Thursday, September 30, 2004

The New Frontier, Again
Yesterday's announcement that ConocoPhillips was acquiring an approximately 8% interest--which could grow to up to 20%--in Russia's Lukoil is another signpost of the growing importance of Russia in the portfolios of the international energy majors. Despite a healthy dollop of political risk in several flavors, Russia represents one of the best opportunities for new reserves and production outside the Middle East, and on a scale that is material even to the world's largest oil and gas firms. As the Financial Times article notes, Conoco's Lukoil stake will have implications for the development of Iraq's enormous reserves, as well.

The timing of this announcement is noteworthy, coming as it does in the midst of the unresolved government assault on Yukos and the challenges facing BP's TNK stake. I'm sure the Putin government placed a lot of emphasis on this deal, as a way to restore some of the confidence that has been shaken recently. While it may not assuage all fears, this transaction, along with ChevronTexaco's recent announced linkage with Gazprom, affirms the central importance of Russian reserves over the next 10-20 years. With yesterday's stars fading, including a more rapid than expected decline in the UK North Sea, significant new production will be needed to meet growing demand.

In many respects this is "back to the future", since Russia was one of the first major oil producers a century ago, creating wealth on a vast scale, including that of the Nobels. Although the wealth is likely to be shared differently this time, Russian oil is no less attractive now than it was then.

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