A New Giant
On the heels of yesterday's discussion about opening up OPEC's reserves to foreign investment comes the announcement that Rosneft, the Russian state oil company, and Gazprom, the largest gas enterprise in the world, will combine to form the world's largest publicly-traded energy firm (measured by reserves.) Today's Wall Street Journal also speculates that the new entity could serve as a receptacle for assets seized from Yukos. In any case, this is a momentous development, if actually carried out, and it could provide a useful model for other countries.

At the same time, this news poses challenges for the existing international oil and gas companies. Although examples such as BP's investment in Russia's TNK abound, the international majors need more than just passive--and hopefully profitable--minority investments. Their business models depend on access, so any such investments must be made in the expectation that access to resources will follow, and on a scale to justify the portfolio and governance risks endemic to minority stakes in countries with poorly-developed legal protections for investors.

As enticing as the new Gazpromneft may be from a market perspective, it is harder to discern how an investment by an Exxon or Shell in this new entity will translate into profitable equity oil and gas production and bookable reserves. Without those, the oil majors may end up evolving into service companies that no longer enjoy the resource rent that has fueled their earnings for the last century.