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Liberalism on ice: Russia will keep offshore projects closed for non-state companies until oil prices fall

This is an abridged version. The full text is avaiable to subscribers to The Russian Energy weekly.

If anything could make Alexey Miller and Igor Sechin hug when posing for cameras, it was Russia’s continental shelf. The alliance of Gazprom and Rosneft has prevented the government from opening offshore opportunities to private business. If the price of oil makes a plunge, the leverage of Miller and Sechin may evaporate—and liberal ideas will be taken out from cold storage.

Monopoly defenders

Two presidents—Alexey Miller of Gazprom and Igor Sechin of Rosneft—have succeeded in protecting the Russian continental shelf from private investors. A letter they sent to President Vladimir Putin after their meeting on September 19 has made a deep impact on the Russian market. The head of the state has instructed the government to accelerate issue of offshore licenses to both state-controlled companies.

Rosneft, which has already accumulated 14 offshore licenses, wants to get another 14, and Gazprom would like to add 29 to its existing 7. A few requests are overlapping, but the state companies will probably come to terms. Sechin already supports Miller as the exclusive manager of Russia’s gas export channel, and Miller will have to appreciate this attitude of a person who can easily destroy the monopoly status of Gazprom.

The impulsive friendship of two giants, which were usually considered as eternal antagonists, has thwarted strategic plans of the Cabinet of Ministers.

Prime Minister Dmitry Medvedev has been trying to strengthen his positions in the government since May. It seemed that Deputy Prime Minister Igor Dvorkovich, who is in charge of the energy sector, Minister of Energy Alexander Novak and Minister of Natural Resources and Ecology Sergei Donskoy were sharing liberal views on the future of the national oil and gas industry. In July, Dvorkovich responded to Putin’s previous order to issue offshore licenses to state companies saying that Gazprom and Rosneft had obtained too many licenses to be able to develop them on schedule. And during the summer the Cabinet was preparing legislative amendments to enable private investors to work on the continental shelf.

After Sechin and Miller demonstrated their new alliance, the liberal-minded ministers changed their rhetoric. Novak says he does not see any danger in the takeover of TNK-BP by Rosneft and in the emergence of a super-giant controlling 40% of national oil production. Dvorkovich and Donskoy are promising to issue all the desired licenses to this giant by November 1. The natural resources ministry merely wants to trim the blocks down to a reasonable size and determine the volume of obligatory surveying in the licenses.

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