Total and Lukoil in talks over Russian shale deal

Financial Times, 27.03.2014

Total is in talks to partner with Lukoil on its shale oil projects in Russia, as Moscow targets unconventional resources to replace falling production at ageing fields in Siberia.

Lukoil, the largest private energy company in Russia, is exploring the giant but unproven Bazhenov formation, which holds the lion’s share of Russia’s shale oil reserves, estimated by the US Department of Energy to be the biggest in the world.

People familiar with the matter said that Lukoil and the French oil major are discussing a joint venture to co-operate on the production of “difficult oil” in Russia – a category that includes shale oil. There is no guarantee that the talks would result in a deal, they added. Total and Lukoil declined to comment.

The two companies have been discussing a tie-up since before Russia’s annexation of Crimea and the subsequent sanctions imposed on the country by the US and EU. Nonetheless, the talks highlight the desire among some international companies to continue doing business in Russia despite the deteriorating political relations.

On Wednesday Joe Kaeser, the chief executive of Siemens, met president Vladimir Putin in Moscow and promised to continue the German company’s investments in Russia and its co-operation with Gazprom. The $10bn state-backed Russian Direct Investment Fund also said it had tapped Chinese and Middle Eastern sovereign wealth fund money to purchase a $200m stake in Sodrugestvo, a large oilseed processor and trader.

Lukoil’s potential partnership with Total would mark a change of strategy for the Russian group, which until now has opted to develop its Russian assets alone. The company told investors at a presentation in London earlier this month that it was in talks with a European major, although it did not mention a name.

Total already has a significant presence in Russia through its 16 per cent stake in Novatek, the country’s largest gas producer after Gazprom. That investment has been under scrutiny since Gennady Timchenko, the tycoon who owns 23 per cent of Novatek, was sanctioned by the US last week.

Total is not alone in seeking to work with Lukoil. Rainer Seele, chairman of BASF subsidiary Wintershall, told business daily Vedomosti recently that the German group was interested in expanding co-operation with the Russian major.

“Lukoil is the only large Russian oil company without a western major as a partner,” said Karen Kostanian, oil and gas analyst at Bank of America Merrill Lynch in Moscow.

The Kremlin has made development of new types oil deposit – including shale, the Arctic, and fields in little-developed east Siberia – a priority amid declining production at older fields.

Western oil companies have rushed to join forces with Russian groups to take advantage of tax breaks for so-called “difficult oil” projects, which came into effect in September. Rosneft has joint ventures with ExxonMobil and Statoil, while Gazprom Neft, the oil subsidiary of Gazprom, has a tie-up with Royal Dutch Shell.

Although Russia’s shale reserves are enormous, estimated by the DoE at 75bn barrels, analysts have warned that there is no guarantee that Russia will enjoy a repeat of the US shale boom.

Lukoil’s willingness to partner with a western group could indicate that it has become more optimistic about the prospects for Russian shale. “For the first time last month they were very bullish about unconventionals,” said Mr Kostanian. “The very fact that they were bullish was a 180-degree turnround.”