An interesting article in the Moscow Times states that ConocoPhillips and ExxonMobil are negotiating with Gazprom to help the latter in the Yamal LNG project. I know what you are thinking–Time to short CP and Exxon! Are they out of their minds? Investing in Russia with Gazprom? Don’t they remember Sakhalin II? BP-TNK? Yukos?
But read a little bit deeper, and take a look at an accompanying article, and it makes a little more sense. Gazprom chairman Alexander Medvedev said: “Recently, we had a meeting with top managers of Conoco and outlined potential areas of cooperation. One of these areas [involves] the Arctic, both in the United States and Russia. â€¦ They are very similar.” The accompanying article states:
Gazprom said it might explore offshore Alaska with ConocoPhillips as the gas exporter seeks to expand its global reach.
CEO Alexei Miller and his counterpart from ConocoPhillips, Jim Mulva, held talks Monday in Moscow, Gazprom said in a statement.
Gazprom, which supplies one-quarter of Europe’s gas, is seeking access to new markets in North America, and a delegation visited Alaska last month. Miller and Mulva on Monday discussed joint projects on international markets, focusing on liquefied natural gas supplies, the statement said.
“The experience of Gazprom could be beneficial in developing gas projects in the U.S.,” Miller said in the statement.
Miller said in June that Gazprom had approached ConocoPhillips and BP on joining their Denali pipeline project, aimed at delivering Alaskan gas to the continental United States. Gazprom sent eight executives, including Miller, to Anchorage in October, where they met with ConocoPhillips representatives.
My interpretation of all this is that it involves a Williamsonian exchange of hostages. Yes, maybe US majors will invest in Russia, but at the same time Gazprom will invest in the US. If Russia expropriates the western firms, they will have a hostage that they can seize in return.
The critical thing will be to craft the agreement and contracts so that Gazprom’s investment can truly be seized if Russia/Gazprom attempts to steal the western firms’ investment in Russia. Russia has already shown great creativity in finding ways to expropriate assets–even from its own. Yukos–taxes. Uralkali (perhaps)–safety investigation. Mechel (perhaps)–antitrust. Sakhalin II–environmental violations. BP-TNK–immigration issues, license revocations. It will be a challenge to write an agreement that defines expropriation sufficiently broadly so as to encompass all the various schemes that the Russian government–and the country’s pliant courts–could use to effectively expropriate western investments in Yamal, or make the transaction so unpalatable that the western majors are forced into selling their stake at a distressed price. (Perhaps one clever thing to do would be to preclude any Russian firm from buying the stake in the future.) Even then, there is the challenge of dealing with the asymmetry between Russian and western courts. Gazprom would almost certainly get a fairer hearing in any western jurisdiction than any western firm would get in Russia.
Perhaps no deal will get done. But the I’ll-invest-in-yours-if-you-invest-in-mine approach is quite revealing. It indicates that Putin’s and Gazprom’s past actions have affected the thinking of western firms. They understand the nature of the expropriation risk, and are dealing with it by going medeival: that is, by exchanging hostages the way knights and dukes and kings did in the days of yore.
The discussions are revealing in another way. They represent a dramatic turn away from Gazprom’s go it alone bravado of 2007 and earlier in 2008. Their tune then: Western investors? We don’t need no stinkin’ western investors. Their tune now: come on over! We could use the help. This is indicative of (a) the effects of the financial crisis on Gazprom’s ability to finance these huge projects, and likely (b) Gazprom’s recognition of its technical capability to complete these challenging projects and its desperate need for new gas supplies to offset its declining production and large delivery commitments.
It’s amazing how rapidly things can change. But CP and XOM and BP should recognize that things can change right backagain. Therefore, I suggest that they craft their hostage agreements very, very, carefully.