Friday, May 26, 2006

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All the cool petrostates are doing it!!

Expropriation was a hot topic of study in international politcal economy in the seventies, when it seemed like the phenomenon was going to be a permanent feature. In the eighties, the diffusion of free-market ideas and the collapse of communism rendered that topic pretty much inert.

I suspect we're going to start seeing a few dissertations on the topic sprouting up soon, however. Ecuador, Bolivia, Venezuela... this is definitely a trend.

And then there's Russia. Here are the first few paragraphs of Arkady Ostrovsky's "Russian ministry seeks review of oil deals" in the Financial Times:

Russia’s natural resources ministry called on Thursday for a review of the two largest foreign oil projects in the country, even as senior Russian officials sought to assure EU leaders that Russia was a reliable energy partner.

The ministry said the legal agreements underpinning oil and gas developments on Sakhalin island, on Russia’s eastern flank, were ineffective and should be reviewed.

It said it planned to ask the Duma, Russia’s lower house of parliament, to review production-sharing agreements signed in the 1990s, saying they were damaging Russia’s national interests.

Any review of PSAs would threaten the two largest foreign investments in Russia: the Sakhalin-1 project, on which ExxonMobil and its partners have already spent nearly $5bn; and the Sakhalin-2 project, in which Royal Dutch Shell and its partners are investing $20bn.

However, two Russian ministers insisted separately that all Moscow’s agreements with foreign energy companies would be honoured, suggesting a rift had opened within the government.

Of course, such a thing couldn't happen in the United States. Oh, wait.....

posted by Dan on 05.26.06 at 09:27 AM


You might be interested in these figures:

- 700000 tonnes: The copper that was produced every year in Zambia in the 1970s, soon after nationalisation.

- 249100 tonnes: The quantity that was produced in 2000, after 30 years of mismanagement, waste and corruption in the state copper company.

- 427000 tonnes: The quantity produced today, after the mines have been sold to KCM, a private Indian company.

- 900000 tonnes: The quantity that will be produced in 2008, thanks to KCM´s upgrades and investments that will develop new mines and processing plants and expand old mines´ life.


posted by: Pablo on 05.26.06 at 09:27 AM [permalink]

I think Russia's strategy is a little different than the other petrostates. Russia sees energy as its last card as a major world power and it intends to play it as best it can. To do that, it needs enough foreign investment to access technology and know-how, while not allowing foreign companies to get control of strategic assets. In the case of Sakhalin, the government is sending a very strong signal that Sakh 4-5 should go to a Russian-led consortium.

While the Russian government has not hesitated to nationalize Russian-owned assets - ie YUKOS - in the energy sector, it has not siezed the assets of major foreign investors. I don't think we will see expropriation in this case. I think we may see a minor tweaking of the PSAs, about which the majors will piss and moan, but ultimately go along with it. What choice do they have?

It has to be noted that the Sakhalin PSAs are likely to be a pretty unique example. The Russian government realized a long time ago that PSAs favor investors over host country governments. Thus, they have not allowed any new PSAs since the Sakhalin agreements a decade ago. I would be shocked if we see a PSA signed with a foreign oil major in the foreseeable future in Russia.

Russia isn't Zambia, it isn't Venezuela. It is a country that sees itself as a great power in world affairs. After a decade of humiliation, they are now trying to leverage the energy card to ensure a signficant role in world affairs. For this to be a successful strategy, Russia needs to combine this leverage with structural reform at home to develop competitive industries and a broad economic base to underpin its recovery. Unfortunately, while Russia is proving somewhat shrewd in leveraging the energy card, it has been very, very slow on structural reform. Thus, I am not sure the energy superpower strategy will be successful in the medium to long term.

posted by: SteveinVT on 05.26.06 at 09:27 AM [permalink]

All true, Steve, but remember also that Putin and his cronies-- both inside and outside the government-- need their cut, as did Chernomyrdin, and Yeltsin and Berezovsky and Abramovich and the semya and Chubais and so many others before him. Putin's geopolitical strategy derives as much from simple corruption as from any coherent great-power game. Scratch a neo-soviet pol and you'll see a thief with a numbered Swiss account and some Cote d'Azur property.

posted by: thibaud on 05.26.06 at 09:27 AM [permalink]

Two keywords you forgot to mention are: review and renegotiation. This is not what happened in Bolivia where the army invaded private property of a state-owned company of a close ally who invested more than a billion dollars in Bolivia, which, at the time they started investing, didnt' even have how to extract it or whom to sell their natural gas. Renegotiation is part of the contract. Sending the army to invade and expropriate foreign private companies is a risky and irresponsible populist measure.

posted by: Paulo on 05.26.06 at 09:27 AM [permalink]

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