Forbes, February 22, 2007
OutFront: It Beats Iraq
Foreign energy companies keep running into trouble in Russia. So why is Chevron going there now?
By Michael Freedman

What in the world is Chevron thinking? The oil company has largely stayed out of Russia, nervous about investing in a country that makes a sport of smacking around any foreign energy company venturing inside its borders. But in January Chevron announced its first foray into exploring and producing there, agreeing to enter a joint venture with a Gazprom subsidiary. Though details are scarce, the two companies say the deal will focus on the development of the Yamal region in northwestern Siberia, an area believed to hold enormous energy reserves.

At first glance this looks foolhardy. Over the last few years Russian President Vladimir Putin has consolidated the industry into two state-controlled oil and gas giants, Rosneft and Gazprom. He also has dismantled a private energy company, whacked another with an enormous tax bill and attempted to renegotiate contracts signed years earlier. In the course of all this he has seized control of some of the world's largest energy assets.

Chevron's own limited moves in Russia have had mixed results. It took a 15% stake in an oil pipeline that runs from Kazakhstan through Russia to the Black Sea but became enmeshed in difficult negotiations over a proposed expansion with the Russians. Chevron was also among five companies to be shortlisted for an equity stake in the enormous Shtokman gas field in the Barents Sea, but Gazprom abruptly decided to go it alone.

Still, companies such as BP and Shell have signed deals, entering into partnerships in this alluring but forbidding nation. Pavel Kushnir, an analyst at Deutsche UFG bank in Moscow, says the deal could be lucrative for Chevron. Chevron will initially hold a 70% stake in the venture but finance all upfront costs of exploration, potentially investing hundreds of millions of dollars. If the venture makes any discoveries, the Gazprom subsidiary's stake increases to 50%, but Chevron will take 100% of the cash flow until it's compensated for laying out Gazprom's share of the cost. Kushnir's analysis assumes that the Russians do not double-cross Chevron.

Besides, Gazprom is a Putin favorite, so Chevron could perhaps gain special access to potential reserves, at least while Putin's influence remains strong. More likely, Chevron, like the others, has little choice but to play by the Kremlin's capricious rules. And notwithstanding those rules, Russia still looks better than some of the alternatives, says Clifford Kupchan, an analyst at New York City political risk consultancy Eurasia Group. "The place is still Florida compared to Africa or the Middle East," he says.