy-starved world.

At a meeting of the Association of Southeast Asian Nations in mid-December, Putin pledged to ramp up oil deliveries to Asia, from the present 3 percent of Russia's total exports to 30 per cent by 2020. In a joint statement, leaders of the 10-nation group pledged to build a "comprehensive partnership" and boost trade and security cooperation with Russia. A new Siberian pipeline should start pumping crude in 2008, with early deliveries going mainly to China.

"Russia has been seeking a more active role in the Asia-Pacific region, and it's been recognized that only oil that can facilitate this," says Yury Sinyak, head of energy studies at the official Institute of National Economic Forecasting in Moscow. "It's an open question whether Russia actually has enough oil to fulfill all the political promises."

If the Kremlin is demonstrating that energy supplies can be dangled like a carrot, it has also realized they can be wielded like a stick. Ukraine, which broke free of Moscow's orbit in last year's "Orange Revolution," was hit last month with more than a quadruple price hike for natural gas supplies - from $50 per 1,000 cubic meters to $230. Kiev has protested that it cannot adjust to such a rapid price hike, but Gazprom has threatened to shut down gas deliveries to Ukraine on New Year's Day if it doesn't comply. Ukraine announced Tuesday an agreement had been reached but a Gazprom spokesman in Moscow denied the claim.

Meanwhile Belarus, Moscow's most loyal former Soviet ally, has contracted with Gazprom to pay just $46 per 1,000 cubic meters of gas.